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, 2004
 
 [  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR
 SECTION
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 FOR THE
TRANSITION PERIOD FROM _____________ TO ______________
 
 COMMISSION
FILE NUMBER: 000-30785
 
 **CAMELOT
ENTERTAINMENT GROUP, INC.(FKA DSTAGE.COM, INC.)**
 (EXACT
NAME OF SMALL BUSINESS REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
 DELAWARE
52-2195605
 (State or
other jurisdiction (I.R.S. Employer
 of
incorporation or organization) Identification No.)
 
 **CAMELOT
ENTERTAINMENT GROUP, INC.**
 2020 Main
Street, Suite 990
 Irvine,
California 92614
 (Address
of principal executive offices) (Zip Code)
 
 (949)
777-1080
 Registrant'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
 
 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 [  ]
 
 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 21,041,738 Common Stock shares held by
non-affiliates of the Registrant, based on 74,951,209 total outstanding shares
less 53,909,471 shares held by affiliates for a total of
 21,041,738
non-affiliated shares at a market price of $.19, was $3,997,930 as of December
31, 2004.
 
 On
December 31, 2004, the Registrant had outstanding 74,951,209 shares of
Common
 Stock,
$0.001 par value.
 
 The
Registrant's revenues for the year ended December 31, 2004 were $0.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 SEE ITEM
13
  ***Page
- 1***
  
 
 
 TABLE OF
CONTENTS
 FORM
10-KSB ANNUAL REPORT
 FISCAL
YEAR ENDED DECEMBER 31, 2004
 
 **CAMELOT
ENTERTAINMENT GROUP, INC.**
 
 ITEM
 
 PART I
 
 1. Description of Business
 2. Description of Properties
 3. Legal Proceedings
 4. Submission of Matters to a Vote of Security
Holders
 
 PART II
 
 5. Market for Common Equity and Related Stockholder
Matters
 6. Management's Discussion and Analysis
 7. Financial Statements
 8.
Changes in and Disagreements with Accountants on Accountingand
Financial Disclosures
 8A. Controls and Procedures
 
 PART III
 
 9. Directors, Executive Officers, Promoters and Control
Persons
 10. Executive Compensation
 11. Security Ownership of Certain Beneficial Owners and
Management
 12. Certain Relationships and Related
Transactions
 13. Exhibits and Reports on Form 8-K
 14. Principal Accountant Fees and Services
 
 F-1
Financial Statements with Footnotes
 
 Signatures
 
 Exhibits
   
 
 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.
  ***Page
- 2***
  **PART I**
 
 **ITEM 1. DESCRIPTION OF BUSINESS**
 
 **Business
Development**
 
 ***Background
of the Company***
 
 Camelot
Entertainment Group, Inc., a Delaware corporation (the "Company") is in the
business of developing, producing, marketing and distributing motion pictures.
Originally incorporated to provide support, organization and restructuring
services to development stage companies, between October 12, 1999 (“Inception”)
and March 31, 2003, the Company's activities consisted of developing its
business plan, raising capital, business plan implementation, recruiting a
management team and entering into new ventures and alliances with affiliates. On
March 31, 2003, the Company’s management established a new business model for
the Company, resulting in the Company pursuing the development, production,
marketing and distribution of motion pictures. Since Inception, the Company has
been in the development stage.
 
 From
inception to December 31, 2004, the Company has had minimal revenues of $59,000
and has expensed operating costs in the amount of $7,608,000, resulting in a
cumulative net loss of $7,325,000 (including $224,000 in total other
income/expense). Historically, the Company has had nominal cash resources and
has been largely dependent on the direct financial support from a few
shareholders, directors and officers along with limited revenue to pay for cash
expenditures. In addition, the Company has been dependent on its officers,
directors and certain key vendors accepting restricted common stock for their
services.
 
 In March
2003, the Company reached an agreement with The Corporate Solution, Inc., a
Nevada based business consulting firm, resulting in Robert P. Atwell, President
of The Corporate Solution, becoming President and Chief Executive Officer of the
Company and Albert Golusin becoming Chief Financial Officer. Former President
Rounsevelle Schaum and Director Jane Olmstead elected to remain on the Company's
Board of Directors. All other directors and committee members either resigned or
their term expired. On December 1, 2004, Al Golusin resigned as Chief Financial
Officer and Jane Olmstead was appointed as interim Chief Financial Officer.
 
 With the
new management team in place, the Company reached an agreement with Eagle
Consulting Group, Inc., a Nevada based consulting firm (“Eagle”), on March 28,
2003, to provide operational funding for the Company. At the time of the
agreement, Eagle’s President was Tamara Atwell, wife of Company President Robert
P. Atwell. Subsequent to the agreement with Eagle, Robert P. Atwell became
President of Eagle. 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. Eagle advances to date total $296,562,including
interest.
 
 The
Company's new management team put into motion a plan to refine the Company’s
scope and direction while restructuring the overall business framework to
encompass a more diversified business model. As a result, during the second
quarter of 2004, the Company changed its name to Camelot Entertainment Group,
Inc.
 
 *Mission
Statement*
 
 The
Company’s mission is to establish a presence in the motion picture industry by
developing, producing, marketing and distributing high quality, low budget
motion pictures utilizing new technologies while combining the efficiencies
realized by studios of the early and mid 1900s with the artistic focus and
diversity of today's independent productions.
 
 *The
Business Model for Camelot Entertainment Group, Inc.*
 
 The new
management team developed a new plan of operation for implementation during
2004. The plan attempts to combine the efficiencies realized by studios of the
early 1900s, with the artistic focus and diversity of today's independent
productions. Using this approach, the Company believes 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 Camelot model extends the
pre-production cycle substantially to reduce costs while simultaneously
increasing quality. Similarly, whereas a low-budget picture is severely limited
by the types of postproduction technology used, due to budget constraints,
Camelot intends to invest directly in top of the line technology, spreading the
costs over a minimum 12 original motion pictures each year. The goal 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.
 
 ***Page
- 3***
 We
believe that only a fraction of the writers, directors, actors and other film
production personnel actively seeking motion picture projects are successful in
any given year. Similarly, we believe that only a small fraction of films in
production in any given year will actually be released and an even smaller
percentage will generate profits. As a result, it is our opinion that
independent filmmakers are often willing to go to great lengths to get a picture
made, sacrificing not only their current standard of living, but also their
claim to potential profits made by the film. Despite these concessions,
relatively few succeed. Our business model is intended to overcome these
obstacles for writers, producers, directors, actors and other personnel that
wish to actively participate in original motion picture projects and are willing
to accept incentive and stock based compensation for a portion of their efforts.
 
 We
believe that our plan to create our motion pictures should succeed because two
members of our management team have, previously, worked together extensively in
financing, producing and directing original motion pictures and television
programs. In addition, one of our officers has over 30 years experience in the
business. This combined experience led these officers to a number of beliefs
upon which our business model for creating our product is founded. These key
views are:
 
 ·
    The
      manner in which development and pre-production activities are managed can
      have the largest impact on both the quality, or creative content, and the
      cost of creating a motion picture.
 
 ·
    There
      are a number of factors that make it difficult for most production
      companies to invest large amounts of time and a proportionally large share
      of a motion picture’s overall budget into development and pre-production
      activities.
 
 ·
    The
      factors that make it difficult for many motion picture projects to invest
      a major share of a film’s time and financial resources into development
      and pre-production activities may have created a pervasive business
      culture that emphasizes moving projects towards principal photography too
      quickly.
 
 ·
    A
      very small percentage of all writers that want to have their screenplays
      become completed motion picture projects will ever realize this
      ambition.
 
 ·
    A
      very small percentage of all directors will participate in principal
      photography in any given year.
 
 ·
    The
      percentage of qualified actors that never have the opportunity to
      participate in a completed original motion picture that is released
      commercially is substantial.
 
 ·
    There
      are large periods of unemployment for many individuals involved in motion
      picture production.
 
 We
believe that these observations suggest that the capacity to create motions
pictures, in terms of employable professionals, is far higher than the current
demand of existing film production companies for these services. However, we
also believe that growth in motion picture consumption worldwide has created
increased demand for original motion pictures in general. As a result, we
anticipate that the underemployed, or unemployed, directors, writers and other
film professionals could help fill a void for low cost, quality original motion
picture production, given the right mix of incentives and business structure.
 
 Successfully
creating such low cost, but relatively high quality pictures might result in a
higher per picture financial return and a lower breakeven point for each film
produced. Also, by distributing these pictures primarily through in-house
distribution professionals, the per picture return might be increased even
further, enabling more motion pictures to be produced by us annually and thereby
diversifying the risk associated with any single film project. These beliefs
form the foundation for our planned business model and strategy.
 
 *Recent
Developments*
 
 During
2004, we began the process of implementing our business plan, including
beginning the critical process of securing funding for the Company and its
projects. Upon completion of our initial formal business plan, we began the
process of preparing our funding documents, including the private placement
memorandum and registration statement. Once these documents are finalized, they
will be filed with the Securities and Exchange Commission (“SEC”) and various
state regulatory agencies. We plan to commence the funding process during
2005.
 
 ***Page
- 4***
 
 In order to successfully
implement our business model, we will need to secure the necessary financing. If
we are unable to do so, we may not be able to sustain operations. The specific
amount and types of funding we will be seeking will be finalized by the time we
commence the filing of our documents with the SEC and the state agencies.
 
 
 In
addition, we will be exploring funding options with various international
resources currently being developed by our management team. There can be no
assurance that any of these potential resources will ever be realized, or that
any of them will participate in any funding of our Company and our projects. The
international regions currently being explored include Europe, specifically
Germany and the United Kingdom, and the Far East, specifically China.
 
 
 Our
corporate operating structure continued to evolve during 2004, with shareholders
approving the acquisition of three new subsidiaries, Camelot Films, Inc., a
Nevada corporation, Camelot Films, Inc., a California corporation, and Camelot
Films, Inc., a Delaware corporation. Each of these corporations will become
wholly owned subsidiaries of our Company during 2005. None of the corporations
have current operations, assets or liabilities. Each newly acquired subsidiary
will handle a specific area of our business model, including, but not limited
to, production services, marketing, distribution and our new family film
division.
 
 Shareholders
also approved the establishment of Dstage.com, Inc. as a Delaware company and a
wholly owned subsidiary in order to eventually continue the Dstage.com business
model, including the development of certain technologies and business acumens
originally being pursued by the Company prior to the Company revising its
business model in 2003. We expect to formalize the new Dstage.com as a wholly
owned subsidiary during 2005.
 
 
 While we
continued to pursue the development of our business model during 2004, we also
began negations with a business group in Phoenix, Arizona, which could result us
entering into a joint venture during the first quarter of 2005 whereby
commercial real estate would be utilized as collateral for a funding mechanism
which might result in two or three motion pictures going in to production during
2005. In the event this joint venture becomes a reality, it would be placed
within one of our three new wholly owned subsidiaries, the acquisitions of which
are expected to be formalized during 2005. This transaction would represent
managements desire to diversify beyond our base business model in order to
generate revenues while continuing to develop and implement our base business
model. The funding generated by this proposed joint venture would allow
additional staffing within the subsidiary without impeding progress on our base
business model.
 
 During
the fourth quarter of 2004, we made an agreement with The Corporate Solution,
Inc., a corporation owned by our President, Robert P. Atwell, to fund an initial
project by the Company during 2005. In exchange for 3,500,000 shares of stock,
The Corporate Solution, Inc. agreed to provide a minimum of $262,500 toward the
budget of a film we are currently developing. Physical production of the film,
which will be done through one of our newly acquired subsidiaries, is expected
to commence during the 3 rd or
4 th quarter
of 2005. This transaction also represents our desire to diversify beyond our
base business model in order to generate revenues while continuing to develop
and implement our base business model.
 
 We also
decided during 2004 to establish a family film division which would be dedicated
to developing, producing, marketing and distributing specifically family films
domestically and internationally. We plan to name the new president of this
division during the first quarter of 2005. The business model for this new
division will be similar to our base business model.
 
 Fiscal
year 2004 also saw us explore the possibility of setting up European operations
in order to better facilitate potential funding and production opportunities in
Europe. The first step in this process is expected to be the retention of a
business consultant to represent us at the Berlin Film Festival during the first
quarter of 2005.
 
 We also
continued to interview potential entertainment law firms to represent us
specifically on entertainment legal issues that will arise as we continue to
implement our business model. We expect to make a final decision during the
first quarter of 2005.
 
 In
addition, we continued to interview potential public relation firms during 2004.
We hope to make an announcement on our final selection during early
2005.
 
 A key
component of our business model is distribution. During the fourth quarter of
2004, we began the process of identifying and interviewing various candidates
that could head up our distribution efforts. We plan to make a final decision
during the first or second quarter of 2005. The decision will be based in part
on where we are in our funding process. Our inability to bring in a qualified
candidate could have a material adverse effect on our operations once we begin
production.
 
 ***Page
- 5***
 ****
 **Business
of Issuer**
 
 ***Principal
Products or Services and Their Markets***
 
 We intend
to engage in the development, production, marketing and distribution of original
motion pictures. Our objective is to develop, produce, market and distribute 12
pictures annually with budgets fixed at one million dollars ($1,000,000) per
picture. The elements of the budget include $500,000 in cash, $200,000 in
deferments, $200,000 in corporate contributions and $100,000 in our common
stock. Each picture is expected to have a 12 month production cycle, including 6
months of pre-production, 2 months of physical production and 4 months of
post-production. Our plan is to market and distribute all of our pictures
ourselves, thereby keeping as much control as possible over the revenues
generated by our productions.
 
 *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 second quarter of 2005. We will
not be able to commence our plan to develop, produce, market and distribute 12
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*
 
 A
majority of line items in the budgets will 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.
 
 *Corporate
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.
 
 *Common
Stock Component*
 
 We plan
to issue every individual working on our films shares of our $.001 par value
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.
 
 ***Page
- 6***
 In the
case of studios and independent production companies, their staffs actively seek
and participate on the acquisition of completed scripts or developing scripts
into motion picture projects, usually with either in-house producers or
non-affiliated producers who 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.
 
 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.
 
 ***Page
- 7***
 **
 *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.
 
 The U.S.
motion picture industry can be divided into major studios and independent
companies, with the major studios accounting for a large majority of the number
of theatrical releases. The major studios are MGM (including UA Films and
Orion), The Walt Disney Company (including Buena Vista, Touchstone and Miramax
Films), Paramount Pictures Corporation, Sony Pictures Entertainment, Inc.
(including Columbia Pictures), Twentieth Century Fox Film Corp., Vivendi
Universal Entertainment LLLP (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. The one
exception to this has been Lions Gates Films, a major independent that continued
to experience significant growth during 2004.
 
 According
to the Motion Picture Association of America, the motion picture industry is
large and growing. Moreover, this growth is increasing both domestically and
internationally.
 
 Since
1991, box office has been steadily increasing and has grown by almost $6 billion
over the past 20 years. After a record breaking year in 2002 which saw the box
office numbers increase 13.2% over 2001 to $9.52 billion, the U.S. Box Office
continued its momentum, grossing a record breaking $9.54 billion in 2004, a 5%
increase over a solid $9.49 billion in 2003.
 
 U.S. Box
Office continued its success with a strong slate of movies released in the
summer of 2004, with summer box office receipts reaching $4.49 billion, up 21%
compared to summer 2003. Close to half of 2004’s box office gross can be
attributed to summer releases. Overall, the top twenty films of 2003 made up 40%
of the total U.S. Box Office, grossing $3.78 billion. Between 1953 and 2004, a
span of 51 years, the U.S. Box Office has gone from $1.34 billion in gross
receipts in 1953 to the all time high of $9.54 billion in 2004.
 
 In 2004,
611 films were produced for theatrical release with only 483 films released
during the year. In 2003, only 593 films were produced and only 473 films were
released theatrically. The average new release earned $20 million at the U.S.
Box Office in 2004, as compared to $20.7 million in 2003. Of the 483 films
released in 2004, 475 were new releases, while 8 were reissued films. In 2003,
of the 473 films released, 459 were new releases with 14 films being
reissued.
 
 Worldwide
Box Office increased 24% from last year, racking up $25.2 billion in gross
receipts. The increase can be attributed to box office growth in the
international market, which was up 47% after reaching the $10 billion mark for
the first time in 2003. International box office continued to benefit from a
weak US dollar and strong box office showings from both local and US product.
 
 All of
the international regions saw double-digit growth in 2004. Europe,
the Middle East and Africa saw an
increase of 53%. Asia-Pacific saw an increase of 44%. Latin America’s theatrical
market increased 14%. Europe, the Middle East and Africa comprised more than
half of the $15.7 billion international box office, accounting for 54% of the
total with $8.53 billion in receipts. Asia-Pacific box office finished strong
with $5.4 billion in 2004.
 
 ***Page
- 8***
 
 U.S.
admissions decreased 2.4% to 1.54 billion in 2004 when compared to 1.57 billion
in 2003, both years in the wake of 2002’s record 1.64 billion admissions;
however 2004 remains the third highest admissions figure of all time, and almost
49 million tickets ahead of 2001.
 
 Worldwide
admissions increased 11% over 2003 to a record 9.6 billion, breaking the
previous record of 9.1 billion admissions in 2002. The growth comes from the
international market, which experienced a strong year at the box office with
admissions increasing 13% over 2003.
 
 The
number of theatrical screens in the U.S. increased 2.2% to 36,594 in 2004. This
follows a 3.7% increase in screens between 2003 and 2002. Of the 36,594 screens
in the U.S., 35,993 were indoor screens, while 601 were drive-in screens.
 
 Digital
screens continued their rapid growth in 2004 with the number of worldwide
digital screens climbing 80% to 328 screens. To put this number of digital
screens in a better perspective, in 1999 there were 12 digital screens
worldwide.
 
 ·
    Between
      1987 and 2004, gross domestic box office revenues more than doubled, to a
      record $9.54 billion in 2004 from $4.3 billion in 1987.
 
 ·
    The
      increase in gross domestic box office revenue from 2001 to 2002, an
      increase of 13.2%, was the largest such growth experienced in the industry
      in over 20 years. 2003 domestic gross held strong, dipping 3% from the
      record 2002 domestic gross of $9.52 billion, only to be outperformed in
      2004 with the record $9.54 billion, a 5% increase over
    2003.
 
 ·
    In
      the past decade, admissions have increased nearly 20%, up 244 million. In
      2002, motion picture theatrical attendance in the United States grew at
      the fastest rate since 1957, increase from 1.487 billion admissions in
      2001 to 1.639 billion admissions in 2002, a 10.2% increase. Admissions,
      like gross domestic box office, held strong in 2003, with 1.57 billion
      admissions, dipping slightly in 2004 with 1.54 billion
      admissions.
 
 ·
    Admissions
      have shown a steady growth over the past decade, with an average increase
      of 2% per year, despite the many choices in entertainment
      options.
 
 ·
    In
      2004, the number of moviegoers reached its highest point in five
      years.
 
 ·
    For
      the past eight years, each U.S. resident attended an average of at least 5
      movies per year. In 2004, the average was 5.2, up from 4.4 in 1985. In
      2003, the average was 5.4. Admissions per capita reached an all time high
      of 5.7 in 2002.
 
 ·
    The
      average annual admission price was $6.21, up 3% over the previous year.
 
 ·
    The
      average box office revenue for a new film release was $20 million in 2004,
      compared to $20.7 million in 2003 and $21.2 million in
    2002.
 
 ·
    Of
      the 475 films released theatrically in 2004, 199 were released by the
      major studios. 276 were released by all others.
 
 ·
    Between
      1968 and 2004, 58% of the top grossing films released theatrically were
      rated “R”, 21% were rated “PG”, 12% were rated “PG-13”, 7% were rated “G”
      and 2% were rated “NC-17/X”.
 
 ·
    In
      2004, 55% of the top grossing films were rated PG-13, 15% were rated R,
      25% were rated PG and 5% were rated G. In 2003, 60% of the top grossing
      films were rated PG-13, 20% were rated R, 15% were rated PG and 5% were
      rated G.
 
 ·
    The
      average budget of a major studio film in 2004 was $63.6 million. In 1983,
      the average was $11.9 million. The average marketing budget was $34.4
      million in 2004, a 12% decrease when compared to 2003, which had a 28%
      increase over 2002, due to a significant increase in the cost of
      advertising on television, which represents 39% of the total advertising
      costs for new releases. In 1983, the average was $5.2
    million.
 
 ·
    The
      total average cost to produce and launch a studio film in 2004 was $98
      million compared to $102.9 million in 2003. This represents a 5% decrease.
      In 1983, the total average cost to produce and launch a studio film was
      $17.1 million.
 
 ·
    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.
 
 ***Page
- 9***
 ·
    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, Lions Gate etc.) in 2004 was $28.2
      million, contributing to a 39.8% decrease in combined negative and
      marketing costs when compared to 2003. 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 $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 2004 was $39.6 million, the lowest
      since 2000’s average of $31.6 million. In 1999, the total average cost to
      produce and launch a major studio subsidiary or specialty/independent type
      film was $24.9 million.
 
 ·
    Between
      1980 and 2004, there was a 108% increase in the total number of screens.
      There was a 157% increase in the number of indoor screens and an 83%
      decrease in the number of drive-in screens.
 
 ·
    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
      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
      2004, 39% of the screens were miniplexes (2 to 7 screens), 27% were single
      screen, 25% were multiplexes (8 to 15 screens) and 9% were megaplexes (16
      or more screens).
 
 ·
    In
      2004, preliminary estimates show a total of 367,900 employees in the U.S.
      motion picture industry and associated fields. Of that number, 198,300 are
      involved in production and services, with 141,000 in the theater and
      video/DVD rental sector and 28,600 employed in related
    fields.
 
 ·
    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 increased from 729.9 million units in 2002 to 1,462.2
      billion in 2004, an increase of 83.6%, reflecting the continued growth in
      DVD use by consumers. Since 2000, this sector has seen an increase of 677%
      in DVD sales to dealers.
 
 ·
    Total
      sales of motion picture video cassettes to dealers in the United States
      decreased from 293.6 million in 2003 to 148.7 million in 2004, a 49.4%
      decrease, also reflecting the continuing growth in DVD use by consumers.
      This follows a 39% decrease between 2003 and
2002.
 
 ·
    There
      are currently over 40,000 titles available on DVD. In 1999, there were
      5,000.
 
 ·
    In
      2004, 19,999,913 DVD players were purchased by retailers, a 9.1% decrease
      from 2003, when 21,994,389 were purchased.
 
 ·
    In
      2004, 37,000,000 DVD players were sold to U.S. consumers, an increase of
      9.8% over 2003, when 33,700,000 were sold.
 
 ·
    The
      average price of a DVD title in 2004 was $20.52. In 1999 the average was
      $25.53.
 
 ·
    Factory
      sales of digital TV sets and displays continue to rise, with 3.9 million
      units sold in 2003, compared to 2.5 million units sold in 2002. The
      average unit has dropped in price from $2,433 in 1999 to $1,441 in 2003.
      Total sales in 2003 reached $6.149 billion.
 
 ·
    In
      the U.S., of the 111.3 million homes accounted for in 2004, 109.6 million,
      or 98.4%, have television. Of the 109.6 million homes that have
      television, 65.4 million, or 59.7%, have DVD players. That represents an
      increase of 40.1% over 2003, and 403% increase since 2000. In comparison,
      68.4 million homes have internet access. 29 million homes have broadband
      services.
 
 ·
    73.9
      million homes, or 67.5% of the 109.6 million homes with television, have
      basic cable. That represents an increase of .1% over 2003. 35.1 million
      have pay cable services, a decrease of 12.2% from 2003. According to the
      FCC, as of January 2004, the average subscriber paid $14.45 per month for
      basic cable and $45.32 per month for expanded basic, or pay, cable. 36.8
      million of these homes have set-top boxes that can be tracked to an exact
      location in the home.
  ***Page
- 10***
 
 ·
    Preliminary
      reports show that at the end of 2004, 27.7 million homes subscribed to
      digital cable, a 14.5% increase over 2003. 22.2 million homes have
      satellite service, a 14.6% increase.
 
 ·
    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 2004 preliminary numbers, is available
      in 16.9 million households, or approximately 15.4% of homes with
      televisions. VOD consumer spending is projected at $337.2 million for
      2004, compared to $202.4 million in 2003. According to Adams Media
      Research, the average VOD price was $3.87.
 
 Despite
the attractiveness this growth suggests, the motion picture business remains a
very risky industry. Studios and independent producer’s 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 project.
 
 *The
Industry Process*
 
 *Motion
Picture 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 4 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.
 
 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.
 
 *Motion
Picture 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.
 
 ***Page
- 11***
 
 *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 set to expire on May 1, 2004 and the collective bargaining agreement
with the Screen Actors Guild was set to expire on June 30, 2004. Negotiations
for new agreements with the Screen Actors Guild and with the Writers Guild of
America are expected to be fully completed in 2005. The Directors Guild of
America collective bargaining agreement expires on June 30, 2005. 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, 2004
and the collective bargaining agreement with the International Alliance of
Theatrical and Stage Employees expires on July 31, 2006. 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.
 
 *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.
  ***Page
- 12***
 
 *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 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, a
gross profit participation receives a percentage of the first dollar received by
a film before any costs are deducted, while a 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.
 
 **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 advertising
expenditures incurred by their members in marketing a single theatrical release
was $30.61 million in 2004. The average print expenditures incurred by their
members in marketing a single theatrical release was $3.74 million in 2004.
Together, the average print and advertising costs per release per member, as
reported by the MPAA, totaled $34.35 million. Combining this total with the
$63.60 million reported average MPAA member costs to produce film, or motion
picture negative, results in an average production and distribution cost of $98
million. When one considers that the average box office revenue per release for
these members was only $34.6 million, and for all new releases the average was
$20 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.
  ***Page
- 13***
 
 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. 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.
  
 ***Page
- 14***
 
 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
12, 2004, we announced plans for our new business model, including the procedure
through which we changed our name and officially became Camelot Entertainment
Group, Inc.
 
 **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 being a leading independent producer and distributor of
feature films, we plan to exploit our competitive advantages, which we believe
includes our experience in developing, preparing, producing, finishing,
marketing and distributing low budget, independent films utilizing a unique and
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, 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.
 
 We
compete with major film studios and their classic divisions including:
 
 ·
    The
      Walt Disney Company, including Miramax;
 
 ·
    Paramount
      Pictures Corporation;
 
 ·
    Universal
      Pictures, including Universal Focus;
 
 ·
    Sony
      Pictures Entertainment, including Sony Pictures Classics;
 
 ·
    Twentieth
      Century Fox, including Fox Searchlight; and
 
 ·
    Warner
      Brothers Inc., including New Line Cinema.
  ***Page
- 15***
 
 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 that 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.
 
 *Majors
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.
 
 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.
 
 ***Page
- 16***
 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*Scream*film series,*Shakespeare
      in Love*and*Chocolat*;
 
 ·
    New
      Line Cinema Corporation/Fine Line Features, now owned by AOL/Time Warner,
      which produced the*Lord
      of the Rings*series, the*Austin
      Powers*films,*The
      Mask, Teenage Mutant Ninja Turtles*and the*Nightmare
      on Elm Street*series;
 
 ·
    U.S.A
      Films (formerly October Films and now owned by Vivendi/Universal), which
      produced*Traffic,
      Secrets & Lies*and*Breaking
      the Waves*together with Gramercy Pictures, which produced*Dead
      Man Walking*and*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 Ball*and*American
      Psycho*;
      and its newly acquired subsidiary, Artisan Entertainment Inc., which
      distributed*Boat
      Trip, National Lampoon's Van Wilder*and*The
      Blair Witch Project*.
 
 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 $10.86 billion in 2003. 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, 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.
  ***Page
- 17***
 
 *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
trademarks as valuable assets and believe that trademarks are an important
factor in marketing our products. To that extent, we have filed a trademark
application for Camelot Films, our feature film production division. We expect
to receive a permanent trademark for Camelot Films during early 2005.
 
 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.
 
 ***Page
- 18***
 **
 *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.
 
 *Product
Status*
 
 We have
received a commitment for initial project funding which should allow us to
commence production on our initial in-house project, which hopefully will
generate some initial revenues. While we have begun negotiations to acquire
various scripts we intend to produce as part of our base business model, we have
yet to physically receive our funding for these pictures and we plan not to
commence pre-production until all of the production monies have been received.
If sufficient capital is raised, we plan to implement our business plan of
developing, producing, marketing and distributing 12 pictures annually. In the
event we are unable to raise sufficient capital, our ability to implement our
planned business model would be severely affected, which could have a material
adverse effect on our business, results of operations or financial condition.
 
 ***Page
- 19***
 ****
 **Sources
and Availability of Raw Materials and the Names of Principal
Suppliers**
 
 ****  Once we
begin production, we plan to 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
depend on any one customer at this stage of our development. As we plan to
market and distribute our 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**
 
 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.
 
 **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.
 
 ***Page
- 20***
 
 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.
 
 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.
  ***Page
- 21***
 
 **Research
and Development Activities**
 
 ****  Our
research and development activities include preparing to implement 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 twenty per cent of management’s time has been spent conducting
research and development activities during the past two years.
 
 **Costs
and Effects of Compliance with Environmental Laws**
 
 As a
provider of incubation, research, vertical marketing and market index services
for development stage businesses through December 31, 2004, we did not incur any
compliance issues with environmental laws. 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.
 
 **Number
of Total Employees and Number of Full Time Employees**
 
 As of
December 31, 2004, we had a two staff members, both of whom are officers of our
company, who spent fifty to eighty per cent of their time on matters relating to
our company. We also have six additional staff members who spent anywhere from
ten to fifty per cent of their time on matters relating to our business. None of
our executive officers or other personnel currently receive cash compensation
from our Company for their services.
 
 **Risk
Factors**
 
 ***Risks
Related To Our Business***
 
 *We
have an Accumulated Deficit and we have no History of Operations as a Motion
Picture Company*
 
 We have
incurred losses in each operating period since our inception. Operating losses
may continue, which could adversely affect financial results from operations and
stockholder value, and there is a risk that we may never become profitable.
 
 As of
December 31, 2004 we have an accumulated deficit of $7,325,000, all of which
related to our previous activities as a business development organization,
Dstage.com, and none of which relate to our current activities as a motion
picture production, marketing and distribution entity. Similarly, of these
losses, approximately $5,940,000 was the result of non-cash charges to earnings
related to stock-based compensation and impairments to intangibles and
long-lived assets.
 
 There can
be no assurance that our management should be successful in managing the Company
as a motion picture production, distribution and marketing concern. See
“Managements Discussion and Analysis of Financial Conditions and Results of
Operations”.
 
 *We
expect to have a need for Additional Financing*
 
 As of
December 31, 2004, we had a working capital deficit of $358,000. Our history of
recurring losses from operations raises a substantial doubt about our ability to
continue as a going concern. There can be no assurance that we will have
adequate capital resources to fund planned operations or that any additional
funds will be available to us when needed, or if available, will be available on
favorable terms or in amounts required by us. If we are unable to obtain
adequate capital resources to fund our motion picture operations, it may be
required to delay, scale back or eliminate some or all of our operations, which
may have a material adverse effect on our business, results of operations and
ability to operate as a going concern.
 
 ***Page
- 22***
 Our
business 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 other sources. Although we
intend to reduce the risks of our production exposure through strict financial
guidelines and financial contributions from broadcasters, subdistributors, 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.
 
 *Penny
Stock Regulation*
 
 Our
common stock is deemed to be a penny stock. Penny stocks generally are equity
securities with a price of less than $5.00 per share other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
Stock Market, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system.
 
 Our
securities may be subject to "penny stock rules" that impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally those with
assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000
together with their spouse). For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase of
such securities and have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving a
penny stock, unless exempt, the "penny stock rules" require the delivery, prior
to the transaction, of a disclosure schedule prescribed by the Commission
relating to the penny stock market.
 
 The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks.
 
 Consequently,
the "penny stock rules" may restrict the ability of broker-dealers to sell our
securities. The foregoing required penny stock restrictions should not apply to
our securities if such securities maintain a market price of $5.00 or greater.
Considering our stock currently has a bid price of 1.2 cents, there can be no
assurance that the price of our securities will ever reach or maintain such a
level.
 
 *We
are Dependent on Key Personnel*
 
 Our
success and future growth depends on our ability to attract and retain qualified
employees throughout our business. Specifically, we are dependent on our
officers and directors, including President and Chief Executive Officer Robert
P. Atwell and Director H. Kaye Dyal, who is expected to be named President of
Camelot Films, our film production division. He is a key member of our
organization and we plan to rely on his experience in the motion picture
business.
 
 We
compete for our employees with many other companies, some of which have greater
financial and other resources. In the future, we may have difficulty recruiting
and retaining sufficient numbers of qualified personnel, which could result in a
material decline in revenues. In addition, increased compensation levels could
materially and adversely affect our financial condition or results.
 
 Our
success in achieving growth objectives depends upon the efforts of 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. Although we expect to find high quality candidates to fill
these positions, 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.
 
 ***Page
- 23***
 **
 *Competition
is Severe in the Motion Picture Industry*
 
 The
motion picture industry is highly competitive. Our management believes 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.
 
 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.
 
 *Substantial
Risks Germane to the Motion Picture Industry*
 
 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.
  *Distribution
in Foreign Countries*
 
 We plan
to license motion picture and television programming in foreign countries to
subdistributors. 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.
 
 ***Page
- 24***
 **
 *Risks
of Litigation*
 
 The
nature of the motion picture industry is such that claims from third parties
alleging infringement upon their rights to characters, stories, concepts or
other intellectual property are common. Due to our limited history as a motion
picture production company, it is likely that we could receive such claims at
some point in the future following release of completed film projects by us.
Such claims could have material adverse impact on our results from operations
and our financial statements.
  There can
be no assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against us, or that any assertions or prosecutions will not
materially adversely affect our business, financial condition or results of
operations. Irrespective of the validity or the successful assertion of such
claims, we would incur significant costs and diversion of resources with respect
to the defense thereof, which could have a material adverse effect on our
business, financial condition or results of operations.
  *Our
Management and Chief Executive Officer Own a Large Portion of our Common Stock*
  As of
December 31, 2004, our Chief Executive Officer, Robert P. Atwell, beneficially
owns approximately 62.0% of our outstanding Common Stock. This concentration of
our common stock ownership, combined with Mr. Atwell’s position as our Chief
Executive Officer, substantially reduce the ability of other shareholders to
impact matters requiring shareholder approval, or cause a change in control to
occur. As a result, Mr. Atwell, acting alone, is able to exercise sole
discretion over all matters requiring shareholder approval, including the
election of the entire board of directors and approval of significant corporate
transactions, including an acquisition. Such concentration of ownership may also
have the effect of delaying or preventing a change in control or impeding a
merger, consolidation, takeover or other business combination, or discouraging a
potential acquirer from making a tender offer or otherwise attempting to obtain
control of the Company. Mr. Atwell is also Chief Executive Officer at The Atwell
Group, Inc. Although Mr. Atwell spends time at the Company and is active in its
management, he does not devote his full time and resources to the Company.
  *Piracy
of Original Motion Pictures we 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 $3.5
billion in 2002. 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.
 
 *Fluctuation
of Operating Results*
 
 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.
 
 ***Page
- 25***
 **
 *Difficulties
with Relationships Impacting Organized Labor may Adversely Impact our Earnings
and Ability to Complete Film Projects*
 
 The
Screen Actors Guild, of which many actors in the film industry are members,
bargains collectively with producers on an industry-wide basis from time to
time. Similarly, many other classes of personnel required to complete a motion
picture bargain collectively through guilds and unions. There is no assurance
that labor difficulties will not adversely affect the production of our films.
  It is
common for film directors, producers, animators and actors at film production
companies to belong to a union. There can be no assurance that our employees
will not join or form a labor union or that we, for certain purposes, will not
be required to become a union signatory. We may be directly or indirectly
dependent upon certain union members, and work stoppages or strikes organized by
such unions could materially adversely impact our business, financial condition
or results of operations. For example, many of the actors who provide voice
talent for films are members of the Screen Actors Guild (SAG) and/or the
American Federation of Television and Radio Artists (AFTRA) and the current SAG
and AFTRA contract expires June 30, 2005. If a work stoppage did occur, it could
delay the completion of our films and have a material adverse effect on our
business operating results or financial condition.
  *Forecasting
Film Revenue and Associated Gross Profits from our Feature Films is Extremely
Difficult*
  While
customer acceptance is initially measured by box office success, customer
acceptance within each follow-on product category, such as home video,
merchandise or television, depends on factors unique to each type of product,
such as pricing, competitive products, and the time of year or state of the
economy into which a product is released, among many other factors. In addition,
the degree of customer acceptance varies widely among foreign countries. While
box office success is often a good indicator of general customer acceptance, the
relative success of follow-on products is not always directly correlated, and
the degree of correlation is difficult to predict.
   With
respect to the difficulty of forecasting the timing of revenues, distribution of
our films and film-related products, therefore, determines the timing of product
releases.
   In
addition, the amount of revenue recognized in any given quarter or quarters from
all of our films depends on the timing, accuracy, and sufficiency of a
distributor’s information we receive to determine revenues and associated gross
profits. Although we plan to rely on the most current information available to
recognize our revenue and to determine our film gross profit, any subsequent
adjustments to the information that has been provided could have a material
impact on us in later periods.
   For
instance, towards the end of the life cycle for a revenue stream, we may be
informed of additional distribution costs to those previously forecasted. Such
adjustments can impact and may continue to impact our revenue and our film gross
profit. In addition, through information we obtain from other sources, we may
make certain judgments and/or assumptions and adjust the information we receive
from a distributor.
   With
respect to capitalized film production costs, our policy is to amortize these
costs over the expected revenue streams as we recognize revenues from each of
our films. The amount of film costs that should be amortized each quarter
depends on how much future revenue we expect to receive from each film.
Unamortized film production costs are compared with net realizable value each
reporting period on a film-by-film basis. If estimated remaining gross revenues
are not sufficient to recover the unamortized film production costs, the
unamortized film production costs should be written down to net realizable
value. In any given quarter, if we lower our previous forecast with respect to
total anticipated revenue from any individual feature film, we would be required
to accelerate amortization of related film costs, resulting in lower gross
margins. Such lower gross margins would adversely impact our business, operating
results, and financial condition.
   *Forecasting
our Operation Expenses is Extremely Difficult*
  Our
business model requires that we be efficient in production of our motion
pictures. Actual motion picture production costs often exceed their budget,
sometimes significantly. The production, completion and distribution of motion
pictures are subject to a number of uncertainties, including delays and
increased expenditures due to creative differences among key cast members and
other key creative personnel or other disruptions or events beyond our control.
Risks such as death or disability of star performers, technical complications
with special effects or other aspects of production, shortages of necessary
equipment, damage to film negatives, master tapes and recordings or adverse
weather conditions may cause cost overruns and delay or frustrate completion of
a production. If a motion picture production incurs substantial budget overruns,
we may have to seek additional financing from outside sources to complete
production.
 
 ***Page
- 26***
 
 We cannot
make assurances regarding the availability of such financing on terms acceptable
to us, and the lack of such financing could have a material adverse effect on
our business, results of operations and financial condition. In addition, if a
motion picture production incurs substantial budget overruns, we cannot assure
you that we should recoup these costs, which could have a material adverse
effect on our business, results of operations or financial condition. Increased
costs incurred with respect to a particular film may result in any such film not
being ready for release at the intended time and the postponement to a
potentially less favorable time, all of which could cause a decline in box
office performance, and thus the overall financial success of such film. Budget
overruns could also prevent a picture from being completed or released.
 
 Any of
the foregoing could have a material adverse effect on our business, results of
operations and financial condition. Production costs and marketing costs are
rising at a faster rate than increases in either domestic admissions to movie
theaters or admission ticket prices, leaving us more dependent on other media,
such as home video, television and foreign markets, and new media. If we cannot
successfully exploit these other media, it could have a material adverse effect
on our business, results of operations or financial condition.
  *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 12 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 12 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.
  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.
  ***Page
- 27***
 **
 *Because
our Films may Contain Mature Themes, they may be Subject to Ratings Restrictions
and Censorship which would Reduce our Ability to Commercialize a Film*
 
 Certain
agreements we may obtain, including agreements with distribution companies for
films we elect not to distribute ourselves, may be contingent upon our film
ultimately receiving a rating classification from the MPAA that is no more
restrictive than “R”. However, some of our films may contain mature themes, and
it is difficult to predict how the MPAA will ultimately classify a specific
film.
 
 If any of
our films are unable to obtain a rating less restrictive than NC-17, then
marketing and advertising support may be reduced, resulting in fewer
distribution venues and thus a smaller audience.
 
 In
addition, censors in certain foreign jurisdictions might find elements of our
films to be objectionable. We may be forced to make revisions before exhibiting
our films in these jurisdictions, further adding to our expenses. The release of
our films in certain jurisdictions may be denied regardless of revisions. These
occurrences would reduce our international revenues. We cannot provide any
assurances that we will be successful in addressing such risks.
  *Terrorist
Activities and Resulting Military and other Actions could Adversely Affect our
Business*
   The
continued threat of terrorism within the United States and abroad, military
action and heightened security measures in response to such threats, as well as
other socioeconomic and political events, may cause significant disruption to
commerce, including the entertainment industry, throughout the world. For
example, the terrorist attacks in New York and Washington, D.C. on September 11,
2001 disrupted commerce throughout the United States and Europe. Such disruption
in the future could have a material adverse effect on our business and results
of operations.
   *We
are Subject to Risks Caused by the Availability and Cost of Insurance*
  Changing
conditions in the insurance industry have affected most areas of corporate
insurance. These changes have equated to higher premium costs, higher
deductibles and lower insurance coverage limits. We intend to obtain insurance
policies standard in a motion picture production, including general liability
insurance, a completion bond and other production related insurance. This
decision should be made by our management after their review of other insurance
policies we obtain for our film productions. There is no way to know how
comprehensive our coverage may be or how such a loss might impact the success of
the Company. In addition, our schedules and budgets must be reviewed and
approved by a completion bond company before we can obtain a completion bond.
Nevertheless, our ability to adhere to our schedules and budgets face many
uncertainties, including but not limited to, whether we can attract suitable
production and creative staff within our budgets; the timing of the availability
of our principal cast members; the continued health of our director, producer,
actors and other key personnel; delays caused by unpredictable weather; the
availability and affordability of desirable locations for our productions; and
our ability to secure appropriate facilities for post-production work in a
timely fashion. Therefore, we cannot be certain that production of our films
will occur on schedule or within budget.
 
 If we are
forced to exceed our production budgets due to unforeseen problems, we may be
required to raise additional capital in the form of short-term debt to complete
the films. Additionally, if we do not complete a film on schedule its
distribution could be delayed and it could increase the time before we begin to
generate revenues. During this period we expect to continue to incur overhead
costs, which may reduce our net revenue, if any. If our productions go over
budget, we may be unable to raise additional capital.
 
 *Our
Success Depends on the Commercial Success of Motion Pictures, which is
Unpredictable*
 
 Operating
in the motion picture industry involves a substantial degree of risk. Each
motion picture is an individual artistic work, and unpredictable audience
reactions primarily determine commercial success. Generally, the popularity of
our motion pictures or programs depends on many factors, including the critical
acclaim they receive, the format of their initial release, for example,
theatrical or direct-to-video, the actors and other key talent, their genre and
their specific subject matter.
 
 The
commercial success of our motion pictures also depends upon the quality and
acceptance of motion pictures or programs that our competitors release into the
marketplace at or near the same time, critical reviews, the availability of
alternative forms of entertainment and leisure activities, general economic
conditions and other tangible and intangible factors, many of which we do not
control and all of which may change.
 
 We cannot
predict the future effects of these factors with certainty, any of which factors
could have a material adverse effect on our business, results of operations and
financial condition. In addition, because a motion picture’s performance in
ancillary markets, such as home video and pay and free television, is often
directly related to its box office performance, poor box office results may
negatively affect future revenue streams.
 
 ***Page
- 28***
 
 Our
success could depend on the experience and judgment of our management to select
and develop new investment and production opportunities. We cannot make
assurances that our motion pictures will obtain favorable reviews or ratings, or
that our motion pictures will perform well at the box office or in ancillary
markets. The failure to achieve any of the foregoing could have a material
adverse effect on our business, results of operations and financial condition.
 
 *We
are Smaller and Less Diversified than Many of our Competitors.*
 
 Although
we plan to be an independent distributor and producer, 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 once we begin to 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.
 
 *We
May Not be Able to Obtain Additional Funding to Meet our Requirements*
 
 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 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. If we do not have access to such
financing arrangements, and if other funding does not become available on terms
acceptable to us, there could be a material adverse effect on our business,
results of operations or financial condition.
 
 *We
Face Risks from Doing Business Internationally*
 
 We may
distribute motion picture productions outside the United States through third
party licensees and derive revenues from these sources. As a result, our
business is subject to certain risks inherent in international business, many of
which are beyond our control. These risks include changes in local regulatory
requirements, including restrictions on content; changes in the 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; instability of foreign
economies and governments; cultural barriers; wars and acts of terrorism. Any of
these factors could have a material adverse effect on our business, results of
operations or financial condition.
 
 ***Page
- 29***
 **
 *Leverage
Risks*
 
 The
degree to which we might become leveraged may require us to dedicate a
substantial portion of our cash flow to the payment of principal of, and
interest on, our indebtedness, reducing the amount of cash flow available to
fund film production costs and other operating expenses. Additionally, the
degree to which we might become leveraged may adversely affect our ability to
obtain additional financing, if necessary, for such operating expenses, to
compete effectively against competitors with greater financial resources, to
withstand downturns in our business or the economy generally and to pursue
strategic acquisitions and other business opportunities that may be in the best
interests of us and our stockholders.
 
 **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.
 
 **ITEM 2. DESCRIPTION OF PROPERTY**
 
 Our
corporate headquarters are located at 2020 Main Street, Suite 990, Irvine,
California 92614. We occupy and share approximately 2,800 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, 2008.
 
 **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**
 
 On April
12, 2004, The Company announced the intention to change the name of the Company
from Dstage.com, Inc. to Camelot Entertainment Group, Inc. which met with
shareholder approval in April, 2004.
 
 During
April and May, 2004, the Company received shareholder approval to increase the
authorized shares to 150,000,000 common and 50,000,000 preferred stock and to
adopt the 2004 Stock Option Plan, which provides for the grant of stock options
to purchase up to 50,000,000 shares of common stock to officers, directors,
employees and consultants.
 
 On August
25, 2004 the Company held its annual meeting of shareholders and approved the
following matter:
 
 (a)
Electing five directors to serve on the Board of Directors of the Company:
Robert P. Atwell, Albert A. Golusin, Jane Olmstead, Rounsevelle Schaum and H.K.
Dyal III; (b) ratified the selection of the Company’s auditors, Epstein, Weber
& Conover, PLC, of Scottsdale, Arizona; (c) approved the acquisition of
Camelot Films, Inc., a Delaware corporation, Camelot Films, Inc., a Nevada
corporation, Camelot Films, In., a California corporations, and the
establishment of Dstage.com, Inc., a Delaware corporation newly formed in April,
2004, each to serve as a subsidiary of the Company; (d) ratify all actions taken
by the directors to commence with an SB-2 registration filing with the
Securities and Exchange Commission; (f) authorized the Board of Directors to
amend by-laws or adopt new By-Laws; and (g) to transact such other business as
may properly come before the meeting.
 
 ***Page
- 30***
 ****
 **PART II**
 
 **ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**
 
 *Market
Information*
 
 Although
the 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"), there is currently no established market for such
shares; and there can be no assurance that any such market will ever develop or
be maintained.
 
 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*
 
 The
following table reflects the high and low bid, ask and sales price per share of
Common Stock as quoted from the OTCBB transactions for each period indicated.
 
 Year
      Ended
      **December
      31, 2003**
    BID
    ASK
    CLOSE
      PRICEHigh
    Low
    High
    Low
    High
    LowFirst
      Quarter
    0.02
    0.015
    0.04
    0.03
    0.04
    0.015Second
      Quarter
    0.06
    0.015
    0.04
    0.02
    0.07
    0.012Third
      Quarter
    0.04
    0.03
    0.07
    0.05
    0.04
    0.04Fourth
      Quarter
    0.05
    0.03
    0.08
    0.04
    0.05
    0.03**December
      31, 2004**First
      Quarter
    0.13
    0.03
    0.15
    0.04
    0.15
    0.035Second
      Quarter
    0.14
    0.045
    0.18
    0.05
    0.15
    0.05Third
      Quarter
    0.16
    0.045
    0.19
    0.065
    0.18
    0.065Fourth
      Quarter
    0.22
    0.03
    0.28
    0.055
    0.29
    0.05
 
 As of
December 31, 2004 the bid share price of our Common Stock was $.19 on the OTCBB.
OTCBB quotations reflect inter-dealer prices, without retail mark-up, mark-down,
or commissions and may not represent actual transactions.
 
 *Holders*
 
 On
December 31, 2004, there were 112 holders of record of our Common Stock.
However, we estimate there are approximately 2,300 beneficial owners of our
Common Stock. As of December 31, 2004, there were 74,951,209 shares of Common
Stock outstanding.
 
 *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
the fourth quarter of 2004, the Company issued the following
securities:
 
 On
November 30, 2004, the Company authorized the issuance of 8,749,998 shares to
individuals providing consulting services to the Company. The number of shares
issued to officers in full payment of their services was 3,999,998, valued at
$262,500. Additional shares were issued for consulting services, valued at
$393,750. The
issuance of the stock was exempt from registration under Section 4(2) of the
Securities Act. No underwriter was involved in the offer of sale of the
shares.
 
 ***Page
- 31***
 On
December 15, 2004, the Company issued shares in exchange for legal services. The
total number of shares issued were 450,000 and such shares were issued in the
fourth quarter of 2004 at a stated price of $. 23/share.
The issuance of the stock was exempt from registration under Section 4(2) of the
Securities Act. No underwriter was involved in the offer of sale of the
shares.
 
 On
December 15, 2004, the Company issued 1,000,000 shares to VedaLabs, Inc. in
accordance with the settlement agreement dated October 23, 2003. The shares had
been authorized on March 30, 2004, subject to completion of all the terms and
conditions of the settlement agreement, which were finally completed on or about
December 15, 2004.
 
 On
December 31, 2004, the Company authorized the issuance of common stock shares to
Eagle Consulting Group, Inc. The number of shares to be issued are 2,967,573 at
an agreed upon price of $.03/share. The issuance of the stock was exempt from
registration under Section 4(2) of the Securities Act. No underwriter was
involved in the offer of sale of the shares.
 
 *Subsequent
Authorization and/or Issuances of Preferred Stock*
 
 During
the first quarter of 2005, the Company issued the following
securities:
 
 On
January 5, 2005, the Company established a Series A and Series B Preferred Class
of stock, with the Series A Preferred Stock reserved for employees, consultants
and other professionals retained by the Company, and with the Series B Preferred
Stock reserved for the Board of Directors.
 
 On
January 5, 2005, the Company directed its officers to file the appropriate
Preferred Stock Designations with the State of Delaware.
 
 On
January 5, 2005, the Company authorized the issuance of 5,100,000 shares of its
Class A Preferred Stock to Robert P. Atwell.
 
 On
January 5, 2005, the Company authorized the issuance of 5,100,000 shares of its
Class B Preferred Stock to Robert P. Atwell.
  ***Page
- 32***
  **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.
 
 **Plan
of Operation**
 
 *Overview*
 
 On
October 12, 1999 we were incorporated in Delaware as Dstage.com, Inc.. On April
12, 2004 we announced our intention of changing our name to Camelot
Entertainment Group, Inc. and changed our business model from pursuing a new
approach to venture formation (the Dstage.com Model) to the Camelot Studio Model
(or "CSM"). The CSM attempts to combine the efficiencies realized by studios of
the early 1900s, with the artistic focus and diversity of today's independent
productions. Using this approach, the Company believes 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 CSM extends the pre-production
cycle substantially to reduce costs while simultaneously increasing quality.
Similarly, whereas a low-budget picture is severely limited by the types of
postproduction technology used, due to budget constraints, we intend to invest
directly in top of the line technology, spreading the costs over a targeted
minimum of 12 original motion pictures each year. The goal of the CSM 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.
 
 Our
historical operations, prior to becoming Camelot Entertainment Group, Inc.,
consisted primarily of attempting to provide support, organization and
restructuring services to other development stage companies. Due to the complete
and drastic change in our business focus, from seeking to aid development stage
companies to our current focus of producing, distributing and marketing original
motion pictures, 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 financials and the related notes included elsewhere in this
annual report in addition to thoroughly reading our current plan of
operations.
 
 *Our
View of the Steps Required for Motion Picture
Commercialization*
 
 We view
the motion picture commercialization process as involving three major steps,
each of which bears a symbiotic relationship to the costs, creative value and
profitability of any planned film to be released by us. These three steps are
development, production and distribution. Under our planned model, development
should include not only screenplay acquisition and development, but also a
carefully constructed and unusually elongated pre-production phase. This process
was developed as a result of the direct experience and observations of our
management.
  By
viewing the development phase as a distinct and major component of the motion
picture creation process, we hope that we can create a culture that encourages
producers, writers and directors associated with our projects to focus their
efforts and expertise on creating world-class pictures before the first day of
shooting begins. We believe that creating such a culture could potentially
result in a substantial reduction of the cost of our film projects, as compared
to the film projects of our competitors. When combined with what we believe is a
unique method of attracting, compensating and retaining talent that would
otherwise not be involved in an active motion picture project, it is expected
that the opportunity for a cost advantage could emerge.
 
 Two
members of our management team, President and Chief Executive Officer Robert P.
Atwell and H. Kaye Dyal, who is expected to be named President of Camelot Films,
our film production division, have worked extensively in financing, producing
and directing original motion pictures and television programs with a combined
50 years experience in the motion picture and related businesses. This combined
experience led our management to a number of beliefs upon which our planned
business model should be founded. These key views are:
 
 ***Page
- 33***
 
 
 ·
    The
      manner in which development and pre-production activities are managed can
      have the largest impact on both the quality, or creative content, and the
      cost of creating a motion picture.
 
 ·
    There
      are a number of factors that make it difficult for most motion pictures to
      invest large amounts of time and a proportionally large share of a motion
      picture’s overall budget into development and pre-production activities.
 
 ·
    The
      factors that make it difficult for many motion picture projects to invest
      a major share of a film’s time and financial resources into development
      and pre-production activities may have created a pervasive business
      culture that emphasizes moving projects towards principal photography too
      quickly.
 
 ·
    A
      very small percentage of all writers that want to have their screenplays
      become completed motion picture projects will ever realize this
      ambition.
 
 ·
    A
      very small percentage of all directors will participate in principal
      photography in any given year.
 
 ·
    The
      percentage of qualified actors that never have the opportunity to
      participate in a completed original motion picture that is released
      commercially is substantial.
 
 ·
    There
      are large periods of unemployment for many individuals involved in motion
      picture production.
 
 We
believe that these observations suggest that the capacity to create motions
pictures, in terms of employable professionals, is far higher than the current
demand of existing film production companies for these services. However, we
also believe that growth in motion picture consumption worldwide has created
increased demand for original motion pictures in general. As a result, we
anticipate that the underemployed, or unemployed, directors, writers and other
film professionals could help fill a void for low cost, quality original motion
picture production, given the right mix of incentives and business structure.
There can be no assurance that such benefits, advantages or capacity will ever
materialize.
 
 Successfully
creating such low cost, but relatively high quality pictures should result in a
higher per picture financial return and a lower breakeven point for each film
produced. Also, by distributing these pictures primarily through in-house
distribution professionals, the per picture return might be increased even
further, enabling more motion pictures to be produced by us annually and thereby
diversifying the risk associated with any single film project. These beliefs
form the foundation for our planned business model and expected
strategy.
 
 *Our
Strategy of Emphasizing the Pre-production Phase of Motion Picture
Commercialization*
 
 As noted
previously, we believe that a very small percentage of all writers that want to
have their screenplays become completed motion picture projects will ever
realize this ambition. We believe that this assertion speaks to the opportunity
we envision to cost effectively acquire writing, directing producing and other
motion picture production talent that would otherwise exceed demand for these
services.
  This
perceived opportunity is critical to our strategy, because without a great
script, we believe it is either incredibly expensive or simply impossible to
produce a great motion picture. However, we also believe that few great scripts
begin as great scripts, but most evolve from a great idea to a substandard
script and so forth. Matching great script ideas with tried and true expertise
of professionals that know character development, genre formulas and how to
convert words into pictures that create passion are expected to allow us to
realize our vision.
  We
believe that many small and medium sized production companies can rarely afford
to invest their time into unproven writers, much less even consider going with
unproven directing talent. Moreover, we believe that the investors and
distributors they are aligned with often play a major role in which projects get
approved for production, or “green-lighted.”
  Similarly,
we believe that major studios have even more reasons for steering clear from
these unproven sources of product. If these assertions are correct, then a large
pool of untapped creative talent available for use in motion picture production
exists. It is our intention to engage this pool to commercialize motion pictures
in accordance with our strategy. To accomplish this objective, we intend to do
the following:
  ·
    *Obtain
      Complete And Outright Ownership Of Scripts And Other Literary
      Works***:**We
      anticipate that by offering the proper incentives to screenwriters and
      other authors of compelling literary works well suited for a film project,
      we should be able to acquire complete and outright ownership of these
      copyrights for a fraction of what many producers would pay simply to get
      an option on a script. As mentioned, such writers have an incentive that
      fewer than 10% of Screenwriters Guild members expect to experience in a
      given year the true opportunity to have their vision become a theatrically
      released motion picture. In addition, our plan calls for participating
      writers to share in the success of their script, through profit
      participation and indirectly in the success of other film projects we
      complete, through restricted shares of or common stock. This same formula
      is expected to allow us to attract directors, producers and other creative
      personnel with a passion for making pictures that the public wants to see.
   ***Page
- 34***
 
 ·
    *A
      Recurring 6-Month Cycle Of Pre-Production Activities***:**Our plans for the pre-production phase for each motion picture project we
      initiate is to utilize a recurring 6-month cycle that starts every month
      for a new film, enabling us to create a rolling pipeline of product.
      Unlike our perception of pure independents and small production companies,
      we don’t anticipate that our pre-production phase could consume creative
      resources by having producers, writers and directors hunt for additional
      film financing. Instead, we anticipate that each film should have a set
      and fixed budget. We expect the additional time that should emerge, if we
      are successful, to allow the production designer, producers, director of
      photography and other personnel adequate time to find ways to increase
      quality and reduce costs through skillful planning.
 
 ·
    *Relatively
      Firm Scheduling Of Film Projects***:**Another feature we expect to emerge as a result of our planned approach is
      that it should allow relatively firm scheduling of the cast at a very
      early stage, something that we believe is rare in the world of pure
      independent productions. During this same time, we expect the production
      team to benefit from a mentoring environment that insures the creative
      spark sought in each of our productions does not become an increasing
      collection of unrealistic ambitions, leading to missed production
      schedules. With these elements firmly in place, we would typically expect
      principal photography to begin in the fifth month of each project.
 
 *Our
Strategy of Achieving Higher Quality and Lower Costs During the Production Phase
of Motion Picture Commercialization*
 
 Four key
elements following development and pre-production are expected to enable us to
create quality pictures for a fraction of the cost experienced by our
competitors. These four elements are:
 
 1. *Digital Photography*
 
 Like the
model we plan to pursue, we believe that purely independent productions can
realize costs savings by using digital film technology due to the lower cost of
processing, stock, dailies and certain editing costs. We also believe that major
studios benefit from using digital technology in certain genres, but not so much
from a cost standpoint.
 
 Instead,
we think that the heavy special effects used by major studios’ high-budget
action and science-fiction pictures are increasingly enhanced as a result of
using digital photography. While, if true, this would negate some of the cost
benefits of using digital photography, the overall value in terms of
entertainment quality would still be enhanced, in general. One party that we
believe has found the benefits of digital photography rather elusive is the
small and mid-sized production company.
 
 We
believe that this is generally because when such companies convince a director
to use digital photography, the director and director of photography (or “DP”)
are likely to specify additional camera setups. We also believe that the
increased, low-cost coverage available, along with real-time video monitoring,
often results in issues between directors and directors of photography on
projects of these companies, as they analyze and debate each shot during
precious shooting time. As a result, the mixed use of digital photography by
small and medium sized production companies generally has a neutral impact on
overall value, in our opinion.
 
 2. *Profit Participation*
 
 We
believe that it is very common for purely independent productions to offer
profit participation, or points, as a means of getting parties they could
otherwise not afford to hire (for cash) to work on the production. If this is in
fact a standard method of simply getting a picture made for these types of
productions, we believe the effects on value are neutral. That is, if every
competitive production is offering this same type of compensation, the potential
impact of the incentive is reduced.
 
 Similarly,
in the case of major studios, we believe that all of the parties involved in
such productions have access to sophisticated negotiators and advocates that can
reasonably weigh the potential market value of such incentives. If so, we
believe that such incentives rarely offer a competitive advantage to the
production. However, for small and medium sized independents, our model assumes
that the added incentive of points can be the extra incentive needed to attract
certain parties that would otherwise not participate on a given project.
 
 ***Page
- 35***
 
 We intend
to use profit participation in a manner that we think is precedent setting in
the industry. Firstly, under our model, every member of the production stands to
participate in the financial success of our film projects, thereby reversing an
industry tradition whereby the phrase “net” has had little or no meaning or
substance. Similarly, since the same types of writers and directors that would
be otherwise willing to work on a picture with little or no compensation are
being pursued under our model, albeit at very low cash rates, the added
incentive of profit participation is expected to be a meaningful bonus in the
eyes of these parties.
 
 3. *Production Management*
 
 We
believe that the largest full-time employers of motion picture production
management, and also the entities with the most developed production management
infrastructures, are major studios. However, we believe that these large
bureaucracies, while essential to the management of a relatively large volume of
high budget pictures, also create an environment that often pits creative talent
against management. If true, then to a certain degree, this may offset some of
the potential advantages of their production management systems. The production
management systems of one-picture only, pure independent productions tend to be
ad hoc systems that find their way into the process through the producer,
director and other personnel that are assembled to create a one-time
organization, in our opinion. This leaves the small and medium sized production
companies, who benefit from their ambitions of creating multiple motion
pictures. Unfortunately, as their staffs of full-time production and development
personnel grow, we believe their budgets grow accordingly, in general, creating
little competitive value over time.
 
 4. *Common Stock Incentives*
 
 To the
best of our knowledge, no other publicly traded film company has ever utilized
common stock to incentivize all of its creative, production and management
resources. There are two specific reasons why this option is not generally
available to competitors. Firstly, most of the companies making lower budget
pictures do not have business models that justify becoming a publicly traded
company. Secondly, for companies that do have the scale to offer publicly traded
stock as a form of production compensation, we believe that doing so would be at
odds with their fundamental business cultures and, in many cases, at odds with
the wishes of their shareholders.
 
 With the
exception of using common stock, we believe that each of these value enhancement
tools is used to varying degrees, with varying success, by other motion picture
productions. However, we are not aware of any other Company that uses the
systematic and flawless integration of these elements into each of their
productions the way that we intend to. If this is correct, we believe it may
explain why few if any motion picture companies can consistently realize the
reduction in cash production expenditures combined with the increase of quality
that we expect to be a key element of our business model.
 
 *Our
Strategy of Developing and Utilizing In-house Distribution
Expertise*
 
 A number
of new distribution channels have increased the means by which motion picture
product can be consumed and, therefore, the potential channels for revenue.
These channels include theatrical or box office, video cassette, DVD,
pay-per-view television, cable television, network television, television
syndication, non-theatrical outlets, such as in-flight movies, and international
channels. With so many new distribution channels available, it may seem
surprising that pictures with smaller budgets still find it so difficult to get
their films in front of audiences. Our management believes this pervasive
problem is primarily due to two difficult obstacles to overcome.
 
 Firstly,
we believe that the very reliance on a distributor places a small independent
production at the mercy of a party they have limited bargaining power with and
virtually no control over: the distributor. Under such a scenario, we believe
that even if revenues and expenses are fairly and properly accounted for by the
distributor, cash must flow through many hands before revenue makes it way back
to investors and other profit participants.
 
 Secondly,
and perhaps equally important, we believe that without a large volume of product
in the pipeline, the alternatives to using an outside distributor are few, and
rarely result in large, predictable inflows of cash. For instance, if an
independent producer has a single picture budgeted at $5 million, it is
generally economically impractical to establish an in-house distribution
department with the limited mission of directly marketing that one film. At the
same time, we believe that volume purchasers of motion picture product,
including studios, cable outlets, home video companies and other buyers with
large needs for product, require a dependable source of multiple pictures. The
one-picture or two-picture production company simply can’t meet these needs,
making it more efficient for buyers to deal with an agent or sub-distributor, in
our opinion. Our planned combination of high-volume and high-quality motion
pictures stands to change these economics, making in-house distribution an
essential element of our strategy.
 
 ***Page
- 36***
 **
 *Motion
Picture Library*
 
 A
potential benefit of our business model is the planned ownership of an expansive
library of feature films that should be, for the most part, unencumbered. If we
are successful in implementing our business plan, we could have 12 films or more
going into our library annually that could have an extended shelf life in
ancillary markets, including, but not limited to, cable, satellite and
television syndication, both domestically and internationally, extended DVD’s,
special edition DVD’s and other areas of repurposing.
 
 **Liquidity
and Capital Resources**
 
 We have
no history of operations as a film production and distribution company. We
believe that, due to the complete and drastic change in our business focus,
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
financing agreement with Eagle Consulting Group, Inc.(“Eagle”). 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 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 2004 Eagle advanced $127,341. The funding commitment from
Eagle should cover all of our operating expenses for the next twelve months.
 
 We
entered into an agreement with The Corporate Solution, Inc., owned by our
President, Robert P. Atwell, whereby The Corporate Solution has agreed to
provide a minimum of $262,500 toward the budget of an initial film we are
currently developing in-house. The filming is expected to commence during the
third or fourth quarter of 2005. In exchange for providing the funds, The
Corporate Solution, Inc. received 3,500,000 shares of our $.001 par value common
stock.
 
 In
addition, we entered into an agreement with Corporate Awareness Professionals,
Inc.(“CAP”), which in part provided for the initial purchase of 1,675,000 shares
of our $.001 par value common stock through options priced at $0.15 per share
for $251,250. In addition, CAP has the option to purchase an additional
1,000,000 shares at $.50 per share for $500,000. Upon purchasing those shares,
CAP has the right to purchase up to a maximum of 10% more shares, or 100,000
shares, at $.50 per share. If CAP exercises all its options, it should have
purchased 2,775,000 total shares for $801,250. As of the date of this annual
report, CAP has not exercised any of its options. There can be no guarantee that
they will exercise any of their options, and in the event they do exercise some
of their options, there can be no guarantee that they will exercise all of their
options. As a result, the failure of CAP to exercise some or all of their
options would have an adverse effect on us. As of December 31, 2004, CAP had not
exercised any of its options, which expire in March, 2005.
 
 Further,
we are in the process of preparing a private placement memorandum and an SB-2
registration statement for the purpose of funding our initial slate of
pictures.  If the
anticipated funding is successful, it is our goal to have between 10 and 12
motion pictures in various stages of development or production within 12 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
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. 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 films than our plan calls for.
 
 **Sources
of Revenue**
 
 Upon
completion of each film, assuming that any are successfully completed, we intend
to engage international and domestic channels of distribution using a variety of
methods. These methods include, but are not limited to:
 
 ·
    Licensing
      of videocassettes and digital video discs
(DVDs)
 
 ·
    Pay-per-view
      cable and satellite licensing
  ***Page
- 37***
 
 ·
    Pay
      television and Internet licensing
 
 ·
    Broadcast
      television, cable and satellite licensing
 
 ·
    Hotels,
      airlines and other non-theatrical
exhibitions
 
 ·
    Theatrical
      exhibition
 
 ·
    Syndicated
      television licensing
 
 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 were we 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 2004, 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.
 
 Prior to
the date of this annual report, none of our executive officers or other
personnel were paid cash compensation for their services. As a result, we would
typically monitor the amount of time devoted by each executive officer and other
personnel engaged as independent contractors. Subsequent to this annual report,
and subject to our ability to properly capitalize the Company, we anticipate
that at least 3 of our current officers could be receiving cash compensation as
salaried employees. We also plan to hire a minimum of 4 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.
 
 ***Page
- 38***
 ****
 **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
$2,747,000 deferred income tax asset related to net operating loss carryforward
and other book/tax differences at December 31, 2004. 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.
 
 ***Page
- 39***
 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, 2002, all deferred compensation had been expensed. As a result,
there were no deferred compensation issues in 2003 or in 2004.
 
 *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 the Company as a going concern. However, the Company
has experienced recurring operating losses and negative cash flows from
operations.
 
 The
Company's continued existence is dependent upon its ability to increase
operating revenues and/or obtain additional equity financing.
 
 The
Company has reached an agreement with Eagle Consulting Group, Inc., a Nevada
corporation ("Eagle"), to provide equity financing. Eagle has advanced the
Company a limited amount of funds since 2003, and it appears likely that such
funding should continue to be enough to meet all of the Company's cash
requirements in 2005. 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.
 
 *Impairment
of Long-Lived Assets*
 
 The
Company adheres 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.
 
 *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.
 
 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 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.
 
 ***Page
- 40***
 
 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.
 
 *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.
 
 *New
Accounting Pronouncements*
 
 In June
2000, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 139, *“Rescission
of FASB No. 53 and Amendments to FASB Statements No. 63, 89 and
121,”* which,
effective for financial statements for fiscal years beginning after December 15,
2000, rescinds Statement of Financial Accounting Standards No. 53, *“Financial
Reporting by Producers and Distributors of Motion Picture
Films.”*
 
 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.
 
 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 not materially impact
our results of operations.
 
 In June
2001, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 142, *“Goodwill
and Other Intangible Assets.”* According to this statement, goodwill and intangible assets with indefinite
lives are no longer subject to amortization, but rather an annual assessment of
impairment by applying a fair-value-based test. Under this statement, the
carrying value of assets are calculated at the lowest level for which there are
identifiable cash flows, which include feature film operations, television
programming operations, cable channels and other businesses. We adopted this
statement beginning January 1, 2002, and upon adoption we did not recognize any
impairment of goodwill.
 
 ***Page
- 41***
 
 In
December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 148, *“Accounting
for Stock-Based Compensation—Transition and Disclosure—an Amendment of Statement
of Financial Accounting Standard No. 123.”* This
statement provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
This statement also amends the disclosure requirements of Statement of Financial
Accounting Standard No. 123 and Accounting Principles Board Opinion No. 28, *“Interim
Financial Reporting,”* to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. We implemented Statement of
Financial Accounting Standard No. 148 effective January 1, 2003 regarding
disclosure requirements for condensed financial statements for interim periods.
We have not yet determined whether we will voluntarily change to the fair value
based method of accounting for stock-based employee compensation.
 
 In
January 2003, the Financial Accounting Standards Board issued Interpretation No.
46, *“Consolidation
of Variable Interest Entities,”* which
establishes criteria to identify variable interest entities and the primary
beneficiary of such entities. An entity that qualifies as a variable interest
entity must be consolidated by its primary beneficiary. All other holders of
interests in a variable interest entity must disclose the nature, purpose, size
and activity of the variable interest entity as well as their maximum exposure
to losses as a result of involvement with the variable interest entity.
Interpretation No. 46 was revised in December 2003 and is effective for
financial statements of public entities that have special-purpose entities, as
defined, for periods ending after December 15, 2003. For public entities without
special-purpose entities, it is effective for financial statements for periods
ending after March 15, 2004. We do not have any special-purpose entities, as
defined, and are currently evaluating the provisions of this statement as it
relates to its various forms of investments. We do not expect Interpretation No.
46 to have a material effect on our financial statements.
 
 In May
2003, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 150, *“Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity.”* This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability or an asset in some circumstances. Many of those
instruments were previously classified as equity. This statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15 2003. We implemented this statement on July 1, 2003. The impact of
such adoption did not have a material effect on our financial statements
 
 In
December 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132 (revised 2003), *“Employers’
Disclosures about Pensions and Other Postretirement Benefits.”* This
statement revises employers’ disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans required by Statement of Financial Accounting Standards No. 87, *“Employers’
Accounting for Pensions,”* Statement of Financial Accounting Standards No. 88, *“Employers’
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits,”* and
Statement of Financial Accounting Standards No. 106, *“Employers’
Accounting for Postretirement Benefits Other Than Pensions.”* This
statement retains the disclosure requirements contained in Statement of
Accounting Standards No. 132, *“Employers’
Disclosures about Pensions and Other Postretirement Benefits,”* which it
replaces. It requires additional disclosures to those in the original Statement
of Financial Accounting Standards No. 132 about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. The required information should be
provided separately for pension plans and for other postretirement benefit
plans. This statement is effective for financial statements with fiscal years
ending after December 15, 2003. We implemented the Statement of Financial
Accounting Standards No. 132 (revised 2003) on December 15, 2003. The impact of
such adoption did not have a material effect on our financial
statements.
 
 *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.
 
 ***Page
- 42***
 
 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. 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. The Company reached an agreement with Eagle
Consulting Group, Inc. 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 an anti-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. Eagle advances to date total $296,563, including interest. In
2004, Eagle advanced $127,341. 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.
 
 ***Page
- 43***
 ****
 **Management’s
Discussion and Analysis of Financial Condition and Results of
Operations**
 
 *General*
 
 Our
historical operations consisted primarily of attempting to provide support,
organization and restructuring services to other development stage companies.
Due to the complete and drastic change in our business focus, from seeking to
aid development stage companies to our current focus of producing, distributing
and marketing original motion pictures, 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, 2004 COMPARED TO YEAR ENDED DECEMBER 31,** **2003**
 **REVENUE**
 
 **Cumulative
      During Development**
    
    **Year
      Ended December 31,****Stage**
    
    **2004**
    
    **2003**
    
    **%
      Change**Net
      Revenues
    $58,568
    
    $
      0
    
    $0
    
    (0%)
 
 
 
 We did
not generate any revenue for the year ended December 31, 2004. The business
model we were pursuing at that time anticipated that most of our services would
be paid for with stock and certain services would be paid for with cash. The
ultimate balance we realized between sales settled with cash and sales settled
with stock had a material impact on our results of operations, operating cash
flow, and the degree to which our earnings, revenues and costs fluctuated from
period to period. This was due in part to the complexities of transactions
settled in equity. This complexity was increased by our focus on early stage
companies, whose securities were privately held, thinly traded, or quoted on
mediums that make valuation highly subjective.
 
 To
address these complexities, our accounting policies required us to record
services issued in exchange for stock in early stage companies at a nominal
value, or no value at all, since the stock issued generally has no readily
determinable value. As a result, the extent to which we accepted stock in
exchange for services we rendered to privately held, early stage clients
directly impacted our future results. In the remaining quarter of 2003, we
stopped pursuing opportunities to deliver services to such clients in exchange
for cash, stock and a combination of stock and cash. Previously, we anticipated
that these agreements would involve a variety of contracting methodologies,
including, but not limited to, performance based compensation for services
rendered, fixed sum, guaranteed maximum price, and time and materials.
Similarly, it was expected that an hourly rate would be used to track contract
progress. Professional services under all types of agreements except those
involving contingent consideration were to be recognized as the services are
performed.
 
 Another
important consideration regarding the balance between services paid for in cash
and services settled in the client's stock was our ability to cover operating
expenses we are required to settle in cash. Our primary business focus was not
on generating immediate revenue. Instead, our focus was on acquiring equity
interests in promising companies we believed would create capital appreciation
for our shareholders. Despite this focus, operating activities that result in
cash revenue were assumed to play an important role in our ability to meet cash
requirements. This was especially true to the degree that we were unable to
successfully secure external cash financing to satisfy expenses we could not
satisfy using our common stock.
 
 Our
future operations as a film production and distribution company are also
expected to be influenced by our ability to use equity compensation to cover
certain types of expenses. However, accepting common stock in exchange for
services we rendered to non-affiliated enterprises is no longer a component of
our business strategy.
 
 **COST
OF SERVICES**
 
 
 
 **Cumulative
      During Development**
    
    **Year
      Ended December 31,****Stage**
    
    **2004**
    
    **2003**
    
    **%
      Change**Cost
      of Services
    $95,700
    
    $0
    
    $0
    
    (0%)
 
 ***Page
- 44***
 
 Our cost
of services 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, 2004, and had no costs of services. To the degree that
we generated 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 do not expect to be
providing consulting services in exchange for the common stock of early stage
companies. However, we do 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**
    
    **2004**
    
    **2003**
    
    **%
      Change**Sales
      & Marketing
      Expenses
    $53,959
    
    $0
    
    $0
    
    (0%)
 
 
 
 Since
inception, sales and marketing expenses have consisted of advertising,
promotional materials and public relations expenses. The percentage decrease in
sales and marketing expenses, from the year ended December 31, 2003 compared to
the year ended December 31, 2004, is insubstantial and reflects our ability to
perform our marketing and sales efforts internally, which reduces costs and adds
benefits to our customers. The total dollar amount of sales and marketing
expenses were extremely low in 2002 and there were none in 2003 or 2004. Of our
total sales and marketing expenses incurred in the year ended December 31, 2002,
100%, or $14,000, required payment in cash. 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 we intend to produce.
Similarly, we anticipate that nearly all such expenses should require settlement
in cash.
 
 **RESEARCH
AND DEVELOPMENT**
 
 **Cumulative
      During Development**
    
    **Year
      Ended December 31,****Stage**
    
    **2004**
    
    **2003**
    
    **%
      Change**Research
      & 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 sales and
marketing expenses was zero during 2003 and there were none in 2004, the
percentage change in research and development expenses, from the year ended
December 31, 2003 compared to the year ended December 31, 2004, is explained by
no research and development activity during 2003. Prior to 2003, 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**
    
    **2004**
    
    **2003**
    
    **%
      Change**General
      & Administrative
      Expenses
    $4,092,000
    
    $1,265,000
    
    $408,000
    
    (.210%)
 
 
 ***Page
- 45***
 General
and administrative expenses during 2004 consisted primarily of officer
compensation, professional services and stock options. The increase in general
and administrative expenses for the year ended December 31, 2004, compared to
the year ended December 31, 2003, is primarily due to increased activity within
the Company, the need to utilize outside professional services and the expensing
of stock options. Accounting, legal, shareholder relations and compliance
expenses of approximately $191,000 accounted for 15% of the general and
administrative costs expensed for 2004, while $749,000, or 59%, of the general
and administrative costs expensed was comprised of accrued compensation to its
corporate officers and consulting fees. The remaining 26% was comprised of
expensing stock options, travel, and general office expense.
 
 **IMPAIRMENT
OF LONG-LIVED ASSETS AND IMPAIRMENT OF INVESTMENTS IN OTHER
COMPANIES**
 
 
 **Cumulative
      During Development**
    
    **Year
      Ended December 31,****Stage**
    
    **2004**
    
    **2003**
    
    **%
      Change**Impairment
      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 10% of our $6,974,000 net loss, whereas impairment of
long-lived assets has accounted for $2,402, 338, or approximately 34% of our net
loss since inception. Together, these two expense categories account for 44.1%
of our net loss from inception and through the year ended December 31, 2004.
 
 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, 2004 to
December 31, 2004 due to net losses from operations by the Company. As of
December 31, 2004 we had federal net operating loss carryforwards of $4,437,000,
compared to operating loss carryforwards of $3,012,000 as of December 31, 2003.
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**
    
    **2004**
    
    **2003**
    
    **%
      Change**Net income (loss)
    ($7,325,000)
    
    ($1,265,000)
    
    ($162,000)
    
    95%Net income (loss) per share
    ($0.36)
    
    ($0.02)
    
    ($0.01)
    
    96%Weighted averageshares
      outstanding
    20,323,000
    
    52,678,000
    
    23,116,000
 
 ***Page
- 46***
 
 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, 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 2004 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. With the anticipated change in 2004 of our business model,
impairments should hopefully no longer be an issue.
 
 General
and administrative expenses accounted for a higher proportion of our net loss in
2003 compared to 2002. In 2003, general and administrative expenses represented
252% of our net loss, whereas this caption represented 58% of our net loss in
2002. In 2004, however, general and administrative expenses of $1,265,000
accounted for only 17% of our cumulative net loss. We anticipate that these
expenses could continue to increase in 2005, as we engage more officers,
directors and other key personnel. Similarly, we anticipate that the total
dollar amount of general and administrative expenses requiring payment by cash
could also increase in 2005. To the extent that we are unable to secure
additional external financing, and or increase the cash revenue generated by our
operations, our results and ability to continue as an ongoing concern may be
materially adversely affected.
 
 **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 March
16, 2004, the Company engaged Epstein, Weber & Conover, P.L.C., Certified
Public Accountants of Scottsdale,(“EW&C”) 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 Camelot Entertainment Group, Inc. ("the Company") 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.
 
 The
Company authorized Marshall to respond fully to any inquiries of any new
auditors hired by the Company relating to their engagement as the Company's
independent accountant. The Company requested that Marshall review the
disclosure and Marshall was given an opportunity to furnish the Company with a
letter addressed to the Commission containing any new information, clarification
of the Company's expression of its views, or the respect in which it did not
agree with the statements made by the Company in the report on Form 8-K filed on
March 19, 2004. Such letter was filed as an exhibit to such Form 8-K.
 
 During
the fiscal year ended December 31, 2002, and the interim period between
September 20, 2002 and May 8, 2003, there were no disagreements between the
Company and Ehrhardt, Keefe, Steiner & Hottman PC (“EKS&H”) on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreement(s), if not resolved to
EKS&H's satisfaction, would have caused it to make reference to the subject
matter of the disagreement(s) in connection with its reports for such year.
 
 On March
19, 2003, the Company changed the Board Directors and appointed new
management.
 
 On May
23, 2003, the Company received a letter from EKS&H, addressed to the
Securities and Exchange Commission, stating EKS&H agreed with the statements
included under Item 4 of our
Form 8-K dated May 15, 2003 other than advising the Company that it believed the
Company had a reportable condition related to adequate infrastructure over
accounting and financial reporting including segregation of duties during the
year ended December 31, 2002.
 
 The
Company disagreed with EKS&H and responded accordingly. Our new management
team reviewed our infrastructure regarding accounting and financial reporting
including segregation of duties during the time period in question and
subsequent thereto.
 
 
 ***Page
- 47***
 
 The
Company had not previously consulted with EW&C regarding either (i) the
application of accounting principles to a specified transaction, either
completed or proposed; or (ii) the type of audit opinion that might be rendered
on the Company's financial statements; or (iii) any matter that was either the
subject matter of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation
S-B and the related instructions) between the Company and Marshall or the
Company's previous independent accountant.
 
 The
disagreement on a reportable condition as stated by EKS&H on May 23, 2003
was disclosed to EW&C. EW&C reviewed the disclosure and was provided an
opportunity to furnish the Company with a letter addressed to the Commission
containing any new information, clarification of the Company's expression of its
views, or the respects in which it did not agree with the statements made by the
Company in response to Item 304(a). EW&C did not furnish a letter to the
Commission.
 
 During
the preceding two fiscal years and through September 20, 2002, there were no
reportable events required to be disclosed pursuant to Item 304(a)(1)(v).
Pursuant to Item 304(a)(3), on September 30, 2002, GH&B, our previous
auditors, furnished us with a letter addressed to the Securities and Exchange
Commission stating it agreed with the statements made by us in response to Item
304(a). A copy of that letter was filed as an exhibit to our report on Form 8-K,
filed October 12, 2002.
 
 On
September 20, 2002, we engaged EKS&H as our independent accountants for the
fiscal year ending December 31, 2002. This change in accountants was recommended
by our executive management and approved by our board of directors.
 
 **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.
 
 As of the
end of the period covered by this report (the *“Evaluation
Date”* ), we
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures were effective at the reasonable assurance
level and in compliance with Section 404 of the Sarbanes-Oxley Act.
 
 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, 2004 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reports.
 
 **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, 2004, 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.
 
 ***Page
- 48***
 **Name
      of Executive**
      **Officers
      and Directors**
    **Age**
    **Position**
    **Date
      of Appointment**Robert
      P. Atwell
    51
    President,
      CEO and Director
    March
      2003H K
      Dyal
    64
    Director
    August
      2004Jane
      Olmstead
    50
    CFO
    December
      1, 2004Rounsevelle
      Schaum
    72
    Director
    October
      2002
 
 Robert P.
Atwell, 51, Chairman, President and Chief Executive Officer, has been President
of the Company since March 19, 2003. Mr. Atwell is also the President of The
Corporate Solution, Inc. a position he has held since 1978. The Corporate
Solution 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., The Atwell Group, Inc. and Camelot Films, Inc.
 
 H. Kaye
Dyal, 64, Director, has been President of our production entity, Camelot Films,
since August of 2004. Mr. Dyal has worked in the film industry for over 25
years. He began his career in the studio of renowned film designer Saul Bass.
While in the Saul Bass Studios, Mr. Dyal worked with clients as diverse as
Kaiser Aluminum Corporation, Kellogg’s, General Mills, Continental Airlines,
United Air Lines, and many more. While a directing associate to Mr. Bass, their
film "Why Man Creates" made for Kaiser Aluminum Corporation, won the Academy
Award for Best Short Subject.
 
 Mr. Dyal
worked on television programming with CBS and the National Geographic Society,
and with Warner Bros. and Lorimar Television on the "Waltons" television series.
Mr. Dyal headed an After School Specials division at Lorimar. As a pilot for
Public Television, Mr. Dyal wrote and Produced an award winning adaptation of
William Faulkner's short story, "A Rose For Emily", which starred Anjelica
Huston, John Randolph and John Houseman. Presented at the Cannes Film Festival,
the film has won every major award available in the short film market.
Houghton-Mifflen Publishers selected “A Rose For Emily” as their featured work
in a Teacher’s Guide to American Literature on Film. Mr. Dyal wrote and also
developed several television series, one with Dick Clark Productions, two for
World Vision. Most recently, Mr. Dyal Executive Produced two television series
pilots, “Norm Crosby’s Celebrity Golf Challenge” and “Melina” a talk show being
developed for production in the Latin beat of Miami.
 
 Mr.
Dyal's feature motion picture career began at Cinema Financial of America, where
he produced and co-directed "Silence" starring Will Geer. Also for CFA, Mr. Dyal
directed "the Memory of Us", winner of a Special Jury Prize at the Atlanta Film
Festival. Both films received nation wide domestic theatrical release, and were
showcased on cable television. Mr. Dyal advanced his film career writing the
Chuck Norris international hit, "Lone Wolf McQuade", which became the television
series "Walker, Texas Ranger". He wrote and directed "Trained to Kill" and
"Gambit", feature motion pictures which were released through Overseas Film
Group. Mr. Dyal was an Executive Producer on “Saved”, a feature motion picture
for MGM/UA starring Jena Malona, Mandy Moore, and Macauley Culkin released in
April 2004. While head of production for Gravity Entertainment, Dyal oversaw the
production of “Bully” directed by Larry Clark, starring Brad Renfro, Nick Stahl,
Bijou Phillips, Rachel Miner, Kelli Garner. He is currently producing "Victims"
for Cameo Entertainment and “The Cauldron” for Media Financial Partners. Mr.
Dyal has written more than two dozen screenplays and stories for a variety of
clients, including Orion, Universal, Overseas Film Group and many more. Mr. Dyal
has production managed and/or line produced more than eighteen
films.
 
 As a
corporate executive, Mr. Dyal served as Executive Vice President of Folksay
Inc., a Los Angeles based film production and management company, and was the
Managing Director of "Will Geer's Theatricum Botanicum" a theater company. Mr.
Dyal has served as President of Production for Gravity Entertainment, a Florida
Film Studio. During his tenure, the company produced three feature motion
pictures, including “Bully” by Larry Clark and the “Suitor”, a PBS feature film.
Mr. Dyal has developed several television pilots, and has overseen the
development of a number of feature film projects for Gravity Pictures and
arranged for the company to sponsor a number of Sundance Film Festival events.
While attending the Cannes Film Festival Mr. Dyal successfully developed a
number of international film projects, including “Eastern Harbor”, to be filmed
in China and Berlin, Germany. Mr. Dyal also negotiated a three picture deal with
Penny Marshall’s company Parkway Entertainment and Columbia Pictures. As an
Executive Consultant, Mr. Dyal has been responsible for the development and
execution of several company business plans, and has introduced and arranged
funding for entertainment and non-entertainment clients. Dyal has served as a
Board member for Integrated HealthCare, Inc. a publicly traded medical software
company and was Assistant to the President of Integrated Direct Inc., an
advertising company. Mr. Dyal served as President of Stellar Pacifica LLC, a
transactional television and marketing company bringing commercial products to
transactional national television markets. Mr. Dyal has a varied background in
corporate project funding, and has arranged and closed funding of more than $15
million for both private and public clients, in addition to his current funding
activities. Mr. Dyal has a varied background in corporate project funding. Mr.
Dyal is a graduate of the University of Illinois with a Bachelor's degree in
Fine Arts, and holds a Master's degree in Fine Arts from the University of
Southern California. He has been awarded two Ford Foundation Grants, and lives
in Southern California.
 
 ***Page
- 49***
 Jane
Olmstead, CPA, 50, Chief Financial Officer, Director, has over 20 years
experience in the financial and accounting fields, including serving as a Senior
Management Consultant with Touche Ross & Co. (currently Deloitte &
Touche) for nine years. Ms. Olmstead's expertise is in strategic business
planning, financial systems design and implementation and tax preparation and
planning. Her involvement with numerous Fortune 500 companies such as Ford Motor
Co., Mobil Oil and Coors resulted in cost savings measures and increases in
profitability through the implementation of improved financial and communication
systems.
 
 Ms.
Olmstead has focused on improving corporate efficiency and effectiveness through
a variety of means including: acting as CFO, implementing new procedures,
creating reorganization plans, forecasting and planning for future growth. Some
of her additional strengths are in asset management, systems integration,
budgeting and cost control. Ms. Olmstead graduated Magna cum Laude from the
University of Tennessee with a B.S. in Accounting and a Minor in Statistics. She
is currently a member of the Colorado Society of CPAs and the Association of
Professional Consultants.
 
 Rounsevelle
Schaum, 72, Director, is the Chairman of Newport Capital Partners, Inc., an
investment banking firm specializing in providing financial advisory services to
emerging growth companies. He is a graduate of Phillips Andover Academy and
holds a Bachelor of Science degree in Mechanical Engineering from Stanford
University and an MBA from the Harvard Business School. He was also a member of
the faculty and Defense Research Staff of the Massachusetts Institute of
Technology, where he participated in the development of the computer programs
for the Ballistic Missile Early Warning System.
 
 He is a
director and chairman of the audit committee of the Quigley Corporation (NASDAQ
"QGLY") and was a founder and director of Streaming Media Corporation. He was
also the Chairman and CEO of BusinessNet Holdings Corporation and has served as
a crisis manager for Heller Financial Corporation. He also served on the
District Advisory Council of the U.S. Small Business Administration; as Chairman
of the California Small Business Development Corporation, a private venture
capital syndicate; and was the founder and Managing Director of the Center of
Management Sciences, a consulting firm serving the aerospace industry.
 
 He was
the principal author of the "Weapon Systems Management Guide" under contract to
the Office of the Secretary of Defense. Mr. Schaum resides in Newport, Rhode
Island, where he has been active in civic affairs. He is a member of the Naval
War College Foundation and a director of the Newport Historical Society.
 
 *Audit
Committee*
 
 We have
had an audit committee since inception. Our current audit committee has been
reduced to two following the resignation on December 1, 2004 of our CFO, Albert
Golusin. Of our two remaining audit committee members, Jane Olmstead, who was an
independent director and our audit committee financial expert that met the
definition of an *"audit
committee financial expert,"* as that
term is defined by SEC regulations, and further, one of two audit committee
members who were independent, as defined by applicable regulations, has
temporarily stepped in as interim CFO until a permanent CFO is named. As a
result, our current independent member on the audit committee is H. K. Dyal. We
are currently in the process of searching for and recruiting potential director
candidates who are independent and who might qualify as additional audit
committee financial experts. We expect to name a permanent CFO during the first
quarter of 2005, at which time Ms. Olmstead will resume her duties as an
independent director and audit committee financial expert.
 
 *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.
 
 *Code
of Ethics*
 
 We have
adopted a Code of Business Conduct that applies to all our directors, officers
(including its principal executive officer and principal financial officer) and
employees. The Code of Business Conduct can be found on our website at *“http://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.
 
 ***Page
- 50***
 **
 *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 compensation package.
Although we plan to enter into compensation packages during the second quarter
of 2005, we have not entered into any written employment agreements with our
executive officers as of the date of this filing. All members of management have
elected to postpone negotiations with us regarding salaries, until such time as
our revenue is adequate to pay salaries without causing financial damage to our
plan for business development. As it becomes necessary, more detailed written
employment contracts should be entered into between our key personnel and the
Company.
 
 Our Board
of Directors has not granted any Stock Incentive Plans as of the date of this
filing. We are considering granting such a plan in the future. Stock options may
be granted to eligible participations 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").
 
 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, 2004, 2003, and 2002.
 
 
 **Name**
    **Position**
    **Salary**
    **Bonus**
    **Compensation**
    **Securities**
      **Underlying**
      **Options**
    **All
      Other**
      **Compensation**Robert
      P. Atwell (1)
    President,
      CEO
      &
      Director
      2004
      2003
    250,000
      250,000
    0
    0
    0
    0Albert
      Golusin (2)
    CFO
      & Director
      2004
      2003
    75,000
      100,000
    0
    0
    0
    0Jane
      Olmstead (3)
    CFO
      & Director
      2004
    25,000
    0
    0
    0
    0Rounsevelle
      Schaum
    Past
      President
      2002
    0
    0
    0
    0
    $4,582Frank
      R. Maresca
    CEO
      2002
    0
    0
    0
    0
    0Sue
      Perrault
    Past
      President
      2002
    0
    0
    0
    0
    0Officers
      and Directors
      as
      a group
    2004
      2003
      2002
    0
      0
      0
    0
      0
      0
    0
      0
      0
    0
      0
      0
    0
      0
      $4,582
 
 Notes:
 
 (1) Mr.
Atwell was scheduled to receive a salary of $250,000 for 2004, which was accrued
in 2004. Mr. Atwell converted the accrual to stock during 2004.
 
 (2) Mr.
Golusin was scheduled to receive a salary of $75,000 for 2004, which was accrued
in 2004. Mr. Golusin converted the accrual to stock during 2004. His annual
salary was reduced due to his resignation on December 1, 2004.
 
 ***Page
- 51***
 (3) The
accrual for the officers for salaries is $262,500 as of December 31, 2004, based
upon $87,500 for the second, third and fourth quarters of 2004.
 
 
 Stock
Option Plan
 
 The
Company adopted during fiscal year 2004 a Statutory and Non-Statutory Incentive
Stock Option Plan ("Plan") which authorizes the Company to grant incentive stock
options within the meaning of Section 422A of the Internal Revenue Code of 1986,
as amended, and to grant nonstatutory stock options. 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.
 
 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.
 
 During
2004, independent directors were not compensated; however, officers that were
also directors were compensated as described in the Summary Compensation Table.
In addition, Jane Olmstead, one of our Directors, provided consulting services
to us and received stock for those services and will continue to receive stock
for her services.
 
 **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, 2004, 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, 2004, there were 74,951,209 outstanding shares held by 112
shareholders of record. For the purposes of this Item 11, any shareholder
beneficially owning 5% or more of the Company's common stock are listed below.
 
 
 
 **Name
      of Beneficial**
      **Owner**
    **Shares
      Beneficially**
      **Owned**
    **Percent**Albert
      Golusin
      668
      North 44thStreet, Suite 248
      Phoenix
      AZ 85008
    4,518,695
    6%The
      Atwell Group, Inc. (1)
      100
      E. San Marcos Blvd. #400
      San
      Marcos CA 92069
    46,778,243
    62%TOTAL
      5% Shareholders as a Group
    51,296,938
    68%(1)
      Includes all shares owned and or under the control of Beneficial
      Owner
  
 ***Page
- 52***
 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*
 
 The
following table sets forth as of December 31, 2004, certain information, based
on information obtained from the persons named below, with respect to the
securities ownership of the common stock by Management.
 
 **Name
      of Beneficial Owner**
    **Shares
      Beneficially Owned**
    **Percent**Robert
      P. Atwell
      100
      E. San Marcos Blvd. #400
      San
      Marcos CA 92069
    46,778,243
    62%Jane
      Olmstead
      7474
      East Arkansas #1204
      Denver
      CO 80231
    1,512,333
    2%Rounsevelle
      Schaum
      294
      Valley Road
      Middletown
      RI 02842
    1,100,000
    1%H
      Kaye Dyal
    200
    0%
 
 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 warrants, options or
rights.
 
 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.
 
 *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 fiscal year 2004. All other transactions are
incorporated by reference and can be referenced through our previous
filings.
 
 On
February 3, 2004, the Company authorized the issuance of an additional 6,791,287
restricted common shares to Eagle Consulting Group, Inc., whose President is
Robert P. Atwell, in accordance with its agreement with the Company to receive
20% of the Company’s outstanding shares for providing funding. The Company also
authorized the issuance of 100,000 shares to Jane Olmstead, one of our
directors, for accounting services.
 
 On June
22, 2004, the Company authorized the issuance of a total of 11,105,755
restricted common shares to Robert P. Atwell and a total of 4,442,296 restricted
common shares to Albert Golusin for services in 2003 and the first quarter of
2004, including shares previously authorized by the board. The Company also
authorized the issuance of an additional 4,637,867 restricted common shares to
Eagle Consulting Group, Inc., whose President is Robert P. Atwell, in accordance
with its agreement with the Company to receive 20% of the Company’s outstanding
shares for providing funding.
 
 On August
25, 2004 the shareholders elected our board of directors, including Robert P.
Atwell, Albert Golusin, Jane Olmstead, Rounsevelle Schaum and our newest member,
H. K. Dyal.
 
 On
November 30, 2004 Albert Golusin submitted his resignation as Chief Financial
Officer. The Company authorized the issuance of a total of 2,499,999 restricted
common shares to Robert P. Atwell, a total of 666,666 restricted common shares
to Albert Golusin, and a total of 333,333 to Jane Olmstead for services in
during the second, third and fourth quarters of 2004. In addition, the Company
authorized the issuance of an additional 1,000,000 restricted common shares to
Jane Olmstead for prior services rendered to the Company. The Company also
authorized the issuance of 3,500,000 restricted common shares to The Corporate
Solution, Inc., a company owned by Robert P. Atwell, in connection with The
Corporate Solution, Inc. providing financing for the Company’s initial in-house
production. The Company also authorized moving the corporate headquarters from
San Marcos to Irvine, with said offices to be provided by The Atwell Group,
Inc., a company owned by Robert P. Atwell.
 
 ***Page
- 53***
 On
December 1, 2004, The Corporation accepted the resignation of Albert Golusin as
Chief Financial Officer and appointed Jane Olmstead as interim Chief Financial
Officer.
 
 
 **ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K LIST OF EXHIBITSATTACHED OR INCORPORATED BY REFERENCE PURSUANT TO ITEM 601 OF REGULATION
S-B. add 8k’s for 2004**
 
 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.
 
 INDEX TO
EXHIBITS
 
 Exhibit
Number Description
 
 3.
Articles of Incorporation and Bylaws 3.1 Articles of Incorporation of Camelot
Entertainment Group, Inc.. (Incorporated by reference from exhibit 2.1 to Form
10-KSB filed on April 17, 2001) 3.2 By-Laws of Camelot Entertainment Group, Inc.
((Incorporated by reference from exhibit 2.2 to Form 10-KSB filed on April 17,
2001)
 
 4.
Instruments Defining the Rights of Security Holders 4.1 See Exhibit 3.1
"Articles of Incorporation" (Incorporated by reference from exhibit 2.1 to Form
10-KSB filed on April 17, 2001)
 
 5. Voting
Trust Agreement
 
 5.1 None
 
 6.
Material Contracts
 
 10. 8K
Filings Incorporated Herein by Reference.
 
 10.1
Changes in Control of Registrant incorporated by reference to Exhibit 10.1 on
Form 8-K filed July 22, 2002.
 
 10.2
Changes in Control of Registrant; Acquisition or Disposition of Assets; Other
Events incorporated by reference to Exhibit 10.2 on Form 8-K filed May 29, 2002.
 
 10.3
Settlement Agreement with Veda Labs, Inc. incorporated by reference to Exhibit
10.3 on Form 8-K filed November 14, 2003.
 
 16.1
Changes in Registrant's Certifying Accountant; Other Events incorporated by
reference to Exhibit 16.1 on Form 8-K filed October 1, 2002.
 
 16.2
Changes in Registrant's Certifying Accountant; Other Events incorporated by
reference to Exhibit 16.2 on Form 8-K filed May 15, 2003 and Form 8-K/A on May
28,2003.
 
 16.3
Changes in Registrant's Certifying Accountant; Other Events incorporated by
reference to Exhibit 16.3 on Form 8-K filed March 19, 2004.
 
 16.4
Material Contract; Other Events incorporated by reference to Exhibit 16.4 on
Form 8-K filed April 12, 2004.
 
 16.5
Other Events incorporated by reference to Exhibit 16.5 on Form 8-K filed June
30, 2004.
 
 16.6
Corporate Governance and Management; Departure of Directors or Principal
Officers; Election of Directors; Appointment of Principal Offers incorporated by
reference to Exhibit 16.6 on Form 8-K filed December 12, 2004.
 
 **ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**
 
 Epstein,
Weber & Conover, PLC (“EWC”) has been the Company’s independent auditor
since March of 2004 and were the auditors for the year ended December 31, 2003
and December 31, 2004. James C. Marshall C.P.A., P.C., (”Marshall”), was the
Company's independent auditor for the three quarters ended September 30, 2003.
Ehrhardt, Keefe, Steiner & Hottman PC, (“EKS&H”), were the auditors for
the year ended December 31, 2002 and reviewed the quarterly financial statements
during that year. Gordon, Hughes and Banks, (“GH&B”), were the auditors for
the year ended December 31, 2001 and reviewed the quarterly statements that
year.
 
 ***Page
- 54***
 
 The
Principal Accountants performed the services listed below and were paid the fees
listed below:
 
 AUDIT
FEES
 
 EWC
charged approximately $14,500 for the year ended December 31, 2003 for
professional services rendered in connection with the Company’s annual financial
statements and review of the financial statements included in the Company’s 2004
Quarterly Reports on Form 10-QSB.
 
 Marshall
billed aggregate fees of approximately $9,600 for the review of the financial
statements included in the Company’s Quarterly Reports on Form 10-QSB for each
of the three quarters ended September 30, 2003.
 
 EKS&H
charged approximately $15,600 for year ended December 31, 2002 for professional
services rendered for the audit of the Company's annual financial statements and
review of the financial statements included in the Company's Quarterly Reports
on Form 10-QSB.
 
 TAX
FEES
 
 No
accountants were used for professional advice pertaining to tax
matters.
 
 ALL OTHER
FEES
 
 No
Principal Accountant provided or billed for any other professional services
during the two years ended December 31, 2004.
 
 
 
 
 
 
 
 **(Remainder
of Page Left Intentionally Blank)**
 
 
 
 
  ***Page
- 55***
  
 F-1
FINANCIAL STATEMENTS
 
 
  
 
 **CAMELOT ENTERTAINMENT GROUP, INC.**
 
 
 **Financial
Statements as of**
 **December
31, 2004**
 **And
Independent Auditors’ Report**
 
 **(a
development stage company)**
 
 
  
   ***Page
- 56***
   
 **CAMELOT
ENTERTAINMENT GROUP, INC.**
 (a
development stage company)
 
  **INDEX
TO FINANCIAL STATEMENTS**
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 BALANCE SHEET AS OF DECEMBER 31, 2004
 
 STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
 DECEMBER
31, 2004 AND DECEMBER 31, 2003 AND
 INCEPTION
TO DATE
 
 STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEAR
 ENDED DECEMBER
31, 2004 AND DECEMBER 31, 2003 AND
 INCEPTION
TO DATE
 
 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
 DECEMBER
31, 2004 AND DECEMBER 31, 2003 AND
 INCEPTION
TO DATE
 
 NOTES TO FINANCIAL STATEMENTS
 
 
   ***Page
- 57***
    
 **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM**
 
 
 
 To the
Stockholders and Board
 of
Directors of Camelot Entertainment Group, Inc.:
 
 We have
audited the accompanying balance sheet of Camelot Entertainment Group, Inc. (a
Development Stage Company) as of December 31, 2004 and the related statements of
operations, stockholders’ deficit and cash flows for the each of the two years
in the period then ended and the cumulative period from October 12, 1999
(inception) through December 31, 2004. 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 the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Camelot Entertainment Group, Inc.
as of December 31, 2004, and the consolidated results of its operations and cash
flows for each of the two years in the period ended December 31, 2004, and the
cumulative period from October 12, 1999 (inception) through December 31, 2004,
in conformity with accounting principles generally accepted in the United States
of America.
 
 As
disclosed in Note 1, the accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has yet
to commence revenue generating activities and has experienced material operating
losses and had little cash for operations at December 31, 2004. Management is
seeking equity capital and is implementing a business plan that it believes will
result in profitable operations. There can be no assurances that the Company
will obtain sufficient capital or that operations will become profitable. These
and other conditions raise substantial doubt about the Company’s ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments that might be necessary should the Company be unable to
continue as a going concern.
 
 
 /s/
Epstein, Weber & Conover, PLC
 Scottsdale,
Arizona
 March 15,
2005
  ***Page
- 58***
  
  
 
 **CAMELOT
ENTERTAINMENT GROUP, INC.**
 **(a
development stage company)**
 **BALANCE SHEET**
 As of
December 31, 2004
 
 
 
 **December
      31, 2004**
      **(In
      $000’s)****ASSETS**Current
      assets:Cash
      ..............................................................................
    
    $   
      1Total
      assets................................................
    
    $   
      1**LIABILITIES
      AND STOCKHOLDER’S DEFICIT**Current
      liabilities:Accounts
      payable and accrued liabilities....................................
    
    $   101Total
      current liabilities..........................................
    
    101Stockholders'
      deficit:Preferred
      stock, $.001 par value, 50,000,000 shares authorized, none
      issuedand
      outstandingCommon
      stock, $.001 par value, 150,000,000 shares authorized,74,951,209
      issued and outstanding ...........................
    75Additional
      paid-in capital........................................................
    
    7,408Subscriptions
      receivable under financing agreement.........................
    (258)(Deficit)
      accumulated during development stage............................
    
    (7,325)Total
      stockholders' deficit.......................................
    
    (100)Total
      liabilities and stockholders' deficit.....................
    
    $   1
 
  
 The
accompanying notes are an integral part of these financial
statements.
 
   ***Page
- 59***
   **CAMELOT
ENTERTAINMENT GROUP, INC.**
 **(a
development stage company)**
 **STATEMENTS OF OPERATIONS**
 **In
$(000’s)**
 **For
the Years Ended**
 **December
31, 2004 and December 31, 2003**
 **And
Inception to Date**
 
 
 
 **For
      the fiscal year ended December 31, 2004**
    **For
      the fiscal year ended December 31, 2003****Inception to December 31,**
      **2004**
    ****Revenue:Professional
      services..............................
    $   0
    $   0
    $   
      59Costs
      and expenses:Cost
      of services....................................
    0
    0
    96Marketing
      and sales..............................
    0
    0
    54Product
      research and development.............
    0
    0
    253General
      and administrative......................
    1,265
    408
    4,092Impairment
      of assets.............................
    0
    0
    2,402Impairment
      of investments in othercompanies......................
    0
    0
    711Total
      operating expenses...............................
    1,265
    408
    7,608Income
      (loss) from operations.........................
    (1,265)
    (408)
    (7,549)Other
      income and (expense)Interest
      expense
    0
    (9)
    (31)Gain
      on extinguishment of debt
    0
    255
    255Total
      other income (expense), .....................
    0
    246
    224Net
      income (loss)........................................
    $    (1,265)
    $    (162)
    $  
      (7,325)Net
      income (loss) per share:Basic
      and diluted..................................
    $    (0.02)
    $  
      (0.01)
    $   (.36)Weighted
      average shares used in computingnet
      income (loss) per shareBasic
      and diluted
    52,678
    23,116
    20,323
 
 
 
 
 
 
 
 
 The
accompanying notes are an integral part of these financial
statements.
 
 
  
   ***Page
- 60***
   
 
 
 **CAMELOT
ENTERTAINMENT GROUP, INC.**
 **(a
development stage company)**
 **STATEMENTS OF STOCKHOLDERS’ DEFICIT**
 **In
$(000’s)**
 **For
the Years Ended**
 **December
31, 2004, 2003**
 **And
from October 12, 1999 (date of inception)**
 **Additional**
    
    
    
    **Subscription****Common
      Stock**
    
    **Treasury
      Stock**
    
    **Paid-In**
    
    **Accumulated**
    
    **Under
      Finance**
    
    **Deferred****Shares**
    
    **Amount**
    
    **Shares**
    
    **Amount**
    
    **Capital**
    
    **Deficit**
    
    **Agreement**
    **Compensation**
    
    **Total**BALANCE,
      October 12, 1999 (Inception)
    
    -
    
    $  -
    
    -
    
    $ -
    
    $ -
    
    $   -
    
    $  -
    $  -
    
    $ -Shares
      issued for cash
    
    1,000
    
    1
    
    -
    
    -
    
    19
    
    -
    
    -
    -
    
    20Shares
      issued for services
    
    2,600
    
    3
    
    -
    
    -
    
    49
    
    -
    
    -
    -
    
    52Shares
      issued for expense reimbursement
    
    836
    
    1
    
    -
    
    -
    
    16
    
    -
    
    -
    -
    
    17Net
      loss
    
    -
    
    -
    
    -
    
    -
    
    -
    
    (67)
    
    
    
    
    (67)BALANCE,
      December 31, 1999
    
    4,436
    
    5
    
    -
    
    -
    
    84
    
    (67)
    
    (67)
    
    
    22Shares
      issued for cash
    
    11
    
    -
    
    -
    
    -
    
    11
    
    -
    
    -
    -
    
    11Shares
      issued for services
    
    857
    
    1
    
    -
    
    -
    
    121
    
    -
    
    -
    -
    
    122Shares
      issued for expense reimbursement
    
    4
    
    -
    
    -
    
    -
    
    4
    
    -
    
    -
    -
    
    4Shares
      issued for conversion of debt
    
    1,015
    
    1
    
    -
    
    -
    
    34
    
    -
    
    -
    -
    
    35Shares
      issued for investment in companies
    
    710
    
    -
    
    -
    
    -
    
    709
    
    -
    
    -
    -
    
    709Shares
      issued for prepaid services
    
    195
    
    -
    
    -
    
    -
    
    195
    
    -
    
    -
    -
    
    195Shares
      issued for deferred compensation
    
    89
    
    -
    
    -
    
    -
    
    89
    
    
    
    -
    (89)
    
    -Amortization
      of deferred compensation
    
    -
    
    -
    
    -
    
    -
    
    -
    
    
    
    -
    22
    
    22Net
      loss
    
    -
    
    -
    
    -
    
    -
    
    -
    
    (954)
    
    -
    -
    
    (954)BALANCE,
      December 31, 2000
    
    7,317
    
    7
    
    -
    
    -
    
    1,247
    
    (1,021)
    
    -
    (67)
    
    166Shares
      issued for expense reimbursement
    
    1
    
    -
    
    -
    
    -
    
    6
    
    -
    
    -
    -
    
    6Shares
      issued for prepaid services
    
    337
    
    -
    
    -
    
    -
    
    400
    
    -
    
    -
    -
    
    400Shares
      issued for lease of property and equipment
    
    1,000
    
    1
    
    -
    
    -
    
    1,149
    
    -
    
    -
    -
    
    1,150Shares
      issued for licensed technology
    
    2,270
    
    3
    
    -
    
    -
    
    36
    
    -
    
    -
    -
    
    39Shares
      issued for developed technology
    
    16
    
    -
    
    -
    
    -
    
    19
    
    -
    
    -
    -
    
    19Shares
      issued for forgiveness of debt
    
    -
    
    -
    
    -
    
    -
    
    32
    
    -
    
    -
    -
    
    32Shares
      issued for services paid for by shareholder
    
    -
    
    -
    
    -
    
    -
    
    26
    
    -
    
    -
    -
    
    26Shares
      issued for deferred compensation
    
    1,123
    
    1
    
    -
    
    -
    
    1,297
    
    -
    
    -
    (1,298)
    
    -Amortization
      of deferred compensation
    
    -
    
    -
    
    -
    
    -
    
    -
    
    -
    
    -
    315
    
    315Net
      loss
    
    -
    
    -
    
    -
    
    -
    
    -
    
    (1,876)
    
    -
    
    
    (1,876)BALANCE,
      December 31, 2001
    
    12,064
    
    12
    
    -
    
    -
    
    4,212
    
    (2,897)
    
    
    (1,050)
    
    277
 ****
 ****
 ****
 ***Page
- 61***
 ****
 ****
 **CAMELOT
ENTERTAINMENT GROUP, INC.**
 **(a
development stage company)**
 **STATEMENTS
OF STOCKHOLDERS’ DEFICIT**
 **In
$(000’s)**
 **For
the Years Ended**
 **December
31, 2004, 2003**
 **And
from October 12, 1999 (date of inception)**
 **(continued)**
 **Additional**
    
    **Subscription****Common
      Stock**
    
    **Treasury
      Stock**
    
    **Paid-In**
    **Accumulated**
    **Under
      Finance**
    **Deferred****Shares**
    
    **Amount**
    
    **Shares**
    
    **Amount**
    
    **Capital**
    **Deficit**
    **Agreement**
    **Compensation**
    **Total**BALANCE,
      December 31, 2001
    12,064
    
    12
    
    -
    
    -
    
    4,212
    (2,897)
    $   -
    (1,050)
    277Shares
      issued for licensed technology
    3,000
    
    3
    
    -
    
    -
    
    897
    -
    
    
    900Purchase
      of treasury stock
    -
    
    -
    
    (2,400)
    
    (2)
    
    1
    -
    
    
    (1)Shares
      issued for deferred compensation
    1,208
    
    1
    
    -
    
    -
    
    150
    -
    
    (151)Amortization
      of deferred compensation
    -
    
    -
    
    -
    
    -
    
    -
    
    
    1,201
    1,201Net
      loss
    -
    
    -
    
    -
    
    -
    
    -
    (3,001)
    
    
    (3,001)BALANCE,
      December 31, 2002
    16,272
    
    16
    
    (2,400)
    
    (2)
    
    5,260
    (5,898)
    -
    
    (624)Shares
      issued for debt
    20,000
    
    20
    
    -
    
    -
    
    205
    -
    
    
    225Retirement
      of treasury stock
    (2,400)
    
    (2)
    
    2,400
    
    2
    
    -
    -Cancellation
      of shares previously issued
    (16)
    
    (1)
    
    -
    
    -
    
    -
    -
    
    
    (1)Net
      loss
    -
    
    -
    
    -
    
    -
    
    -
    (162)
    
    
    (162)BALANCE,
      December 31, 2003
    33,856
    
    33
    
    -
    
    $   -
    
    5,465
    (6,060)
    -
    
    (562)
  
 ***Page
- 62***
 
 Shares
      issued under financing agreement
    14,397
    
    14
    
    -
    
    -
    
    418
    -
    (432)
    
    0Advances
      offset against subscriptions receivable
    -
    
    -
    
    -
    
    -
    
    -
    -
    174
    
    174Shares
      issued for debt
    1,000
    
    1
    
    -
    
    -
    
    39
    -
    
    
    40Shares
      issued in exchange for amounts due to affiliates
    1,589
    
    2
    
    -
    
    -
    
    47
    -
    -
    
    48Value
      of options granted
    -
    
    -
    
    -
    
    -
    
    351
    
    -
    
    351Shares
      issued for services
    24,109
    
    25
    
    -
    
    -
    
    1,088
    
    -
    
    1,114Net
      loss
    -
    
    -
    
    -
    
    -
    
    -
    (1,265)
    -
    
    (1,265)BALANCE,
      December 31, 2004
    74,951
    
    $75
    
    -
    
    $ -
    
    $7,408
    ($7,325)
    ($258)
    
    ($100)
 
 
 
 
 The
accompanying notes are an integral part of these financial
statements
   ***Page
- 63***
   
 
 
 
 **CAMELOT
      ENTERTAINMENT GROUP, INC.****(fka
      Dstage.com, Inc.)****(A
      Devlopment Stage Company)****STATEMENTS OF CASH FLOWS****For
      the fiscal**
    
    **For
      the fiscal**
    
    **Cumulative
      from****year
      ended**
    
    **year
      ended**
    
    **Inception
      to****December
      31,**
    
    **December
      31,**
    
    **December
      31,****2004**
    
    **2003**
    
    **2004****(
      in 000's)**
    
    **(in
      000's)**
    
    **(in
      000's)****OPERATING
      ACTIVITIES**Net
      (loss) income for the period
    $
    (1,265)
    $
    (162)
    $
    (7,325)Adjustments
      to reconcile net (loss)to
      cash provided (used) by operating activities:Gain
      on extinguishment of debt
    
    
    
    (255)
    
    (255)Value
      of options expensed
    
    351
    
    
    
    351Depreciation
    
    
    
    -
    
    4Amortization
      of deferred compensation
    
    
    
    -
    
    1,539Common
      stock issued for debt
    
    40
    
    
    
    40Common
      stock issued for services
    
    1,114
    
    -
    
    1,288Common
      stock issued for expense reimbursement
    
    
    
    -
    
    22Common
      stock issued for technology
    
    
    
    -
    
    19Impairment
      of investments in other companies
    
    
    
    -
    
    711Impairment
      of assets
    
    
    
    -
    
    2,629Revenue
      paid in common stock
    
    
    
    
    
    (1)Prepaid
      services expensed
    
    
    
    -
    
    530Expenses
      paid through notes payable proceeds
    
    
    
    -
    
    66Loss
      on disposal of property and equipment
    
    
    
    -
    
    6Change
      in assets and liabilities:
    
    
    
    -Acccounts
      payable and accrued liabilities
    
    (326)
    
    371
    
    190Net
      Cash provided (used) by operating activities
    
    (126)
    
    (46)
    
    (226)Cash
      flows from investing activities:Purchase
      of fixed assets
    
    -
    
    -
    
    (7)Cash
      provided (used) from investing activities
    
    0
    
    -
    
    (7)Cash
      flows from financing activities:Contributed
      capital
    
    
    
    -
    
    26Proceeds
      from issuance of common stock
    
    
    
    -
    
    31Advance
      from affiliate
    
    127
    
    46
    
    173Increase
      (decrease) in notes payable
    
    -
    
    0
    
    4Cash
      provided (used) in financing activities
    
    127
    
    46
    
    234Increase
      in cash
    
    1
    
    0
    
    1Cash
      at beginning of period
    
    -
    
    -
    
    -Cash
      at end of period
    $
    1
    $
    0
    $
    1
 
 
 
 The
accompanying notes are an integral part of these financial
statements
 
 
   ***Page
- 64***
   **Camelot
      Entertainment Group, Inc.****(fka
      Dstage.com, Inc).****(A
      Devlopment Stage Company)****STATEMENTS
      OF CASH FLOWS - continued****For
      the fiscal**
    
    **For
      the fiscal**
    
    **Cumulative
      from****year
      ended**
    
    **year
      ended**
    
    **Inception
      to****December
      31,**
    
    **December
      31,**
    
    **December
      31,****2004**
    
    **2003**
    
    **2004****(
      in 000's)**
    
    **(in
      000's)**
    
    **(in
      000's)****SUPPLEMENTAL
      CASH FLOW INFORMATION:**Interest
      paid
    $
    0
    $
    9
    $
    31**SUPPLEMENTAL
      DISCLOSURE OF NONCASH INVESTING AND FINANCING
      ACTIVITIES:**Issuance
      of common stock for property and equipment
    $
    0
    $
    0
    $
    1,154Issuance
      of common stock for licensed technology
    $
    0
    $
    0
    $
    938Issuance
      of commons stock for debt
    $
    40
    $
    0
    $
    40Purchase
      of treasury stock in exchange for property
    $
    0
    $
    0
    $
    2and
      technology
    $
    0
    $
    0
    $
    2Purchase
      of licensed technology for debt to seller
    $
    0
    $
    0
    $
    250Issuance
      of common stock for prepaid and other assets
    $
    0
    $
    0
    $
    2Prepayment
      of services for common stock
    $
    1,114
    $
    0
    $
    2,046Investments
      in other companies
    $
    0
    $
    0
    $
    711Conversion
      of debt to common stock
    $
    0
    $
    225
    $
    225Forgiveness
      of debt by stockholder
    $
    0
    $
    0
    $
    31Issuance
      of common stock for advances due to affiliate
    $
    47
    $
    0
    $
    47**SEE
      ACCOMPANYING NOTES TO FINANCIAL
STATEMENTS**
 
 
 
 
 ***Page
- 65***
 
 
 **CAMELOT
ENTERTAINMENT GROUP, INC.**
 **NOTES TO FINANCIAL STATEMENTS FOR THE**
 **YEAR
ENDED** **DECEMBER
31, 2004**
 
 1.
    ORGANIZATION
      AND BASIS OF PRESENTATION
 
 Camelot
Entertainment Group, Inc. (the *Company* ), a
Delaware Corporation, which develops, produces, markets and distributes motion
pictures, was originally incorporated with the intention of providing services
and resources to entrepreneurs looking to launch novel products and ventures
worldwide in exchange for an interest in the startup ventures. The Company’s
activities since inception have consisted of raising capital, recruiting a
management team and entering into ventures and alliances with affiliates. The
Company has substantially relied on issuing stock to officers, directors,
professional service providers and other parties in exchange for services and
technology. As of December 31, 2002 the Company had written-off all of its
investments due to impairments in the carrying value of the assets. Since
inception, impairment of investments in other companies and of long-lived assets
accounts for approximately 51% of the Company’s net losses.
 
 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 material operating losses 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.
 
 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. There is no assurance that such
resources would be made available to the Company, or that they would be on
financially viable terms.
 
 2.
    SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
  Cash
and cash equivalents: The
Company considers all investment instruments purchased with maturities of three
months or less to be cash equivalents.
 Income
taxes - The
Company provides for income taxes based on the provisions of Statement of
Financial Accounting Standards No. 109, *Accounting for Income Taxes,* which,
among other things, requires that recognition of deferred income taxes be
measured by the provisions of enacted tax laws in effect at the date of
financial statements.
 
 Financial
Instruments -
Financial instruments consist primarily of obligations under accounts payable
and accrued expenses, notes payable and capital lease obligations. 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
and capitalized lease obligations approximate fair value because they contain
market value interest rates and have specified repayment terms. The Company 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.
   ***Page
- 66***
   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.
 
 Recently
Issued Accounting Standards - In May
2003, the FASB issued SFAS No. 150, *"Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity."* SFAS No.
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. SFAS No. 150 requires the classification
as a liability of any financial instruments with a mandatory redemption feature,
an obligation to repurchase equity shares, or a conditional obligation based on
the issuance of a variable number of its equity shares. The Company does not
have any financial instruments with a mandatory redemption feature. The Company
believes the adoption of SFAS No. 150 will not have a material effect on the
Company's financial statements.
  In
November 2002, the FASB issued FASB Interpretation No. 45, *"Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others"* (FIN
45). FIN 45 clarifies the requirements for a guarantor's accounting for and
disclosure of certain guarantees issued and outstanding. The initial recognition
and initial measurement provisions of FIN 45 are applicable to guarantees issued
or modified after December 31, 2002. The disclosure requirements of FIN 45 are
effective for financial statements for periods ending after December 15, 2002.
The adoption of FIN 45 did not have a significant impact on the Company's
financial statements.
 
 In
December 2002, the FASB issued SFAS No. 148, *Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123* . SFAS
No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value-based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both interim and annual financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for financial statements
issued for fiscal years ending after December 15, 2002. The adoption of SFAS No.
148 did not have a material effect on its financial position or results of
operations.
 
 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,* which
supercedes APB No. 15. 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. There were no
potentially dilutive securities outstanding at December 31, 2004.
 
   ***Page
- 67***
  
 
 3.
    PROPERTY
      & EQUIPMENT
 
 In the
year ended December 31, 2002, the Company’s property and equipment, which was
held at a storage facility, was sold for non-payment of rent. Rent and fees due
at the time of sale were approximately $701. The net book value of the assets
disposed of for settlement was approximately $5,413, resulting in a loss on sale
of $4,712. The Company has had no property or equipment during the twelve months
ended December 31, 2004. Depreciation expense for the years ended December 31,
2004 and 2003 was $0 and $0 respectively.
 
 4.
    LICENSED
      TECHNOLOGY
 
 In the
year ended December 31, 2001, the Company entered into a commitment to purchase
technology licenses from an unrelated entity. The Company was unable to complete
the purchase and returned the asset under a settlement agreement. Accordingly,
the licensed technology which had been recorded at a value of $900,000 was fully
impaired in 2002. Impairment losses for the years ended December 31, 2004 and
2003 were $0.00. The impairment impact in 2002 was $1,186,500. Cumulative losses
due to impairment of assets is $3,113,206 as of December 31, 2004.
 
 5.
    COMMITMENTS
      AND CONTINGENCIES
 
 The
Company is delinquent on obligations to various vendors. Accounts payable
balances over 90 days past due as of December 31, 2004 and 2003 were $14,106 and
$22,270 respectively. The Company believes it has identified and accrued all
valid claims from creditors, consultants and vendors as of December 31, 2004.
Although there have been no specific disputes over these matters and related
amounts these third parties may assert additional claims as the Company attempts
to settle all past due obligations.
 
 The
Company is following a practice of paying all debts within 30 days of invoicing
and has reduced its outstanding debt by over $8,000.00 in the past
year.
 
 6.
    ADVANCES
      FROM AFFILIATE
  The
Company has entered into an agreement with an affiliate whereby the affiliate
receives 20% of the Company’s common stock on a non-dilutive basis in return for
services and cash advances. The anti-dilutive provisions are in force through
March 28, 2008. In addition, the affiliate will receive 2,000,000 options to
purchase common shares.
 During
the year ended December 31, 2004, the Company recorded $127,341 in expenses paid
by an affiliate on behalf of the Company. The affiliate received 14,496,727
shares of common stock equaling approximately 20% of the Company’s outstanding
common stock for services and repayment of advances . The
stock issued was valued at $0.03 per share the
trading value of the common shares at the time the agreement was entered into.
The balance of the value of the shares issued under this agreement was greater
than the advances received by $258,000 at December 31, 2004.
 
 7.
    NOTES
      PAYABLE
 
 During
the year ended December 31, 2002, the Company issued a note payable for $200,000
to an affiliate for investment banking services. The note payable provided for
annual interest at 8%, was secured by all of the assets of the Company, and was
due on demand. In 2003, the Company issued 20,000,000 restricted common shares
to retire the note, additional advances and accrued interest totaling $224,296.
Interest expense for the years ended December 31, 2003 and 2002 was $1,115 and
$9,295 respectively.
 
   ***Page
- 68***
   8.
    DUE
      TO OFFICERS
 
 In the
year ended December 31, 2004, the Company had accrued $262,500 in compensation
to its officers. The officers may accept their compensation in stock, and in the
event they elect to do so the amount of stock to be issued shall be determined
by prorating their annual salary on a monthly basis and issuing shares based on
the average bid price for each month converted to stock as determined by the
market price report generated by the Over The Counter Bulletin Board. On
December 31, 2004, the Company issued stock to three officers, R. Atwell, A.
Golusin and J. Olmstead in full payment for their accrued salaries.
 
 9. INCOME
TAXES
 
 Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
 
 The
deferred tax consequences of temporary differences in reporting items for
financial statement and income tax purposes are recognized, if appropriate.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors. The Company has considered these factors in reaching
its conclusion as to a valuation allowance for financial reporting
purposes.
 
 The
components of the provision for income taxes for years ended December 31, are as
follows:
 
  
 2004
    2003Current
      tax provision (benefit)
    $
    (564,600)
    $(85,400)
      -0-Deferred
      tax provision (benefit)
    
    (564,600)
    (85,400)Total
      income tax provision (benefit)
    $
    -0-
    $
      -0-
 
 The
reconciliation of the effective income tax rate to the Federal statutory rate is
as follows:
 
 2004
    2003Federal
      statutory rates
    $(430,100)
      (552245)
    (34)%
    $(55,080)
    (34)%State
      income taxes
    (75,900)
    (6)%
    (9,720)
    (6)%Valuation
      allowance for
      operating
      loss carryforwards
    500,600
    40%
    161,400
    40%Permanent
      difference on gain on debt extinguishment
    -0-
    -
    -(89,250)-
    -Other
    5,400
    -%
    -7,350-
    0%Effective
      rate
    $
      -0-
    (-0-)%
    $
      -0-
    (-0-)%
 
 At
December 31, 2004, the Company had federal net operating loss carryforwards of
approximately $4,437,000 that expire from 2013 to 2024 and stated net operating
loss carryforwards of approximately $2,521 that expire from 2005 to 2009.
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.
 
 Deferred
tax assets and liabilities reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities at December 31, 2004 are as
follows:
 
 Differences
      in book/tax bases of intangible assets
    $
    832,000Differences
      in book/tax bases of accrued compensation
    
    140,000Net
      operating loss carryforwards
    
    1,775,000Deferred
      income tax asset
    
    2,747,000Less:
      valuation allowance
    
    (2,747,000)Total
      deferred income tax asset
    
    -0-Deferred
      income tax liability
    
    (-0-)Net
      deferred income tax asset
    $
    - 0
      -
  
 ***Page
- 69***
 
 The
Company's valuation allowance increased by approximately $501,000 and $161,000
during the years ended December 31, 2004 and 2003 respectively.
 
 
 10.
RELATED PARTY TRANSACTIONS
 
 During
the years ended December 31, 2004 and 2003, the Company entered into related
party transactions with Board members, officers and affiliated entities. The
Company issued shares of common stock for services rendered, cash advances, and
payment of expenses on behalf of the Company.
 
 On March
20, 2003, the Company entered into an agreement with an affiliate whereby the
Company will issue 20% of its common shares in exchange for services and
advances. On March 31, 2003 the Company granted $350,000 in executive
compensation to be paid in cash or common stock at the election of its officers.
On July 17, 2003 the Company approved the issuance of 20,000,000 shares to an
affiliate in exchange for the retirement of $224,296 of debt.
 
 On
February 3, 2004, the Company authorized the issuance of an additional 6,791,287
restricted common shares to an affiliate in accordance with its agreement with
the Company to receive 20% of the Company’s outstanding shares for providing
funding. The Company also authorized the issuance of 100,000 shares to a
director for accounting services.
 
 On June
22, 2004, the Company authorized the issuance of a total of 11,105,755
restricted common shares to an officer and a total of 4,442,296 restricted
common shares to another officer for services in 2003 and the first quarter of
2004, including shares previously authorized by the board. The Company also
authorized the issuance of an additional 4,637,867 restricted common shares to
an affiliate in accordance with its agreement with the Company to receive 20% of
the Company’s outstanding shares for providing funding.
 
 On
November 30, 2004 the Company authorized the issuance of a total of 2,499,999
restricted common shares to an officer, a total of 666,666 restricted common
shares to another officer, and a total of 333,333 to a third officer for
services in during the second, third and fourth quarters of 2004. In addition,
the Company authorized the issuance of an additional 1,000,000 restricted common
shares to an officer and director for prior services rendered to the Company.
The Company also authorized the issuance of 3,500,000 restricted common shares
to an affiliate in connection with the affiliate providing financing for the
Company’s initial in-house production. The Company also authorized moving the
corporate headquarters with said offices to be provided by an
affiliate.
 
 11.
COMMON STOCK
 
 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).
 
 As a
result of our agreement with the affiliate, the affiliate receives 20% of the
Company’s common stock on an anti-dilutive basis in return for services and
cash advances. The anti-dilutive provisions are in force through March 28, 2008.
In addition, the affiliate has the 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, the affiliate shall be entitled to receive an additional two million
options throughout the term of the agreement between the affiliate and the
Company, which expires on March 28, 2008. In addition, the Company shall have
the first right of refusal to purchase the options from the affiliate for the
current market value once the affiliate 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, the affiliate shall be
entitled to exercise the sale of shares or options immediately thereafter. As of
December 31, 2004, the affiliate has not exercised its right to receive the
options and therefore no options have been granted. The affiliate’s right to
receive the options and to exercise those options expires on March 28,
2008.
 
 ***Page
- 70***
 
 During
the year ended December 31, 2004, the Company granted, under terms of a
consulting agreement, 1,675,000 options to acquire common stock at $0.15 and
1,000,000 options at $0.15. The options expire on March 30, 2005. The Company
determined the value of these options to be $351,000 using the Black Scholes
option pricing model. The Company used the following variables in that
calculation:
 
 Risk Free
Interest Rate  4.5
%
 Dividends    None
 Volatility    248%
 
 The value
of the options was expensed in the year ended December 31, 2004.
 
 During
the year ended December 31, 2003 the Company issued a total of 20,000,000 shares
of its common stock to an affiliate in retirement of the affiliate’s $224,296 of
debt with the Company.
 
 During
the year ended December 31, 2002 the Company issued 4,207,500 shares of its
common stock to various parties for a variety of resources, services and
technology.
 
 The
Company received no cash for any of the shares it issued in the years ended
December 31, 2004 and 2003.
 
 During
the year ended December 31, 2002, the Company entered into an agreement with an
unrelated entity, to acquire their technology for 3,000,000 shares of the
Company’s stock along with a note payable for $250,000. The Company was unable
to fulfill the agreement due to a lack of financial resources. As a result, on
October 23, 2003, the Company entered into a settlement agreement to return the
technology, to issue 1,000,000 restricted common shares at fair market value of
$0.04 per share. As of December 31, 2004 the Company had accrued a liability for
the 1,000,000 shares at $40,000, which was fully satisfied with the issuance of
the stock.
 
 At
December 31, 2002, there were a total of 2,400,000 shares of its common stock in
treasury resulting from two separate transactions. In April 2002 the Company
repurchased 900,000 shares at and in May 2002, the Company repurchased 1,500,000
shares. The shares were acquired for par value of $0.001. During the year ended
December 31, 2004, the Company retired these shares at their par value of $0.001
per share.
 
 
 12. GAIN
ON EXTINGUISHMENT OF DEBT
 
 During
the year ended December 31, 2003, the Company entered into a settlement
agreement with an unrelated entity to return assets which the Company had made a
commitment to purchase for $250,000 plus interest. As retirement of the debt the
Company issued 1,000,000 restricted common shares valued at $0.04 per share
($40,000). The gain on extinguishment of debt for the years ended December 31,
2003 and 2002 was $255,500 and $0 respectively.
 
 13.
SUBSEQUENT EVENTS
 
 On
January 5, 2005, the Company established a Series A and Series B Preferred Class
of stock, with the Series A Preferred Stock reserved for employees, consultants
and other professionals retained by the Company, and with the Series B Preferred
Stock reserved for the Board of Directors. In addition, the Company authorized
the issuance of 5,100,000 shares of its Class A and 5,100,000 shares of its
Class B Preferred Stock to its Chief Executive Officer.
 
 * * * *
*
 
 
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has dully caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
 
 Camelot
Entertainment Group, Inc.
 
 Dated:
March 24, 2005
 
 By:/s/Robert
P. Atwell
 President,
Chief Executive Officer
 
 
 By:/s/Jane
Olmsted, CPA
 Interim
Chief Financial Officer
 
 
 In
accordance with the Exchange Act, the report has been signed below by the following
persons on behalf of the Company and in the capacities and on the dates
indicated.
 
 Date:
March 24, 2005 By: /s/ Robert P. Atwell
 Robert P.
Atwell, Director
 
 Date:
March 24, 2005 By: /s/ H.K. Dyal
 H.K.
Dyal, Director
 
 Date:
March 24, 2005 By: /s/ Jane Olmstead
 Jane
Olmstead, Director
 
 Date:
March 24, 2005 By: /s/ Rounsevelle Schaum
 Rounsevelle
Schaum, Director
 
 
  ***Page
- 71***
  EX-31.1
CERTIFICATION PURSUANT TO SECTION 906
 
 CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
 906 OF
THE SARBANES-OXLEY ACT OF 2002
 
 CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
 
 I, Robert
P. Atwell, certify that:
 
 1. I have
reviewed this Annual Report on Form 10-KSB for Camelot Entertainment Group
Inc.
 
 2. Based
on my knowledge, this Annual Report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to
make
 the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this Annual
Report.
 
 3. Based
on my knowledge, the financial statements, and other financial information
included in this Annual Report, fairly present in all material
 respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this Annual Report.
 
 4. The
registrant's other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in
 Exchange
Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 a)
designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated
subsidiaries,
 is made
known to us by others within those entities, particularly during the period in
which this Annual Report is being prepared;
 
 b)
evaluated the effectiveness of the registrant's disclosure controls and procedures
as of a date within 90 days prior to the filing date of this Annual
 Report
(the "Evaluation Date"); and
 
 c)
presented in this Annual Report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of
the
 Evaluation
Date;
 
 5. The
registrant's other certifying officers and I have disclosed, based on our most
recent evaluation, to the registrant's auditors and the audit committee
of
 registrant's
board of directors (or persons performing the equivalent function):
 
 a) all
significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
 
 b) any
fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal controls;
and
 
 6. The
registrant's other certifying officers and I have indicated in this Annual
Report whether or not there were significant changes in internal
controls
 or in
other factors that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions
with
 regard to
significant deficiencies and material weaknesses.
 
 Date:
March 24, 2005
 
 /s/
Robert P. Atwell
 Robert P.
Atwell Chief Executive Officer
 
 
  ***Page
- 72***
  EX-31.2
CERTIFICATION PURSUANT TO SECTION 906
 
 CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
 906 OF
THE SARBANES-OXLEY ACT OF 2002
 
 CERTIFICATION
OF CHIEF FINANCIAL OFFICER
 
 I, Jane
Olmstead, certify that:
 
 1. I have
reviewed this Annual Report on Form 10-KSB of Camelot Entertainment Group,
Inc.;
 
 2. Based
on my knowledge, this Annual Report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to
make
 the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this Annual
Report;
 
 3. Based
on my knowledge, the financial statements, and other financial information
included in this Annual Report, fairly present in all material
 respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this Annual Report;
 
 4. The
registrant's other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in
 Exchange
Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 a)
designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated
subsidiaries,
 is made
known to us by others within those entities, particularly during the period in
which this Annual Report is being prepared;
 
 b)
evaluated the effectiveness of the registrant's disclosure controls and procedures
as of a date within 90 days prior to the filing date of this Annual
 Report
(the "Evaluation Date"); and
 
 c)
presented in this Annual Report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of
the
 Evaluation
Date;
 
 5. The
registrant's other certifying officers and I have disclosed, based on our most
recent evaluation, to the registrant's auditors and the audit committee
of
 registrant's
board of directors (or persons performing the equivalent function):
 
 a) all
significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
 
 b) any
fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal controls;
and
 
 6. The
registrant's other certifying officers and I have indicated in this Annual
Report whether or not there were significant changes in internal
controls
 or in
other factors that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions
with
 regard to
significant deficiencies and material weaknesses.
 
 Date:
March 24, 2005
 
 /s/
Jane Olmsted, CPA
 Jane
Olmstead, Interim Chief Financial Officer
 
 
  ***Page
- 73***
  EX-32.1
CERTIFICATION PURSUANT TO SECTION 906
 
 CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
 906 OF
THE SARBANES-OXLEY ACT OF 2002
 
 CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
 
 In
connection with the Annual Report of Camelot Entertainment Group, Inc., a
Delaware corporation (the
"Company"), on Form 10-KSB for the year ending December 31, 2004 as
filed
 with the
Securities and Exchange Commission (the "Report"), I, Robert P. Atwell, Chief
Executive Officer of the Company, certify, pursuant to 906 of the
 Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350), that to my knowledge:
 
 (1) The
Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
 
 (2) The
information contained in the Report fairly presents, in all material
r espects,
the financial condition and result of operations of the Company.
 
 /s/
Robert P. Atwell
 Robert P.
Atwell Chief Executive Officer
 March 24,
2005
 
 
 
 EX-32.1
CERTIFICATION PURSUANT TO SECTION 906

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
906 OF
THE SARBANES-OXLEY ACT OF 2002
 
 CERTIFICATION
OF CHIEF FINANCIAL OFFICER
 
 In
connection with the Annual Report of Camelot Entertainment Group, Inc., a
Delaware corporation (the
"Company"), on Form 10-KSB for the year ending December 31, 2004 as
filed
 with the
Securities and Exchange Commission (the "Report"), I, Jane Olmstead, Chief
Financial Officer of the Company, certify, pursuant to 906 of the
 Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350), that to my knowledge:
 
 (1) The
Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
 
 (2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and result of operations of the Company.
 
 /s/
Jane Olmstead
 Jane
Olmstead, Interim Chief Financial Officer
 March 24,
2005
 
 
 ***Page
- 74***