SECURITIES
        AND EXCHANGE COMMISSION
 WASHINGTON,
        D.C. 20549
 
 **FORM
        10-KSB/A**
 FIRST
        AMENDED
 
 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, 2006
 
 o TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES
        EXCHANGE ACT OF 1934
 
 COMMISSION
        FILE NUMBER: 000-30785
  
 
 **CAMELOT
        ENTERTAINMENT GROUP, INC.**
 (EXACT
        NAME OF SMALL BUSINESS REGISTRANT AS SPECIFIED IN ITS CHARTER)
   DELAWARE
              52-2195605(State
                  or other jurisdiction of incorporation or organization)
              (I.R.S.
                  Employer Identification No.)
 
  **CAMELOT
                  ENTERTAINMENT GROUP, INC.**2020
                  Main Street, Suite 990Irvine,
                  California 92614(Address
                  of principal executive offices) (Zip Code)(949)
                  777-1080Registrant's
                  telephone number, including area code
  SECURITIES
        REGISTERED UNDER SECTION 12(B) OF THE ACT:
 NONE
 
 SECURITIES
        REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
 (TITLE
          OF
          CLASS)
 COMMON
          STOCK, PAR VALUE $0.001
 
 1
 
 
 Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports), and (2) has been
        subject
        to such filing requirements for the past 90 days. Yes x No o
 
 Check
        if
        no disclosure of delinquent filers in response to Item 405 of Regulation
        S-B is
        contained in this form, and no disclosure will be contained, to the best
        of
        registrant's knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-KSB or any amendment
        to
        this Form 10-KSB. x
 
 The
        approximate aggregate market value of 22,329,079 Common Stock shares held
        by
        non-affiliates of the Registrant, based on 106,655,743 total outstanding
        shares
        less 84,326,664 shares held by affiliates.  Total
        non-affiliated shares at a market price of $.07 had a market value of $1,563,036
        as of December 31, 2006. Total market value of all outstanding shares was
        $7,465,902 as of December 31, 2006.
 
 On
        December 31, 2006, the Registrant had outstanding 106,655,743 shares of Common
        Stock, $0.001 par value.
 
 The
        Registrant's revenues for the year ended December 31, 2006 were $0.
 
 DOCUMENTS
        INCORPORATED BY REFERENCE: SEE ITEM 13
 
 
 
 2
 
 
 
 TABLE
        OF
        CONTENTS
 FORM
        10-KSB ANNUAL REPORT
 FISCAL
        YEAR ENDED DECEMBER 31, 2006
 
 **CAMELOT
        ENTERTAINMENT GROUP, INC.**
 
  ITEM
              
              PagePART
                  I
              51.
              Description
                  of Business
              52.
              Description
                  of Properties
              353.
              Legal
                  Proceedings
              354.
              Submission
                  of Matters to a Vote of Security Holders
              35PART
                  II
              355.
              Market
                  for Common Equity and Related Stockholder Matters
              356.
              Management's
                  Discussion and Analysis
              517.
              Financial
                  Statements
              558.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosures
              558A.
              Controls
                  and Procedures
              56PART
                  III
              579.
              Directors,
                  Executive Officers, Promoters and Control Persons
              5710.
              Executive
                  Compensation
              5911.
              Security
                  Ownership of Certain Beneficial Owners and Management
              6112.
              Certain
                  Relationships and Related Transactions
              6213.
              Exhibits
                  and Reports on Form 8-K
              6314.
              Principal
                  Accountant Fees and Services
              64F-1
              Financial
                  Statements with Footnotes
              F-1Signatures
              65
 
  
 
 
 3
 
 
  THIS
        REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
        OF
        SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND WITHIN THE MEANING
        OF
        SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WHICH ARE
        SUBJECT TO THE "SAFE HARBOR" CREATED BY THOSE SECTIONS. THESE FORWARD-LOOKING
        STATEMENTS INCLUDE BUT ARE NOT LIMITED TO STATEMENTS CONCERNING OUR BUSINESS
        OUTLOOK OR FUTURE ECONOMIC PERFORMANCE; ANTICIPATED PROFITABILITY, REVENUES,
        EXPENSES OR OTHER FINANCIAL ITEMS; AND STATEMENTS CONCERNING ASSUMPTIONS
        MADE OR
        EXCEPTIONS AS TO ANY FUTURE EVENTS, CONDITIONS, PERFORMANCE OR OTHER MATTERS
        WHICH ARE "FORWARD-LOOKING STATEMENTS" AS THAT TERM IS DEFINED UNDER THE
        FEDERAL
        SECURITIES LAWS. ALL STATEMENTS, OTHER THAN HISTORICAL FINANCIAL INFORMATION,
        MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. THE WORDS "BELIEVES", "PLANS",
        "ANTICIPATES", "EXPECTS", AND SIMILAR EXPRESSIONS HEREIN ARE INTENDED TO
        IDENTIFY FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS ARE SUBJECT
        TO
        RISKS, UNCERTAINTIES, AND OTHER FACTORS, WHICH WOULD CAUSE ACTUAL RESULTS
        TO
        DIFFER MATERIALLY FROM THOSE STATED IN SUCH STATEMENTS. FORWARD-LOOKING
        STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "FACTORS THAT
        MAY
        AFFECT FUTURE RESULTS," AND ELSEWHERE IN THIS REPORT, AND THE RISKS DISCUSSED
        IN
        THE COMPANY'S OTHER SEC FILINGS.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 4
 
 
 **PART
        I**
 
 **ITEM
        1. DESCRIPTION OF BUSINESS**
 
 ***Background
        of the Company***
 
 We
        are a
        vertically integrated media enterprise that creatively conceptualizes, finances,
        produces, and distributes original entertainment content across various media,
        including motion pictures, television, interactive gaming, radio and a multitude
        of digital media channels. We were originally incorporated in Delaware on
        October 12, 1999 as Dstage.com, Inc. with the intention to provide support,
        organization and restructuring services to development stage companies. From
        then, until 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, we underwent a restructuring which resulted in a new management
        team and the adoption of a new business model to pursue the development,
        production, marketing and distribution of motion pictures. During May 2004,
        we
        changed our name to Camelot Entertainment Group, Inc. (“CMEG”), and incorporated
        its refined business model of developing, producing, marketing and distributing
        motion pictures, television and digital media. Since inception, we have been
        in
        the development stage and our activities 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.
 
 During
        2004 and 2005 we acquired three companies, Camelot Films, Inc., a Nevada
        corporation, Camelot Films, Inc., a California corporation, and Camelot Films,
        Inc., a Delaware corporation, all of which are our wholly-owned subsidiaries.
        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.
 
 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. Craig Kitchens was named the new president
        of
        this division during the first quarter of 2005. This business named Ferris
        Wheel
        Films, Inc., and was incorporated in the state of Nevada in the second quarter
        of 2005, which is a wholly owned subsidiary of Camelot Entertainment Group,
        Inc.
 
 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 was to be the retention of a business
        consultant to represent us at the Berlin Film Festival during the first quarter
        of 2005. In the second quarter of 2005, we formed Camelot Distribution Group,
        Inc. and hired Chris Davis International, Inc. to consult with us and help
        develop our international film distribution subsidiary. Camelot Distribution
        Group, Inc. was incorporated in Nevada in the second quarter of 2005 and
        is also
        a wholly owned subsidiary of Camelot Entertainment Group, Inc.
 
 During
        fiscal year 2006, with the emergence of our studio group operations, we decided
        to implement a corporate structure that would feature the parent company,
        Camelot Entertainment Group, Inc., and three subsidiaries, Camelot Film and
        Media Group, Camelot Studio Group and Camelot Production Services Group.
        By
        establishing three top-level divisions, we will be able to streamline our
        management efforts in the future, concentrate cost centers and expand revenue
        potential.
 
 **Our
        Structure**
 
 We
        are
        comprised of the following three top-level divisions that can act in concert
        on
        our projects or autonomously as circumstances warrant.
 
 §
              Camelot
                  Film & Media Group
 §
              Camelot
                  Studio Group
 §
              Camelot
                  Production Services Group
 
 **Camelot
        Film & Media Group** is
        responsible for all content production and distribution. It is organized
        into
        five operational units:
 
 §
              Camelot
                  Films
 §
              Camelot
                  Features
 §
              Camelot
                  Distribution
 §
              Camelot
                  Television
 §
              Camelot
                  Digital Media
  5
 
 
 **Camelot
        Studio Group** is
        solely focused on the development, financing, design, planning, building,
        completion and operation of the major West Coast production studio, which
        Camelot is currently proposing to locate in the Advanced Technology &
Education Park (“ATEP”) complex in Tustin, California, which would include the
        following entities:
 
 §
              Studio
                  Development
 §
              Business
                  Development
 §
              Master
                  Development
 §
              Academic
                  Program Development
 
 **Camelot
        Production Services Group** is
        comprised of six divisions:
 
 §
              Technology
 §
              Radio
                  and Music
 §
              Consulting
 §
              Financial
                  Services
 §
              Event
                  Management
 §
              Publishing
 
 ***Our
        New Business Model***
 
 The
        new
        management team developed a new business model for implementation during
        2004
        and continued to enhance its model during 2005 and 2006. 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. Three key ingredients of the business
        model are financial transparency, full-time annualized employment and employee
        revenue/stock ownership.
 
 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.
 
 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,
        while still receiving full compensation and benefits.
 
 We
        believe that our plan to create our motion pictures should succeed because
        our
        management team has worked extensively in all phases of motion picture
        production. In addition, we are actively seeking to bolster our management
        team
        with executives who have extensive experience in not only motion picture
        production, distribution and marketing, but also in television and other
        related
        fields. This combined experience led our management team to a number of beliefs
        upon which our business model for creating our product is founded. These
        key
        views are:
   6
 
 ·
              The
                  manner in which development and pre-production activities are managed
                  can
                  have the largest impact on the quality, 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.
 
 *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 business model for implementation during
        2004
        and continued to enhance its model during 2005. 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. Three key ingredients of the business model are financial
        transparency, full-time annualized employment and employee revenue/stock
        ownership.
 
 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.
 
 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,
        while still receiving full ompensation and benefits.
  We
        believe that our plan to create our motion pictures should succeed because
        our
        management team has worked extensively in all phases of motion picture
        production. In addition, we are actively seeking to bolster our management
        team
        with executives who have extensive experience in not only motion picture
        production, distribution and marketing, but also in television and other
        related
        fields. This combined experience led our management team to a number of beliefs
        upon which our business model for creating our product is founded. These
        key
        views are:
   7
 
 ·
              The
                  manner in which development and pre-production activities are managed
                  can
                  have the largest impact on the quality, 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
        2006, we continued the process of implementing our business plan, including
        beginning the critical process of taking the initial steps which hopefully
        will
        result in us securing funding for the Company and our 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 formal funding process during 2007. Prior
        to
        this year we have purchased scripts at a cost of $18,800 and continued to
        pursue
        other business development projects. In addition, we have expanded our scope
        of
        operations that will hopefully result in significant progress during
        2007.
 
 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 2006, 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 did 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.
 
 We
        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. Named Ferris Wheel Films, Inc. the business
        was incorporated in the state of Nevada in the second quarter of 2005, as
        a
        wholly owned subsidiary of Camelot Entertainment Group, Inc. The business
        model
        for this new division is 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 was to be the retention of a business
        consultant to represent us at the Berlin Film Festival during the first quarter
        of 2005. In the second quarter of 2005, we formed Camelot Distribution Group,
        Inc. and hired Chris Davis International, Inc. to consult with us and help
        develop our international film distribution subsidiary. Camelot Distribution
        Group, Inc. was incorporated in Nevada in the second quarter of 2005 and
        is also
        a wholly owned subsidiary of Camelot Entertainment Group, Inc.
 
 8
 
  
 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. In the first quarter of 2005 we retained Manatt,
        Phelps and Phillips, a well established and respected entertainment law firm
        to
        represent Camelot Entertainment Group, Inc. and all of our subsidiaries.
 
 In
        addition, we continued to interview potential public relation firms during
        2004.
        In the first quarter of 2005, Insignia Public Relations and Media Strategies
        was
        hired to spearhead our marketing campaign for the Cannes Film Festival. Insignia
        has also done other marketing and public relations work for the company during
        this year.
 
 As
        part
        of our plan to enhance our management team, industry veteran Michael Ellis
        was
        hired during the first quarter of 2006 as the Chief Operating Officer of
        Camelot
        Entertainment Group, Inc. He was also appointed to our Board of Directors.
        In
        August 2006, Mr. Ellis was named President of our Camelot Studio Group
        subsidiary.
 
 **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. Our initial plans call for a slate of 36 pictures, with
        a
        total cash investment of $15,000,000 for the slate. We plan to operate on
        an
        annual budget basis, allocating expenses over the planned 12 pictures we
        expect
        to produce annually. By utilizing production teams that will be hired on
        an
        annual basis, our cost allocation per film project is reduced significantly,
        in
        some cases by 30 to 40 per cent. The elements of our annual budget will include
        cash, deferments, corporate contributions and utilization of 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 through our Camelot Distribution subsidiary, 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 or third quarter of
        2006.
        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. By fully disclosing all financial elements connection with the pictures,
        which we call financial transparency, we believe that the deferment component
        can become a trusted and reliable source of payment for our employees and
        vendors.
 
 *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 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.
 
 9
 
 
 *Key
        Components of the Production Process*
 
 The key components of motion picture production are generally viewed as
        consisting of development, pre-production, production or principal photography,
        post-production, marketing and distribution. While these terms are used in
        similar ways by many major studios and independent productions, the relative
        resources of the parties involved in producing an original motion picture
        have a
        meaningful impact on both the scale and scope of the specific activities
        these
        components are comprised of. For example, in a major studio production, the
        post-production phase may include use of numerous special effects professionals
        and companies, composers and music editors, in addition to other personnel.
        This
        is in contrast to many independent productions that might be able to fit
        a music
        editor into their budget, but may not be able to afford hiring a composer
        to
        create an original score, much less an orchestra to perform and record the
        score. Similarly, many independent productions might not be able to afford
        hiring a leading special effects company for months at a time, but may be
        able
        to fit some stock special effects footage into a production or hire an editor
        that also has some experience with editing special effects. As our business
        model depends to a large extent on our ability to efficiently mitigate some
        of
        these differences, our description of the motion picture production process
        includes certain references to our perception of differences between major
        studio productions and independent productions.
 
 *Development*
 
 In
        general, the development phase of motion picture production begins with
        converting a concept or literary work into a script. In certain cases, a
        completed script, or screenplay, may already exist, and require a studio
        or
        independent producer to acquire rights to the script. Such rights could be
        an
        outright purchase of a literary work or an option to purchase the literary
        work
        or script. In the case of a major studio, the next steps in the development
        phase of a motion picture could often involve developing a budget, getting
        contingent commitments from talent such as directors and cast members, and
        assessing the overall creative potential of the project. Independent productions
        generally conduct similar activities; the key difference is often that an
        independent producer has substantially less financial and human resources
        with
        which to execute these activities. As a result, certain independent productions
        must seek external financing from private investment sources to enable shaping
        the motion picture concept into an attractive package that could hopefully
        result in raising additional funds needed to actually produce the motion
        picture.
 
 In
        the case of studios and independent production companies, their staffs actively
        seek and participate 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.
 
 10
 
  
 *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.
  **The
        Motion Picture Industry**
 
 The
        motion picture industry consists of two principal activities: production
        and
        distribution. Production involves the development, financing and production
        of
        feature-length motion pictures. Distribution involves the promotion and
        exploitation of motion pictures throughout the world in a variety of media,
        including theatrical exhibition, home entertainment, television and other
        ancillary markets.
 
 *General.* According to the Motion Picture Association’s *U.S. Theatrical
        Market: 2006 Statistics* ,
        overall
        domestic box office revenue was approximately $9.49 billion in 2006. This
        represents a 5.5% increase in total domestic box office. Global box office
        reached an all-time high with $25.82 billion in 2006, an 11% increase. Although
        it fluctuates from year to year (including a moderate decline from 2004 to
        2005), the domestic motion picture industry has grown in revenues and attendance
        over the past 10 years, with box office receipts up 63.7% and admissions
        up
        11.1% from 1995 to 2005. U.S. theater admissions grew 3.3% to 1.45 billion
        tickets, ending a 3 year downward trend. (However, revenues and attendance
        numbers remained fairly flat from 2002 to 2005.)
 
 *Competition.* Major
        studios have historically dominated the motion picture industry. The term
        major
        studios is generally regarded in the entertainment industry to mean: Universal
        Pictures (“Universal”); Warner Bros.; Twentieth Century Fox; Sony Pictures
        Entertainment (“Sony”); Paramount Pictures; and The Walt Disney Company
        (“Disney”). Competitors less diversified than the major studios include
        Dreamworks SKG, The Weinstein Company, Jerry Bruckheimer Films, Miramax Films,
        Lions Gate Entertainment Corp., New Line Cinema, Newmarket Films, Motion
        Picture
        Distribution LP and IFC Entertainment.
 
 Despite
        the limited resources generally available to independent studios, independent
        films have gained wider market approval and increased share of overall box
        office receipts in recent years. Past successful independent films such as *My
        Big Fat Greek Wedding, Bend It Like Beckham, Saw II* and *Crash* highlight moviegoers’ willingness to support high quality motion pictures
        despite limited pre-marketing and production budgets.
 
 *Product
        Life Cycle.* Successful motion pictures may continue to play in theaters for more than
        three
        months following their initial release. Concurrent with their release in
        the
        United States, motion pictures are generally released in Canada and may also
        be
        released in one or more other foreign markets. After the initial theatrical
        release, distributors seek to maximize revenues by releasing movies in
        sequential release date windows, which are generally exclusive against other
        non-theatrical distribution channels:
 
 
 
 
 
 
 
 
 
 11
 
 
 
 **Typical
        Film Release Windows***
 
 **Months
                  After**
              
              
              **Approximate****Release
                  Period**
              
              **Initial
                  Release**
              
              
              **Release
                  Period**Theatrical
              
              
              —
              
              
              
              0-3 monthsHome
                  video/ DVD (1stcycle)
              
              
              3-6 months
              
              
              
              1-3 monthsPay-per-transaction
                  (pay per-view and video-on-demand)
              
              
              4-8 months
              
              
              
              3-4 monthsPay
                  television
              
              
              9-12 months
              **
              
              
              18 monthsNetwork
                  or basic cable
              
              
              21-28 months
              
              
              
              18-60 monthsSyndication
              
              
              48-70 months
              
              
              
              12-36 monthsLicensing
                  and merchandising
              
              
              Concurrent
              
              
              
              OngoingAll
                  international releases
              
              
              Concurrent
              
              
              
              Ongoing
  *
              These
                  patterns may not be applicable to every film, and may change with
                  the
                  emergence of new technologies**
              First
                    pay television window.
 
 *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.
 
 *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.
 
 
 12
 
 Both
        major studios and independent film companies often acquire pictures for
        distribution through a customary industry arrangement known as a “negative
        pickup,” under which the studio or independent film company agrees before
        commencement of or during production to acquire from a production company
        all
        domestic rights, and in some cases some or all of the foreign rights, to
        a film
        upon completion of production, and also acquire completed films, as well
        as all
        associated obligations.
 
 *The
        Motion Picture Industry: A More Detailed Overview*
 
 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 The Walt Disney Company (including
        Buena Vista, Touchstone and Miramax Films), Paramount Pictures Corporation
        (including Dreamworks), Sony Pictures Entertainment, Inc. (including Columbia
        Pictures and MGM), Twentieth Century Fox Film Corp., NBC Universal (including
        Universal Studios and Universal Focus) and Warner Bros. (including Turner,
        New
        Line Cinema and Castle Rock Entertainment). The major studios are typically
        large diversified corporations that have strong relationships with creative
        talent, exhibitors and others involved in the entertainment industry, and
        have
        global film production and distribution capabilities.
 
 Historically,
        the major studios have produced and distributed the majority of high grossing
        theatrical motion pictures released annually in the United States. In addition,
        most of the studios have created or accumulated substantial and valuable
        motion
        picture libraries that generate significant revenues. These revenues can
        provide
        the major studios with a stable source of earnings that partially offsets
        the
        variations in the financial performance of their current motion picture releases
        and other aspects of their motion picture operations.
 
 The
        independent companies generally have more limited production and distribution
        capabilities than do the major studios. While certain independent companies
        may
        produce as many films as a major studio in any year, independent motion pictures
        typically have lower negative costs and are not as widely released as motion
        pictures produced and distributed by the major studios. Additionally, the
        independent companies may have limited or no internal distribution capability
        and may rely on the major studios for distribution and financing. The one
        exception to this has been Lions Gates Films, a major independent that continued
        to experience significant growth during 2005.
 
 According
        to the Motion Picture Association of America, the motion picture industry
        continues to experience significant growth worldwide over the past decade,
        although certain aspects of the industry have flattened out in recent years.
 
 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. In 2005, U.S. Box Office fell
        slightly to $8.99 billion, its lowest total since $8.41 billion in 2001 Global
        box office remained steady at over $23 billion, just shy of the all time
        high in
        2004 of $25 billion and 46% higher than the 2000 mark of $16 billion.
 
 The
        number of movies released remains on a growth trajectory, with total releases
        topping another all time high of 563 versus 528 in 2004, a growth rate of
        7%. A
        major component of the annual box office was the performance of blockbusters,
        which remained comparable to prior years in total box office. A new all time
        high was set in 2005, with eight movies grossing over $200 million, three
        more
        than in 2004, and five more than 2000, a great milestone for the industry.
        12
        movies grossed between 100 and 199 million dollars each, while 36 films grossed
        between 50 and 99 million dollars each. In total, 56 films grossed in excess
        of
        $50 million dollars during 2005, compared to 64 films which grossed more
        than
        $50 million dollars in 2004.
 
 However,
        U.S. theater admissions continued to decrease, with 1.4 billion tickets sold
        in
        2005, down from 1.54 billion sold in 2004, which represents a 8.7% decline.
        Nonetheless, movies drew more people than theme parks and sporting events
        combined, with theme parks selling 334 million tickets and sporting events
        selling 134.5 million tickets.
 
 U.S.
        Box Office continued its success with a strong slate of movies released in
        the
        summer of 2005, with summer box office receipts reaching $4.49 billion, up
        21%
        compared to summer 2003. Close to half of 2005’s box office gross can be
        attributed to summer releases.
 
 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.
 
 13
 
  
 Worldwide
        Box Office decreased 7.9% from last year, racking up $23.24 billion in gross
        receipts. The decrease follows an increase in 2004 which was 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. These trends were expected
        to
        level off in 2005.
 
 U.S.
        admissions decreased 8.7% to 1.4 billion in 2005 when compared to 1.54 billion
        in 2004, 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 in 2004 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. Worldwide admissions in 2005 are expected
        to level off when compared to 2004.
 
 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 for 2005 was $6.41, up 3.2% over
                  the
                  previous year.
 
 ·
              The
                  average box office revenue for a new film release was $15.4 million
                  in
                  2005, compared to $20 million in 2004 and $20.7 million in 2003.
 
 ·
              Of
                  the 549 films released theatrically in 2005, 194 were released
                  by the
                  major studios. 355 were released by all others.
 
 ·
              Between
                  1968 and 2005, 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
                  2005, 60% of the top grossing films were rated PG-13, 10% 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.
 
 14
  ·
              The
                  average budget of a major studio film in 2005 was $60 million.
                  In 1983,
                  the average was $11.9 million. The average marketing budget was
                  $36.2
                  million in 2005, a 5.2% increase when compared to 2004. In 1983,
                  the
                  average was $5.2 million.
 
 ·
              The
                  total average cost to produce and launch a studio film in 2005
                  was $96.2
                  million compared to $96.8 million in 2004. This represents a 0.6%
                  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.
 
 ·
              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 2005
                  was $23.5
                  million, contributing to a 6.4% decrease in combined negative and
                  marketing costs when compared to 2004. The average cost in 2003
                  was $46.9
                  million, a 154.9% increase over the 1999 average of $18.4 million
                  and a
                  37.7% increase over 2002’s average of $34 million. The average marketing
                  budget was $15.2 million in 2005.The average marketing budget was
                  $11.4
                  million in 2004. The average marketing budget was $14.7 million
                  in 2003.
                  In 1999, the average was $6.5 million.
 
 ·
              The
                  total average cost to produce and launch a major studio subsidiary
                  or
                  specialty/independent type film in 2005 was $37.8 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.
   15
 
 ·
              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.
 
 ·
              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.
 
 16
 
  
 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.
 
 *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.
 
  
 17
 
  Three
          customary contingent compensation arrangements in the industry include:
 
 *1.
          Fixed Deferrals*
  Key
        creative personnel, including the director, producer, writer and actors,
        often
        negotiate fixed deferral payments of flat fees tied to a film's financial
        returns. This is a major component of our business model.
  *2.
        Residual Payments*
 
 The
        principal collective bargaining organizations for personnel within the movie
        industry are: the Directors Guild of America, or DGA; the Writer's Guild
        of
        America, or WGA; the Screen Actors Guild, or SAG; the American Federation
        of
        Musicians, or AFM; and the International Alliance of Theatrical Stage Employees,
        or IATSE. When a movie producer involves members of these organizations in
        a
        film, they are required to comply with certain residual payment obligations.
        These obligations are set forth in agreements between these organizations
        and
        the 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 print and
        advertising costs per release per member, as reported by the MPAA, totaled
        $36.2
        million. Combining this total with the $60 million reported average MPAA
        member
        costs to produce film, or motion picture negative, results in an average
        production and distribution cost of $96.2 million. When one considers that
        the
        average box office revenue per release for these members was only $37.3 million,
        and for all new releases the average was $15.4 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.
 
 18
 
  
 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.
 
 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.
 
 19
 
 
 
 **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, including Dreamworks;
 
 ·
              Universal
                  Pictures, including Universal Focus;
 
 ·
              Sony
                  Pictures Entertainment, including MGM and Sony Pictures Classics;
 
 ·
              Twentieth
                  Century Fox, including Fox Searchlight; and
 
 ·
              Warner
                  Brothers Inc., including New Line Cinema.
 
 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.
 
 20
 
 
 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.
  
 21
  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*.
 
 ·
              The
                  Weinstein Company, recently formed by the Weinstein brothers, who
                  formerly
                  controlled and founded Mirimax.
 
 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.
 
 *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.
 
 22
 
 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.
 
 23
 
 *The
          Completion Bond*
 
 In
          order
          to minimize the risk of budget overruns and to add an additional level
          of
          protection for us, a completion bond, also known as a completion guaranty,
          is
          expected to be required for each production. A completion bond is a form
          of
          insurance which provides that, should the producers of a film run into
          significant problems completing the film, the bond company would:
 ·
              advance
                  any sums in excess of the budget required to complete and deliver
                  the
                  film;
 
 ·
              complete
                  and deliver the film itself; or
 
 ·
              shut-down
                  the production and repay the financier all monies spent thus far
                  to
                  produce the film.
 
 In
        addition to ensuring that the film is completed within budget, the bond company
        should also be responsible for ensuring that the film is delivered within
        a
        pre-determined schedule, follows the script and is technically suitable for
        exhibition in theaters. The bond company usually places certain restrictions
        and
        limitations on us to ensure that the production is following a pre-determined
        schedule. For example, the completion bond agreement normally contains a
        cash
        flow schedule that sets forth the timing and amounts of cash advances required
        to finance production of the film. We expect to be required to deposit funds
        in
        a specific production account in accordance with this cash flow schedule.
 
 Fees
        for
        the completion bond are normally paid out of a particular’s film budget. These
        fees, or premiums, can range anywhere from 2.5% to 6% of a specific budget.
        When
        higher rates are charged, it usually reflects the level of risk involved
        with a
        film as determined by the bond company. In most cases, if a high fee is charged
        initially, the agreement with the bond company will normally contain a rebate
        provision that kicks in if the bond is not called. We plan to negotiate with
        a
        completion bond company to insure our entire slate of films, which will
        hopefully minimize the costs while standardizing the production requirements
        as
        deemed applicable by the bond company.
 
 The
        completion bond company could have the right to take over a production if
        they
        determine that the film is significantly behind schedule or over budget,
        or that
        the production is otherwise not proceeding in a satisfactory manner. This
        could
        include the right to replace any member of the production team. The involvement
        of the completion bond company comes to an end when the film is delivered,
        or
        production monies are refunded, in accordance with the terms and conditions
        of
        the specific completion bond.
 
 In
        order
        to receive a completion bond from a reputable company, we normally have to
        submit a budget, script, shooting schedule and other production elements
        for
        their analysis and approval. Typically, a completion bond cannot be issued
        until
        all material aspects of the production have been determined, such as final
        locations, cast and crew. These aspects are normally determined throughout
        the
        pre-production phase.
 
 A
        completion bond is usually subject to a number of important limitations and
        normally does not reimburse us for losses that result from certain occurrences,
        including, but not limited to, distribution expenses; residual payments due
        to
        creative guilds, such as the Screen Actors Guild; gross or net profit
        participations granted as contingent compensation to actors or production
        personnel; elements of the film that are not included in the approved
        screenplay, budget or production schedule; insolvency; illegal or fraudulent
        acts; violation of any collective bargaining agreements; failure to obtain
        any
        necessary rights to use copyrighted works, such as music; failure to obtain
        required insurance coverage; failure to fulfill any conditions required by
        cast
        members that causes them to abandon their commitment to the film; currency
        fluctuations in the event the film is produced in another country, such as
        Canada; natural disasters; acts of war; or other force majeure events.
 
 **Sources
        and Availability of Raw Materials and the Names of Principal Suppliers**
 
 ****  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.
 
 
 24
 
 
 
 **Need
        for any Government Approval of Principal Products or Services**
 
 Distribution
        rights to motion pictures are granted legal protection under the copyright
        laws
        of the United States and most foreign countries. These laws provide substantial
        civil and criminal sanctions for unauthorized duplication and exhibition
        of
        motion pictures. Motion pictures, musical works, sound recordings, art work,
        still photography and motion picture properties are separate works subject
        to
        copyright under most copyright laws, including the United States Copyright
        Act
        of 1976, as amended. We are aware of reports of extensive unauthorized
        misappropriation of videocassette rights to motion pictures which may include
        motion pictures distributed by us. Motion picture piracy is an industry-wide
        problem. The Motion Picture Association of America, an industry trade
        association, operates a piracy hotline and investigates all reports of such
        piracy. Depending upon the results of investigations, appropriate legal action
        may be brought by the owner of the rights. Depending upon the extent of the
        piracy, the Federal Bureau of Investigation may assist in these investigations
        and related criminal prosecutions.
 
 Motion
        picture piracy is also an international problem. Motion picture piracy is
        extensive in many parts of the world, including South America, Asia including
        Korea, China and Taiwan, the countries of the former Soviet Union and other
        former Eastern bloc countries. In addition to the Motion Picture Association,
        the Motion Picture Export Association, the American Film Marketing Association
        and the American Film Export Association monitor the progress and efforts
        made
        by various countries to limit or prevent piracy. In the past, these various
        trade associations have enacted voluntary embargoes of motion picture exports
        to
        certain countries in order to pressure the governments of those countries
        to
        become more aggressive in preventing motion picture piracy. In addition,
        the
        United States government has publicly considered trade sanctions against
        specific countries that do not prevent copyright infringement of United States
        produced motion pictures. We cannot assure you that voluntary industry embargoes
        or United States government trade sanctions will be enacted. If enacted,
        these
        actions could impact the amount of revenue that we realize from the
        international exploitation of motion pictures depending upon the countries
        subject to and the duration of such action. If not enacted or if other measures
        are not taken, the motion picture industry as a whole, and our business in
        particular, may continue to lose an indeterminate amount of revenues as a
        result
        of motion picture piracy.
 
 The
        Code
        and Ratings Administration of the Motion Picture Association assigns ratings
        indicating age-group suitability for theatrical distribution of motion pictures.
        We plan to submit our motion pictures for these ratings. In certain
        circumstances, motion pictures that we plan to submit for rating might receive
        restrictive ratings, including, in some circumstances, the most restrictive
        rating which prohibits theatrical attendance by persons below the age of
        seventeen. Unrated motion pictures, or motion pictures receiving the most
        restrictive rating, may not be exhibited in certain movie theaters or in
        certain
        locales, thereby potentially reducing the total revenues generated by these
        films. United States television stations and networks, as well as foreign
        governments, impose additional restrictions on the content of motion pictures
        which may restrict in whole or in part theatrical or television exhibition
        in
        particular territories. In 1997, the major broadcast networks and the major
        television production companies implemented a system to rate television
        programs. This television rating system has not had a material adverse effect
        on
        the motion pictures distributed by us. However, the possibility exists that
        the
        sale of theatrical motion pictures for broadcast on domestic free television
        may
        become more difficult because of potential advertiser unwillingness to purchase
        advertising time on television programs that are rated for limited audiences.
        We
        cannot assure you that current and future restrictions on the content of
        motion
        pictures may not limit or adversely affect our ability to exploit certain
        motion
        pictures in particular territories and media.
 
 United
        States television stations and networks as well as foreign governments impose
        content restrictions on motion pictures that may restrict in whole or in
        part
        exhibition on television or theaters in a particular territory. There can
        be no
        assurance that such restrictions will not limit or alter our ability to exhibit
        certain motion pictures in such media or markets or that the cost to edit
        a
        particular motion picture would be prohibitive, thereby eliminating a possible
        revenue source for the motion picture.
 
 **Effect
        of Existing or Probable Governmental Regulations on the Business**
 
 We
        expect
        to be subject to various federal, state and local laws, rules and regulations
        affecting our affiliates and operations. We and each of our potential partners
        may be subject to various licensing regulation and reporting requirements
        by
        numerous governmental authorities which may include Internet (domestic and
        worldwide) oversight regulations, production, manufacturing, OSHA, securities,
        banking, insurance, building, land use, industrial, environmental protection,
        health and safety and fire agencies in the state or municipality in which
        each
        business is located. Difficulties in obtaining or failures to obtain the
        necessary approvals, licenses or registrations, and unforeseen changes in
        government regulations directly affecting the Internet could delay or prevent
        the development or operation of a given business.
 
 In
        1994,
        the U.S. was unable to reach agreement with its major international trading
        partners to include audiovisual works, such as television programs and motion
        pictures, under the terms of the World Trade Organization. The failure to
        include audiovisual works under GATT allows many countries (including members
        of
        the European Union, which currently consists of Austria, Belgium, Denmark,
        Germany, Greece, Finland, France, Ireland, Italy, Luxembourg, The Netherlands,
        Portugal, Spain, Sweden and the United Kingdom) to continue enforcing quotas
        that restrict the amount of U.S. produced product which may be aired on
        television in such countries. The European Union Council of Ministers has
        adopted a directive requiring all member states of the European Union to
        enact
        laws specifying that broadcasters must reserve, where practicable, a majority
        of
        their transmission time (exclusive of news, sports, game shows and advertising)
        for European works. The directive must be implemented by appropriate legislation
        in each member country. Under the directive, member states remain free to
        require broadcasters under their jurisdiction to comply with stricter rules.
        Several countries (including France, Italy and Korea) also have quotas on
        the
        theatrical exhibition of motion pictures.
 
 25
 
  
 In
        addition, France requires that original French programming constitute a required
        portion of all programming aired on French television. These quotas generally
        apply only to television programming and not to theatrical exhibition of
        motion
        pictures, but quotas on the theatrical exhibition of motion pictures could
        also
        be enacted in the future. We cannot assure you that additional or more
        restrictive theatrical or television quotas will not be enacted or that
        countries with existing quotas will not more strictly enforce such quotas.
        Additional or more restrictive quotas or more stringent enforcement of existing
        quotas could materially and adversely affect our business by limiting our
        ability to fully exploit our rights in motion pictures internationally and,
        consequently, to assist or participate in the financing of these motion
        pictures.
 
 *Privacy
        Issues*
 
 Both
        Congress and the Federal Trade Commission are considering regulating the
        extent
        to which companies should be able to use and disclose information they obtain
        online from consumers. If any regulations are enacted, Internet companies
        may
        find some marketing activities restricted. Also, the European Union has directed
        its member nations to enact much more stringent privacy protection laws than
        are
        generally found in the United States and has threatened to prohibit the export
        of some personal data to United States companies if similar measures are
        not
        adopted. Such a prohibition could limit the growth of foreign markets for
        United
        States Internet companies. The Department of Commerce is negotiating with
        the
        Federal Trade Commission to provide exemptions from the European Union
        regulations, but the outcome of these negotiations is uncertain.
 
 *Effects
        of Government Regulations on Business Government Regulation and Legal
        Uncertainties*
 
 In
        the
        United States and most countries in which we plan to conduct our major
        operations, we are not currently subject to direct regulation other than
        pursuant to laws applicable to businesses generally. Adverse changes in the
        legal or regulatory environment relating to the interactive online services,
        venture formation and Internet industry in the United States, Europe, Japan
        or
        elsewhere could have a material adverse effect on our business, financial
        condition and operating results. A number of legislative and regulatory
        proposals from various international bodies and foreign and domestic governments
        in the areas of telecommunication regulation, access charges, encryption
        standards, content regulation, consumer protection, intellectual property,
        privacy, electronic commerce, and taxation, among others, are now under
        consideration. We are unable at this time to predict which, if any, of such
        proposals may be adopted and, if adopted, whether such proposals would have
        an
        adverse effect on our business, financial condition and operating results.
        As
        Internet commerce continues to grow, the risk that federal, state or foreign
        agencies could adopt regulations covering issues such as user privacy, pricing,
        content and quality of products and services, increases. It is possible that
        legislation could expose companies involved in electronic commerce to liability,
        which could limit the growth of electronic commerce generally. Legislation
        could
        dampen the growth in Internet usage and decrease its acceptance as a
        communications and commercial medium. If enacted, these laws, rules or
        regulations could limit the market for our services.
 
 **Research
        and Development Activities**
 
 **** Our
        research and development activities include 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 forty per cent of management’s time has been spent conducting
        research and development activities during the past two years. In addition,
        we
        have been expanding our research and development activities to include initial
        preparations for our studio project.
 
 **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.
 
  
 26
   Intellectual
        Property
 
 We
        regard
        intellectual property as valuable assets and believe that trademarks are
        an
        important factor in marketing our products. We have been in the process of
        trademarking the name “Camelot Films” as a service mark (Serial No. 78558249;
        Registration No. 19800501). We also plan to copyright and own all motion
        pictures that we make, which should result in the Company building a library
        of
        its own products over time.
 
 **Employees**
 
 As
        of
        December 31, 2006, we have approximately 8 employees. Two of our staff members,
        both of whom are officers of our company, spend 50% to 80% of their time
        on
        matters relating to our company. The other 6 staff members spend anywhere
        from
        10% to 50% of their time on matters relating to our business. The Atwell
        Group,
        Inc. is the full time employer of these additional staff members.
 
 **Risk
        Factors**
 
 **Going
        Concern**
 
 As
        reflected in Note 1 to the Financial Statements which accompany this annual
        report, our consolidated financial statements have been prepared on a going
        concern basis, which contemplates the realization of assets and liabilities
        and
        commitments in the normal course of business. In the near term, we expect
        operating costs to continue to exceed funds generated from operations. As
        a
        result, we expect to continue to incur operating losses and we may not have
        sufficient funds to grow our business in the future. We can give no assurance
        that we will achieve profitability or be capable of sustaining profitable
        operations. As a result, operations in the near future are expected to continue
        to use working capital.
 
 To
        successfully grow the individual segments of the business, we must decrease
        our
        cash burn rate, improve our cash position and the revenue base of each segment,
        and succeed in our ability to raise additional capital through a combination
        of
        primarily public or private equity offering or strategic alliances. We also
        depend on certain contractors and our executives, and the loss of any of
        those
        contractors or executives, may harm our business.
 
 **We
        have no operating history as a motion picture company in which to evaluate
        our
        business.**
 
 We
        were
        incorporated in Delaware on October 12, 1999 as Dstage.com, a business
        development organization. On April 12, 2004, we announced our intention to
        change our name to Camelot Entertainment Group, Inc. and our business model
        to
        motion picture production, distribution and marketing. We have been unable
        to
        fully implement this new business model because of financing constraints.
        To
        date, we have no revenue and operating history as a motion picture company
        upon
        which an evaluation of our future success or failure can be made. Current
        company assets may not be suitable for development to the projected forecast
        for
        2007-2008. No assurances of any nature can be made to investors that the
        company
        will be profitable. There can be no assurances that our management will be
        successful in managing the Company as a motion picture production, distribution
        and marketing company.
 
 **We
        have incurred significant and continuing losses and may not be able to generate
        revenues to sustain our operations.**
 
 We
        have
        experienced significant operating losses since our inception on October 12,
        1999. We have incurred net losses of approximately $2,348,351 and 4,500,141
        respectively in 2006 and 2005, and have an accumulated deficit of $14,173,211
        at
        December 31, 2006, 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.
 
 We
        will
        continue to have a high level of operating expenses and will be required
        to make
        significant up-front expenditures in connection with the commencement of
        income-generating activities (including, but not limited to, salaries of
        executive, marketing and other personnel). We expect to incur additional
        losses
        until such time as we are able to fully implement our new business model
        and
        generate sufficient revenues to finance our operations and the costs of
        expansion. There can be no assurance that the Company will be able to generate
        such revenues and operate profitably.
 
 **We
        will require additional funds to achieve our current business strategy and
        our
        inability to obtain additional financing could cause us to cease our business
        operations.**
 
 Even
        with
        the proceeds from this offering, we will need to raise additional funds through
        public or private debt or sale of equity to achieve our new business strategy.
        Such financing may not be available when needed. Even if such financing is
        available, it may be on terms that are materially adverse to your interests
        with
        respect to dilution of book value, dividend preferences, liquidation
        preferences, or other terms.
 
 27
 
 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. Our new business plan requires
        a
        substantial investment of capital. However, at this time, we can not determine
        the amount of additional funding necessary to implement such plan. We intend
        to
        assess such amount at the time we begin fully implementing our business plan.
        The production, acquisition and distribution of motion pictures require a
        significant amount of capital. A significant amount of time may elapse between
        our expenditure of funds and the receipt of commercial revenues from our
        motion
        pictures, if any. This time lapse requires us to fund a significant portion
        of
        our capital requirements from private parties, institutions, and other sources.
        Although we intend to reduce the risks of our production exposure through
        strict
        financial guidelines and financial contributions from broadcasters,
        sub-distributors, tax shelters, government and industry programs and studios,
        we
        cannot assure you that we will be able to implement successfully these
        arrangements or that we will not be subject to substantial financial risks
        relating to the production, acquisition, completion and release of future
        motion
        pictures. If we increase our production slate or our production budgets,
        we may
        be required to increase overhead, make larger up-front payments to talent
        and
        consequently bear greater financial risks. Any of the foregoing could have
        a
        material adverse effect on our business, results of operations or financial
        condition.
 
 If
        we are
        unable to obtain financing on reasonable terms, we could be forced to delay,
        scale back or eliminate certain product and service development programs.
        In
        addition, such inability to obtain financing on reasonable terms could have
        a
        material negative effect on our business, operating results, or financial
        condition to such extent that we are forced to restructure, file for bankruptcy,
        sell assets or cease operations, any of which could put your investment dollars
        at significant risk.
 
 **We
        have been the subject of a going concern opinion for the fiscal years ended
        December 31, 2005 and 2004 from our independent auditors, which means that
        we
        may not be able to continue operations unless we can become profitable or
        obtain
        additional funding.**
 
 Our
        independent auditors have added an explanatory paragraph to their audit opinions
        issued in connection with our financial statements for the fiscal years ended
        December 31, 2005 and 2004, which states that the financial statements raise
        substantial doubt as to our ability to continue as a going concern. Our ability
        to make operations profitable or obtain additional funding will determine
        our
        ability to continue as a going concern. Our financial statements do not include
        any adjustments that might result from the outcome of this uncertainty. We
        will
        have to raise additional funds to meet our current obligations and to cover
        operating expenses through the year ending December 31, 2007. If we are not
        successful in raising additional capital we may not be able to continue as
        a
        going concern.
 
 **We
        are subject to a working capital deficit, which means that our current assets
        at
        December 31, 2006, were not sufficient to satisfy our current liabilities.**
 
 As
        of
        December 31, 2006, we had a working capital deficit of $42,424, which means
        that
        our current liabilities of $576,625 exceeded our current assets of $534,201
        by
        that amount on December 31, 2006 Current assets are assets that are expected
        to
        be converted to cash within one year and, therefore, may be used to pay current
        liabilities as they become due. Our working capital deficit means that our
        current assets on December 31, 2006, were not sufficient to satisfy all of
        our
        current liabilities on that date. We will have to raise additional capital
        or
        debt to fund the deficit or cease operations.
 
 **If
        we are unable to retain the services of our executive officers, Robert P.
        Atwell, George Jackson, and Michael Ellis, or if we are unable to successfully
        recruit qualified managerial personnel and employees with experience in business
        and the motion picture industry, we may not be able to continue our
        operations.**
 
 Our
        success depends to a significant extent upon the continued service of our
        executive officers, Robert P. Atwell, President and Chief Executive Officer,
        George Jackson, Secretary and Chief Financial Officer, and Michael Ellis,
        Chief
        Operating Officer. Loss of the services of any of our executive officers
        could
        have a material adverse effect on our growth, revenues, and prospective
        business. We do not maintain key-man insurance on the lives of our executive
        officers.
 
 In
        addition, in order to successfully implement and manage our business plan,
        we
        will be dependent upon, among other things, successfully recruiting highly
        skilled creative and production personnel, including producers, executives,
        cinematographers, editors, costume designers, set designers, sound technicians,
        lighting technicians, actors, sales and marketing experts, and legal and
        accounting experts. Although we expect to find qualified candidates to fill
        these positions, competition is intense and they may be unwilling to work
        for us
        under acceptable terms. This could delay production or reduce the quality
        of our
        film projects, which would impair our ability to successfully implement our
        business model.
 
 Also,
        many of these positions could require us to hire members of unions or guilds.
        As
        a result, our ability to terminate unsatisfactory or non-performing workers
        could be adversely affected by existing union or guild contracts and
        regulations. This could cause delays in production of our film projects and
        significantly increase costs.
 
 28
 
 There
        can
        be no assurance that we will be able to find, attract and retain existing
        employees or that we will be able to find, attract and retain qualified
        personnel on acceptable terms.
 
 **Mr.
        Atwell, our President, Chief Executive Officer and Chairman owns a controlling
        interest in our voting stock and investors will not have any voice in our
        management.**
 
 Mr.
        Atwell, our President, Chief Executive Officer and Chairman, is the beneficial
        owner of 62.68% of our issued and outstanding common shares and 100% of each
        of
        our Class A Convertible Preferred Stock (“Class A”) and Class B Convertible
        Preferred Stock (“Class B”). Each share of Class A entitles the holder to 50
        votes and each share of Class B entitles the holder to 1,000 votes. In the
        aggregate, Mr. Atwell is entitled to cast 5,414,440,485 or 99.37% of the
        votes
        in any vote by our stockholders. Thus, Mr. Atwell, will have the ability
        to
        control substantially all matters submitted to our stockholders for approval,
        including:
  §
              election
                  of our board of directors;§
              removal
                  of any of our directors;§
              amendment
                  of our certificate of incorporation or bylaws; and§
              adoption
                  of measures that could delay or prevent a change in control or
                  impede a
                  merger, takeover or other business combination involving
                  us.
 
 As
        a
        result of his ownership and position as a director and executive officer,
        he is
        able to influence all matters requiring stockholder approval, including the
        election of directors and approval of significant corporate transactions.
        In
        addition, sales of significant amounts of shares held by our directors and
        executive officers, or the prospect of these sales, could adversely affect
        the
        market price of our common stock. Management's stock ownership may discourage
        a
        potential acquirer from making a tender offer or otherwise attempting to
        obtain
        control of us, which in turn could reduce our stock price or prevent our
        stockholders from realizing a premium over our stock price.
 
 **It
        is likely that additional shares of our stock will be issued in the normal
        course of our business development, which will result in a dilutive affect
        on
        our existing shareholders.**
 
 We
        will
        issue additional stock as required to raise additional working capital in
        order
        to secure intellectual properties, undertake company acquisitions, recruit
        and
        retain an effective management team, compensate our officers and directors,
        engage industry consultants and for other business development
        activities.
 
 **If
        we fail to adequately manage our growth, we may not be successful in growing
        our
        business and becoming profitable.**
 
 We
        expect
        our business and number of employees to grow over the next year. We expect
        that
        our growth will place significant stress on our operation, management, employee
        base and ability to meet capital requirements sufficient to support our growth
        over the next 12 months. Any failure to address the needs of our growing
        business successfully could have a negative impact on our chance of
        success.
 
 **If
        we acquire or invest in other businesses, we will face certain risks inherent
        in
        such transactions.**
 
 We
        may
        acquire, make investments in, or enter into strategic alliances or joint
        ventures with, companies engaged in businesses that are similar or complementary
        to ours. If we make such acquisitions or investments or enter into strategic
        alliances, we will face certain risks inherent in such transactions. For
        example, we could face difficulties in managing and integrating newly acquired
        operations. Additionally, such transactions would divert management resources
        and may result in the loss of artists or songwriters from our rosters. We
        cannot
        assure you that if we make any future acquisitions, investments, strategic
        alliances or joint ventures that they will be completed in a timely manner,
        that
        they will be structured or financed in a way that will enhance our
        creditworthiness or that they will meet our strategic objectives or otherwise
        be
        successful. Failure to effectively manage any of these transactions could
        result
        in material increases in costs or reductions in expected revenues, or both.
 
 **“Penny
        Stock” rules may make buying or selling our common stock
        difficult.**
 
 Trading
        in our securities is subject to the “penny stock” rules. The SEC has adopted
        regulations that generally define a penny stock to be any equity security
        that
        has a market price of less than $5.00 per share, subject to certain exceptions.
        These rules require that any broker-dealer who recommends our securities
        to
        persons other than prior customers and accredited investors, must, prior
        to the
        sale, make a special written suitability determination for the purchaser
        and
        receive the purchaser’s written agreement to execute the transaction. Unless an
        exception is available, the regulations require the delivery, prior to any
        transaction involving a penny stock, of a disclosure schedule explaining
        the
        penny stock market and the risks associated with trading in the penny stock
        market. In addition, broker-dealers must disclose commissions payable to
        both
        the broker-dealer and the registered representative and current quotations
        for
        the securities they offer. The additional burdens imposed upon broker- dealers
        by such requirements may discourage broker-dealers from effecting transactions
        in our securities, which could severely limit the market price and liquidity
        of
        our securities. Broker- dealers who sell penny stocks to certain types of
        investors are required to comply with the Commission’s regulations concerning
        the transfer of penny stocks. These regulations require broker-dealers
        to:
 
 29
 
   §
              Make
                  a suitability determination prior to selling a penny stock to the
                  purchaser;§
              Receive
                  the purchaser’s written consent to the transaction; and§
              Provide
                  certain written disclosures to the
                  purchaser.
 
 **Risks
        Associated with the Motion Picture Production and Distribution
        Industry**
 
 **Because
        the movie industry is intensely competitive and we lack the name recognition
        and
        resources of our competitors, we may never generate any revenues or become
        profitable.**
 
 The
        motion picture industry is highly competitive. We believe that a motion
        picture’s theatrical success is dependent upon general public acceptance,
        marketing technology, advertising and the quality of the production. We intend
        to produce motion picture productions that normally should compete with numerous
        independent and foreign productions as well as productions produced and
        distributed by a number of major domestic companies, many of which are units
        of
        conglomerate corporations with assets and resources substantially greater
        than
        ours. Some of the production and distribution companies that we will compete
        with are The Weinstein Company, Jerry Bruckheimer Films, Miramax Films, Lions
        Gate Entertainment Corp., Sony Pictures Entertainment, Inc., New Line Cinema,
        a
        subsidiary of Time Warner, Universal Studios, 20 th Century
        Fox Film Corporation, a subsidiary of News Corp., Buena Vista Motion Pictures
        Group, a collection of affiliated motion picture studios all subsidiaries
        of The
        Walt Disney Company, Paramount Pictures Corporation, a subsidiary of Viacom,
        and
        Troma Entertainment, Inc. Most of these competitors are significantly larger
        than us, have a long-standing business .
 
 Our
        management believes that in recent years there has been an increase in
        competition in virtually all facets of the motion picture industry. With
        increased alternative distribution channels for many types of entertainment,
        the
        motion picture business competes more intensely than previously with all
        other
        types of entertainment activities as well as television. While increased
        use of
        pay per view television, pay television channels, and home video products
        are
        potentially beneficial, there is no guarantee that we will be able to
        successfully penetrate these markets. Failure to penetrate these potential
        distribution channels would have a material adverse impact on our results
        of
        operations.
 
 **Since
        our success depends on the commercial success of our motion pictures, which
        is
        unpredictable and highly speculative, we may never generate any revenue or
        become profitable.**
 
 The
        success of a single motion picture project is fraught with an unusually high
        degree of uncertainty and risk. Similarly, the probability of successfully
        completing a motion picture project is also laden with an unusually high
        degree
        of uncertainty and risks. A studio or independent producer’s ability to finance
        a project, execute a successful distribution strategy, obtain favorable press
        and compete with an unknown quantity of competing releases are just some
        of the
        factors that impact the commercial success or failure of a film project.
        Our
        strategy involves producing a minimum of 12 motion pictures per year. While
        the
        intent is to reduce production risk through this strategy, our plan has the
        potential to compound risks germane to the industry.
 
 Movie
        producers are often involved in several projects at the same time and an
        active
        film director is often presented with opportunities to direct many movies.
        In
        addition, independent contractors needed to produce the film often have
        commitments to more than one movie project. Because we may decide to replace
        key
        members of our production team if they are unable to perform their duties
        within
        our schedule, the marketing appeal of our film may be reduced.
 
 If
        we do
        not complete the film on schedule or within budget, our ability to generate
        revenue may be diminished or delayed. Our success depends on our ability
        to
        complete the film on schedule and within budget.
 
 Each film we produce and distribute should appeal to a given segment of
        society to achieve acceptance. Although our intent to target niche markets
        that
        should require less than broad market acceptance to achieve commercial success,
        there can be no assurance that this strategy will succeed.
  Motion
        picture production and distribution is highly speculative and inherently
        risky.
        There can be no assurance of the economic success of any motion picture since
        the revenues derived from the production and distribution of a motion picture
        (which do not necessarily bear a direct correlation to the production or
        distribution costs incurred) depend primarily upon its acceptance by the
        public,
        which cannot be predicted. The commercial success of a motion picture also
        depends upon the acceptance of competing films released into the marketplace
        at
        or near the same time, the availability of alternative forms of entertainment
        and leisure time activities, general economic conditions and other tangible
        and
        intangible factors, all of which can change and cannot be predicted with
        certainty. Further, the theatrical success of a motion picture is generally
        a
        key factor in generating revenues from other distribution channels. There
        is a
        substantial risk that some or all of our motion pictures will not be
        commercially successful, resulting in costs not being recouped or anticipated
        profits not being realized.
 
 30
 
 
 Theaters
        are more likely to exhibit feature films with substantial studio marketing
        budgets. Even if we are able to complete the films and obtain distribution,
        it
        is unclear how much should be spent on marketing to promote each film by
        our
        distributors.
 
 All
        of
        these factors cannot be predicted with certainty. In addition, motion picture
        attendance is seasonal, with the greatest attendance typically occurring
        during
        the summer and holidays. The release of a film during a period of relatively
        low
        theater attendance is likely to affect the film’s box office receipts adversely.
 
 Relatively
        few motion pictures return a profit to investors. There can be no assurance
        that
        a motion picture will recoup its production costs. There is a very high degree
        of risk that any motion picture we may produce will not return all or any
        portion of our investment.
 
 **We
        intend to distribute our films in foreign countries which may be unpredictable
        and may have unstable and different governments and/or laws than the
        U.S.**
 
 We
        plan to license motion picture and television programming in foreign countries
        to sub-distributors. If we are at all successful in this regard, a portion
        of
        our revenues should be derived from foreign sources. Because of this, our
        business is subject to certain risks inherent in international trade, many
        of
        which are beyond our control. Such risks include, but are not limited to,
        changes in laws and policies affecting trade, investment and taxes (including
        laws and policies relating to the repatriation of funds and to withholding
        taxes), differing degrees of protection for intellectual property, the
        instability of foreign economies and governments and in some cases an adverse
        acceptance to a film may occur, resulting in a demand to renegotiate the
        license
        agreement’s terms and conditions. In addition, fluctuations in foreign exchange
        rates may affect our results of operations.
 
 **Piracy
        of the original motion pictures that we plan to produce may reduce our revenues
        and potential earnings.**
  According
        to industry sources, piracy losses in the motion picture industry have increased
        substantially, from an estimated $2.2 billion in 1997 to an estimated $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.
 
 **Our
        operating results will fluctuate.**
 
 Like
        all motion picture production companies, our revenues and results of operations
        could be significantly dependent upon the timing of releases and the commercial
        success of the motion pictures we distribute, none of which can be predicted
        with certainty. Accordingly, our revenues and results of operations may
        fluctuate significantly from period to period, and the results of any one
        period
        may not be indicative of the results for any future periods.
  In
        accordance with generally accepted accounting principles and industry practice,
        we intend to amortize film costs using the individual-film-forecast method
        under
        which such costs are amortized for each film in the ratio that revenue earned
        in
        the current period for such title bears to management's estimate of the total
        revenues to be realized from all media and markets for such title. To comply
        with this accounting principal, our management plans to regularly review,
        and
        revise when necessary, our total revenue estimates on a title-by-title basis,
        which may result in a change in the rate of amortization and/or a write-down
        of
        the film asset to net realizable value. Results of operations in future years
        should be dependent upon our amortization of film costs and may be significantly
        affected by periodic adjustments in amortization rates. The likelihood of
        the
        Company's reporting of losses is increased because the industry's accounting
        method requires the immediate recognition of the entire loss in instances
        where
        it is expected that a motion picture should not recover the Company's
        investment.
 
 Similarly,
        should any of our films be profitable in a given period, we should have to
        recognize that profit over the entire revenue stream expected to be generated
        by
        the individual film.
  **Our
        film production budgets may increase and film production spending may exceed
        such budgets.**
  Our
        future film budgets may increase due to factors including, but not limited
        to,
        (1) escalation in compensation rates of people required to work on our projects,
        (2) number of personnel required to work on our projects, (3) equipment needs,
        (4) the enhancement of existing or the development of new proprietary technology
        and (5) the addition of facilities to accommodate the growth of a studio.
        Due to
        production exigencies, which are often difficult to predict, it is not uncommon
        for film production spending to exceed film production budgets, and our projects
        may not be completed within the budgeted amounts. In addition, when production
        of each film is completed, we may incur significant carrying costs associated
        with transitioning personnel on creative and development teams from one project
        to another. These carrying costs increase overall production budgets and
        could
        have a material adverse effect on our results of operations and financial
        condition.
 
 31
 
 
 **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.
  **We
        are smaller and less diversified than most 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.
 
 32
 
 The
        limited supply of motion picture screens compounds this product oversupply
        problem. Currently, a substantial majority of the motion picture screens
        in the
        U.S. typically are committed at any one time to only ten to 15 films distributed
        nationally by major studio distributors. In addition, as a result of changes
        in
        the theatrical exhibition industry, including reorganizations and consolidations
        and the fact that major studio releases occupy more screens, the number of
        screens available to us when we want to release a picture may decrease. If
        the
        number of motion picture screens decreases, box office receipts, and the
        correlating future revenue streams, such as from home video and pay and free
        television, of our motion pictures may also decrease, which could have a
        material adverse effect on our business, results of operations or financial
        condition.
 
 **If
        we are alleged to have infringed on the intellectual property or other rights
        of
        third parties it could subject us to significant liability for damages and
        invalidation of our proprietary rights.**
 
 Our
        business is highly dependent upon intellectual property, a field that has
        encountered increasing litigation in recent years. If third parties allege
        that
        we have infringed on their intellectual property rights, privacy rights or
        publicity rights or have defamed them, we could become a party to litigation.
        These claims and any resulting lawsuits could subject us to significant
        liability for damages and invalidation of our proprietary rights and/or restrict
        our ability to publish and distribute the infringing or defaming content.
        There
        can be no assurance that we would prevail in any such litigation. If we were
        to
        lose a litigation relating to intellectual property, we could be forced to
        pay
        monetary damages and to cease the sale of certain products or the use of
        certain
        technology. Any of the foregoing may adversely affect our business.
 
 **Risks
        Related to Our Common Stock and Its Market**
 
 **If
        the ownership of our common stock continues to be somewhat concentrated in
        shares owned by our management, and mainly Mr. Atwell, it may prevent you
        and
        other stockholders from influencing significant corporate decisions and may
        result in conflicts of interest that could cause our stock price to
        decline.**
 
 As
        of
        December 15, 2006, Mr. Atwell, our President, Chief Executive Officer and
        Chairman, and his affiliates, beneficially own or control approximately 99.37%
        of the votes that may be cast in any stockholder vote. Accordingly, Mr. Atwell
        and his affiliates will have sole control over the outcome of corporate actions
        requiring stockholder approval, including the election of directors, any
        merger,
        consolidation or sale of all or substantially all of our assets or any other
        significant corporate transactions. This stockholder may also delay or prevent
        a
        change of control of us, even if such a change of control would benefit our
        other stockholders. The concentration of stock ownership may adversely affect
        the trading price of our common stock due to investors’ perception that
        conflicts of interest may exist or arise.
 
 **We
        have not, and currently do not anticipate, paying dividends on our common
        stock.**
 
 We
        have
        never paid any dividend on our common stock and do not plan to pay dividends
        on
        our common stock for the foreseeable future. We currently intend to retain
        future earnings, if any, to finance operations, capital expenditures and
        to
        expand our business.
 
 **There
        is a limited market for our common stock which makes it difficult for investors
        to engage in transactions in our securities.**
 
 Our
        common stock is quoted on the OTCBB under the symbol “CMEG”. If public trading
        of our common stock does not increase, a liquid market will not develop for
        our
        common stock. The potential effects of this include difficulties for the
        holders
        of our common shares to sell our common stock at prices they find attractive.
        If
        liquidity in the market for our common stock does not increase, investors
        in our
        company may never realize a profit on their investment.
 
 **Our
        stock is thinly traded, which can lead to price volatility and difficulty
        liquidating your investment.**
 
 The
        trading volume of our stock has been low, which can cause the trading price
        of
        our stock to change substantially in response to relatively small orders.
        In
        addition, during the last two fiscal years and subsequent interim period,
        our
        common stock has traded as low as $0.015 and as high as $0.16. Both volume
        and
        price could also be subject to wide fluctuations in response to various factors,
        many of which are beyond our control, including actual or anticipated variations
        in quarterly and annual operating results and general market perception.
        An
        absence of an active trading market could adversely affect our shareholders’
ability to sell our common stock in short time periods, or possibly at all.
        In
        addition, we believe that factors such as changes in the overall economy
        or the
        condition of the financial markets could cause the price of our common stock
        to
        fluctuate substantially. These fluctuations may also cause short sellers
        to
        enter the market from time to time in the belief that we will have poor results
        in the future. We cannot predict the actions of market participants and,
        therefore, can offer no assurances that the market for our stock will be
        stable
        or appreciate over time.
 
 **A
        sale of a substantial number of shares of our common stock may cause the
        price
        of our common stock to decline.**
 
 33
 
 If
        our
        shareholders sell substantial amounts of our common stock in the public market,
        including shares issued upon the exercise of outstanding options or warrants,
        the market price of our common stock could fall. These sales also may make
        it
        more difficult for us to sell equity or equity-related securities in the
        future
        at a time and price that we deem reasonable or appropriate.
 
 **Our
        common stock is deemed to be “penny stock”, which may make it more difficult for
        investors to sell their shares due to suitability
        requirements.**
 
 Our
        common stock is deemed to be “penny stock” as that term is defined in
        Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, as
        amended (the “Exchange Act”). These requirements may reduce the potential market
        for our common stock by reducing the number of potential investors. This
        may
        make it more difficult for investors in our common stock to sell shares to
        third
        parties or to otherwise dispose of them. This could cause our stock price
        to
        decline. Penny stocks are stock:
  §   With
        a
        price of less than $5.00 per share;
 
 §   That
        are
        not traded on a “recognized” national exchange;
 
 §   Whose
        prices are not quoted on the NASDAQ automated quotation system (NASDAQ listed
        stock must still have a price of not less than $5.00 per share); or
 
 §   In
        issuers with net tangible assets less than $2.0 million (if the issuer has
        been
        in continuous operation for at least three years) or $10.0 million (if in
        continuous operation for less than three years), or with average revenues
        of
        less than $6.0 million for the last three years.
 
 Broker/dealers
        dealing in penny stocks are required to provide potential investors with
        a
        document disclosing the risks of penny stocks. Moreover, broker/dealers are
        required to determine whether an investment in a penny stock is a suitable
        investment for a prospective investor. Many brokers have decided not to trade
        “penny stocks” because of the requirements of the penny stock rules and, as a
        result, the number of broker-dealers willing to act as market makers in such
        securities is limited. In the event that we remain subject to the “penny stock
        rules” for any significant period, there may develop an adverse impact on the
        market, if any, for our securities. Because our securities are subject to
        the
“penny stock rules,” investors will find it more difficult to dispose of our
        securities.
  **The
        conversion of the promissory notes based on our recent financing is based
        on an
        average of our closing bid price of our intra day trading prices of our common
        stock over a certain period of time prior to conversion and the decrease
        of the
        intra day trading price will result in issuance of a significant increase
        of
        shares resulting in dilution to our shareholders.**
  The
        conversion of the promissory notes in our recent financing is based on the
        applicable percentage of the average of the lowest three (3) trading prices
        for
        the Common Stock during the twenty (20) trading day period prior to conversion.
        The “Applicable Percentage” means 50%; provided, however, that the Applicable
        Percentage shall be increased to (i) 55% in the event that a Registration
        Statement is filed within thirty days of the closing and (ii) 60% in the
        event
        that the Registration Statement becomes effective within one hundred and
        twenty
        days. The price of our common shares may fluctuate and the lower intra-day
        trading price in the future, will result in a conversion ratio resulting
        in
        issuance of a significant amount of our common shares to the promissory note
        holders. This will result in our present shareholders being
        diluted.
  **Future
        selling by stockholders may impact our stock value through the execution
        of
        short sales which may decrease the value of our common
        stock.**
  Short
        sales are transactions in which a selling shareholder sells a security it
        does
        not own. To complete the transaction, a selling shareholder must borrow the
        security to make delivery to the buyer. The selling shareholder is then
        obligated to replace the security borrowed by purchasing the security at
        the
        market price at the time of replacement. The price at such time may be higher
        or
        lower than the price at which the security was sold by the selling shareholder.
        If the underlying security goes down in price between the time the selling
        shareholder sells our security and buys it back, the selling shareholder
        will
        realize a gain on the transaction. Conversely, if the underlying security
        goes
        up in price during the period, the selling shareholder will realize a loss
        on
        the transaction. The risk of such price increases is the principal risk of
        engaging in short sales. The selling shareholders in this registration statement
        could short the stock by borrowing and then selling our securities in the
        market, and then converting the stock through either the Note or Warrants
        at a
        discount to replace the security borrowed. Because the selling shareholders
        control a large portion of our common stock, the selling shareholders could
        have
        a large impact on the value of our stock if they were to engage in short
        selling
        of our stock. Such short selling could impact the value of our stock in an
        extreme and volatile manner to the detriment of other shareholders.
 
  
 34
 
 **Shares
        eligible for public sale in the future could decrease the price of our shares
        of
        common stock and reduce our future ability to raise
        capital.**
  Sales
        of
        substantial amounts of shares of our common stock in the public market could
        decrease the prevailing market price of our common stock. If this is the
        case,
        investors in our shares of common stock may be forced to sell such shares
        at
        prices below the price they paid for their shares, or in the case of the
        Investors in the recent financing, prices below the price they converted
        their
        notes and warrants into shares. In addition, a decreased market price may
        result
        in potential future investors losing confidence in us and failing to provide
        needed funding. This will have a negative effect on our ability to raise
        equity
        capital in the future.
 
 **REPORTS
        TO SECURITY HOLDERS**
 
 The
        public may read and copy any materials filed with the SEC at the SEC's Public
        Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public
        may
        also obtain information on the operation of the Public Reference Room by
        calling
        the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains
        reports, proxy and information statements, and other information regarding
        issuers that file electronically with the SEC. This information, once we
        complete our filing, should be available at http://www.sec.gov. Links to
        such
        information are expected to be available on our web site at
        www.camelotfilms.com.
 
 **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, 2007. We can be reached by calling (949) 777-1090, faxing (949) 777-1091
        or
        emailing info@camelotfilms.com .
        We
        invite you to visit our website at www.camelotfilms.com for
        information about our company, products and services.
 
 **ITEM
        3. LEGAL PROCEEDINGS**
 
 As
        of the
        date of this filing, management is not aware of any legal matters threatened
        or
        pending against the Company that have not been previously disclosed in one
        or
        more of the Company’s filings with the Securities and Exchange Commission.
 
 **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 There
        were no matters submitted to stockholders for voting during fiscal year
        2006.
  
 **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*
 
 Our
        common stock is currently quoted on the OTCBB under the symbol “CMEG”. There is
        a limited trading market for our common stock. The following table sets forth
        the range of high and low bid quotations for each quarter within the last
        two
        fiscal years. These quotations as reported by the Pink Sheets reflect
        inter-dealer prices without retail mark-up, mark-down, or commissions and
        may
        not necessarily represent actual transactions.
 
 35
 
 
  **Closing
                  Bid****YEAR
                  2005**
              **High
                  Bid**
              **Low
                  Bid**1stQuarter Ended March 31
              $0.020
              $0.0152ndQuarter Ended June 30
              $0.060
              $0.0153rdQuarter Ended September 30
              $0.040
              $0.0304thQuarter Ended December 31
              $0.050
              $0.030**YEAR
                  2006**
              **High
                  Bid**
              **Low
                  Bid**1stQuarter Ended March 31
              $0.130
              $0.0402ndQuarter Ended June 30
              $0.140
              $0.0843rdQuarter Ended September 30
              $0.160
              $0.0754thQuarter Ended December 31
              $0.129
              $0.060
 
 As
        of
        December 31, 2006 the bid share price of our Common Stock was .07 and 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*
 
 As
        of
        December 31, 2006, there were 106,655,743 shares of Common Stock outstanding.
        On
        December 31, 2006, there were 115 holders of record of our Common Stock.
        On
        December 31, 2005, there were 115 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, 2005, there were 93,649,589 shares of Common
        Stock outstanding, and 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
        fiscal year 2006, the Company issued the following securities:
 
 The
        Company issued a total of 5,191,538 shares for accrued officer compensation
        during fiscal year 2006. The Company issued a total of 1,741,717 restricted
        common shares at a market value of $117,500 for First Quarter 2006 services,
        a
        total of 1,131,746 restricted common shares at a market value of $117,500
        for
        Second Quarter 2006 services, a total of 1,106,190 restricted common shares
        at a
        market value of $117,500 for Third Quarter 2006 services, and a total of
        1,211,887 restricted common shares at a market value of $117,500 for Fourth
        Quarter 2006 services. As a result, a total of 5,191,538 shares were issued
        for
        officer compensation for the first, second, third and fourth quarters of
        2006.
 
 The
        Company determined that the price per share to be utilized in calculating
        the
        total number of shares to be issued in connection with services rendered
        during
        the first quarter would be $.067, based upon the average closing bid price
        of
        the Company’s shares during the first quarter of 2006.
 
 The
        Company determined that the price per share to be utilized in calculating
        the
        total number of shares to be issued in connection with services rendered
        during
        the second quarter would be $.103, based upon the average closing bid price
        of
        the Company’s shares during the second quarter of 2006.
 
 The
        Company determined that the price per share to be utilized in calculating
        the
        total number of shares to be issued in connection with services rendered
        during
        the third quarter would be $.106, based upon the average closing bid price
        of
        the Company’s shares during the third quarter of 2006.
 
 36
 
 The
        Company determined that the price per share to be utilized in calculating
        the
        total number of shares to be issued in connection with services rendered
        during
        the fourth quarter would be $.096, based upon the average closing bid price
        of
        the Company’s shares during the fourth quarter of 2006.
 
 As
        a
        result of the above, the Company issued the following shares to the following
        officers:
 
 The
        Company issued 926,445 shares of the Company’s $.001 par value common stock to
        Robert P. Atwell for services during the first quarter of 2006;
 
 The
        Company issued 601,993 Shares of the Company’s $.001 par value common stock to
        Robert P. Atwell for services during the second quarter of 2006;
 
 The
        Company issued 588,399 Shares of the Company’s $.001 par value common stock to
        Robert P. Atwell for services during the third quarter of 2006;
 
 The
        Company issued 644,621 Shares of the Company’s $.001 par value common stock to
        Robert P. Atwell for services during the fourth quarter of 2006;
 
 The
        Company issued 444,694 shares of the Company’s $.001 par value common stock to
        Michael Ellis for services during the first quarter of 2006;
 
 The
        Company issued 288,957 Shares of the Company’s $.001 par value common stock to
        Michael Ellis for services during the second quarter of 2006;
 
 The
        Company issued 282,432 Shares of the Company’s $.001 par value common stock to
        Michael Ellis for services during the third quarter of 2006;
 
 The
        Company issued 309,418 Shares of the Company’s $.001 par value common stock to
        Michael Ellis for services during the fourth quarter of 2006;
 
 The
        Company issued 370,578 shares of the Company’s $.001 par value common stock to
        George Jackson for services during the first quarter of 2006;
 
 The
        Company issued 240,797 Shares of the Company’s $.001 par value common stock to
        George Jackson for services during the second quarter of 2006;
 
 The
        Company issued 235,360 Shares of the Company’s $.001 par value common stock to
        George Jackson for services during the third quarter of 2006;
 
 The
        Company issued 257,848 Shares of the Company’s $.001 par value common stock to
        George Jackson for services during the fourth quarter of 2006;
 
 Additional
        Common Stock Issuances
 
 The
        Company issued 500,000 Shares of the Company’s common stock to H.K. Dyal in
        connection with an on-going agreement. The Company determined that the price
        per
        share to be utilized in calculating the total number of shares to be issued
        in
        connection therewith would be $.093, based upon the weighted average stock
        price
        of the Company’s shares during fiscal year 2006.
 
 The
        Company issued 103,319 Shares of the Company’s common stock to Doug Warner in
        connection with a consulting agreement. The Company determined that the price
        per share to be utilized in calculating the total number of shares to be
        issued
        in connection therewith would be $.07, based upon the closing stock price
        of the
        Company’s shares at the end of fiscal year 2006. The total valuation of the
        Shares issued is $7,219.73.
 
 The
        Company issued 150,000 Shares of the Company’s common stock to Kenneth Simon in
        connection with a consulting agreement. The Company determined that the price
        per share to be utilized in calculating the total number of shares to be
        issued
        in connection therewith would be $.07, based upon the closing stock price
        of the
        Company’s shares at the end of fiscal year 2006. The total valuation of the
        Shares issued is $10,500.
 
 The
        Company issued 1,500,000 Shares of the Company’s common stock to Scorpion Bay
        LLC. in connection with the financing arrangement between Scorpion and the
        Company. The Company determined that the price per share to be utilized in
        calculating the total number of shares to be issued in connection herewith
        would
        be $.0901, based upon the closing stock price of the Company’s shares on
        the
        date of the agreement.
 
 37
 
 The
        Company issued 1,256,648 Shares of the Company’s common stock to Bastien and
        Associates in connection with the consulting arrangement between Bastien
        and the
        Company. The Company determined that the price per share to be utilized in
        calculating the total number of shares to be issued in connection herewith
        would
        be $.093, based upon the weighted average stock price of the Company’s shares
        during fiscal year 2006.
 
 The
        Company issued a total of 2,472,101 Shares of the Company’s $.001 par value
        common stock to The Atwell Group, LLC in accordance with an agreement reached
        between Eagle Consulting Group, Inc. and its affiliates (“Eagle”) and the
        Company, Eagle agreed to accept stock as payment for certain expenses and
        loans
        to the Company. Eagle has been in the process of consolidating its operations
        under The Atwell Group, LLC, and that all stock issued to Eagle in connection
        therewith should now be issued directly to The Atwell Group, LLC. During
        fiscal
        year 2006, Eagle paid a net of $114,321 in expenses on behalf of the Company,
        resulting in 1,201,329 shares due Eagle. The Company determined that the
        price
        per share in connection herewith would be $.093, based upon the average trading
        price of the stock during fiscal year 2006. In addition, Eagle had made
        stockholder loans to the Company totaling a net of $118,182, resulting in
        1,270,772 shares due Eagle. The Company determined that the price per share
        in
        connection herewith would be $.093, based upon the average trading price
        of the
        stock during 2006.
 
 The
        Company issued 1,855,374 additional Shares of the Company’s $.001 par value
        common stock to The Atwell Group, LLC in accordance with the agreement between
        Eagle and the Company. The Company determined that the price per Share in
        connection herewith would be $.093, based upon the average trading price
        of the
        stock during 2006.
 
 **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**
 
 We
        were
        incorporated in Delaware on October 12, 1999. On April 15, 2004 we changed
        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”), which provides for the development,
        production, marketing and distribution of motion pictures. The CSM attempts
        to
        combine the efficiencies realized by studios of the early 1900’s, with the
        artistic focus and diversity of today’s independent productions. Using this
        approach, we believe the risk-reward relationship facing the typical film
        project can be dramatically shifted. For example, whereas a typical film
        pushes
        artists and directors to rush development and production in hopes of conserving
        cash, the 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.
 
 We
        have a
        limited history of operations as a film production and distribution company.
        Our
        historical operations, as Dstage.com, Inc., consisted primarily of attempting
        to
        provide support, organization and restructuring services to other development
        stage companies. 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. However, it is still important that you review the audited
        financial statements, the unaudited interim financial statements and the
        related
        notes in addition to thoroughly reading our current plan of
        operations.
  Our
        Financial Statements have been prepared on a going concern basis, which
        contemplates the realization of assets and liabilities and commitments in
        the
        normal course of business. In the near term, we expect operating costs to
        continue to exceed funds generated from operations. As a result, we expect
        to
        continue to incur operating losses and we may not have sufficient funds to
        grow
        our business in the future. We can give no assurance that we will achieve
        profitability or be capable of sustaining profitable operations. As a result,
        operations in the near future are expected to continue to use working capital.
 
 38
 
 Our
        current cash requirements 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. For the first three quarters of 2006 alone, Eagle advanced
        the
        Company a total, including interest, of $401,982, which covered most of our
        operating expenses for 2006.
 
 To
        successfully grow the individual segments of our business, we must decrease
        our
        cash burn rate, improve our cash position and the revenue base of each segment,
        and succeed in our ability to raise additional capital through a combination
        of
        primarily public or private equity offering or strategic alliances.
  As
        more
        fully discussed below, we recently secured additional financing from 4 investors
        for the purpose of funding our initial slate of pictures. It is our goal
        to use
        this funding to have between 10 and 12 motion pictures in various stages
        of
        development or production within the next 12 months. In the event we are
        unable
        to receive the entire funding, we may 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.
 
 **2007**
 
 During
        fiscal year 2007, we plan to continue the on-going implementation of our
        business plan and business model, and as a result thereof concentrate on
        achieving the following major goals in the upcoming year:
 
 ·
              Completion
                  of our expanded detailed business
                  plan
 ·
              Corporate
                  Funding Package
 ·
              Acquisition
                  of several key acquisition targets in both film production and
                  distribution
 ·
              Complete
                  first round of Camelot Film Group
                  financing
 ·
              Formal
                  Announcement of first Camelot Studio Group studio
                  location
 ·
              Establishment
                  of Bridge Financing Program
 
 **Our
        Structure**
 
 We
        are
        comprised of the following three top-level divisions that can act in concert
        on
        its projects or autonomously as circumstances warrant.
 
 §
              Camelot
                  Film & Media Group
 §
              Camelot
                  Studio Group
 §
              Camelot
                  Production Services Group
 
 **Camelot
        Film & Media Group** is
        responsible for all content production and distribution. It is organized
        into
        five operational units:
 
 §
              Camelot
                  Films
 §
              Camelot
                  Features
 §
              Camelot
                  Distribution
 §
              Camelot
                  Television
 §
              Camelot
                  Digital Media
 
 **Camelot
        Studio Group** is
        solely focused on the development, financing, design, planning, building,
        completion and operation of the major West Coast production studio, which
        Camelot is currently proposing to locate in the Advanced Technology &
Education Park (“ATEP”) complex in Tustin, California, which would include the
        following entities:
 
 §
              Studio
                  Development
 §
              Business
                  Development
 §
              Master
                  Developer
 §
              Academic
                  Program Development
 
 39
 
 
 **Camelot
        Production Services Group** is
        comprised of five divisions:
 
 §
              Technology
 §
              Radio
                  and Music
 §
              Consulting
 §
              Financial
                  Services
 §
              Event
                  Management
 
 **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.
 
 Our
        President and Chief Executive Officer, Robert P. Atwell, has worked extensively
        in financing, producing and directing original motion pictures and television
        programs. This experience led our management to a number of beliefs upon
        which
        our planned business model 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 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.
 
 40
 
 **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.
  ·
              ***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.
 
 41
 
   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.
  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
        a
        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 incentive 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 stockholders.
 
 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 my 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.
 
 42
 
  
 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.
  **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.
 
 **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·
              Pay
                  television and Internet licensing·
              Broadcast
                  television, cable and satellite licensing·
              Hotels,
                  airlines and other non-theatrical exhibitions·
              Theatrical
                  exhibition·
              Syndicated
                  television licensing·
              Internet
                  Protocol TV (IPTV)
  Our
        strategy of developing in-house distribution and marketing expertise, while
        intended to increase the proportion of a given original motion picture’s revenue
        we can retain, may actually have the effect of reducing the speed with which
        we
        can obtain cash from any motion pictures we complete. This is due in part
        to the
        way that many independent productions distribute their motion pictures.
 
 We
        believe that many independent productions plan to engage sales agents to
        distribute their motion pictures. These sales agents often license the
        distribution rights to distributors on behalf of the production company,
        or
        another party that owns the rights to the motion picture negative. In exchange
        for these services, the agent normally receives a percentage of any licensing
        fees generated by licensing the film to a distributor.
 
 43
 
 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.
 
 **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 2005 Eagle advanced $125,287 to the company and in 2004
        Eagle advanced $127,341. In addition Robert Atwell advanced $259,941 to the
        Company during 2005. 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 planned
        to
        develop in-house. The filming was expected to commence during the third or
        fourth quarter of 2005 but did not. In exchange for providing the funds,
        The
        Corporate Solution, Inc. was to receive 3,500,000 shares of our $.001 par
        value
        common stock. We decided to postpone this initial in-house project in favor
        of
        developing our studio project and entering into transactions to acquire
        additional projects. During 2005 and the first quarter of 2006, we began
        negotiations on securing land for our studio project, retained architects,
        cost
        estimators and related consultants. We also acquired the rights to two motion
        picture projects, which we are currently developing through our Camelot
        Production Services Group division.
 
 In
        addition, during 2004 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 had the option to purchase
        an
        additional 1,000,000 shares at $.50 per share for $500,000. Upon purchasing
        those shares, CAP had the right to purchase up to a maximum of 10% more shares,
        or 100,000 shares, at $.50 per share. If CAP had exercised 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 necessitated additional funds be provided from other
        sources. As of December 31, 2005, CAP had not exercised any of its options,
        which expired 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.
 
 
 44
 
 **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
 
 ·
              Pay
                  television and Internet licensing
 
 ·
              Broadcast
                  television, cable and satellite licensing
 
 ·
              Hotels,
                  airlines and other non-theatrical exhibitions
 
 ·
              Theatrical
                  exhibition
 
 ·
              Syndicated
                  television licensing·
              Internet
                  Protocol TV (IPTV)
 
 Our
        strategy of developing in-house distribution and marketing expertise, while
        intended to increase the proportion of a given original motion picture’s revenue
        we can retain, may actually have the effect of reducing the speed with which
        we
        can obtain cash from any motion pictures we complete. This is due in part
        to the
        way that many independent productions distribute their motion pictures.
 
 We
        believe that many independent productions plan to engage sales agents to
        distribute their motion pictures. These sales agents often license the
        distribution rights to distributors on behalf of the production company,
        or
        another party that owns the rights to the motion picture negative. In exchange
        for these services, the agent normally receives a percentage of any licensing
        fees generated by licensing the film to a distributor.
 
 The
        distributor’s licensing a film’s rights often has a fee set as a percentage of
        gross revenue from the film. While a preset rate is used, the amount of this
        fee
        is generally unknown at the time that the distribution agreement is entered
        into, as there is no way to know with any degree of certainty how much revenue,
        if any, will be generated by the film. However, in some cases the distributor
        might pay a certain minimum amount to the production company, or rights owner,
        upon delivery of a completed motion picture. This is sometimes referred to
        as a
        minimum guarantee or simply as an advance. Such guarantees, when available,
        reduce the perceived risks of parties financing original motion picture
        productions. As a result, these advances can make it easier for producers
        to
        obtain financing for a project.
 
 Our
        strategy does not involve working through sales agents, although 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.
 
 45
 
 
 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.
 
 **Recent
        Financing**
 
 On
        December 27, 2006, we entered into a Securities Purchase Agreement with AJW
        Capital Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC and
        New
        Millennium Capital Partners II, LLC. Under the terms of the Securities Purchase
        Agreement, the Investors purchased an aggregate of (i) $1,000,000 in Callable
        Secured Convertible Notes (the “Notes”) and (ii) warrants to purchase 10,000,000
        shares of our common stock (the “Warrants”).
 
 Pursuant
        to the Securities Purchase Agreement, the Investors will purchase the Notes
        and
        Warrants in two tranches as set forth below:
 
 1.
              At
                  closing on December 27, 2006 (“Closing”), the Investors purchased Notes
                  aggregating $600,000 and Warrants to purchase 10,000,000 shares
                  of CMEG
                  common stock;
 
 2.
              Upon
                  effectiveness of the Registration Statement, the Investors will
                  purchase
                  Notes aggregating $400,000.
 
 The
        Notes
        carry an interest rate of 8% per annum and a maturity date of December 27,
        2009.
        The notes are convertible into CMEG common shares at the applicable percentage
        of the average of the lowest three (3) trading prices for CMEG shares of
        common
        stock during the twenty (20) trading day period prior to conversion. The
        “Applicable Percentage” means 50%; provided, however, that the Applicable
        Percentage shall be increased to (i) 55% in the event that a Registration
        Statement is filed within thirty (30) days of the closing.
 
 At
        our
        option, we may prepay the Notes in the event that no event of default exists,
        there are a sufficient number of shares available for conversion of the Notes
        and the market price is at or below $.25 per share. In addition, in the event
        that the average daily price of the common stock, as reported by the reporting
        service, for each day of the month ending on any determination date is below
        $.25, we may prepay a portion of the outstanding principal amount of the
        Notes
        equal to 101% of the principal amount hereof divided by thirty-six (36) plus
        one
        month's interest. Exercise of this option will stay all conversions for the
        following month. The full principal amount of the Notes is due upon default
        under the terms of Notes. In addition, we have granted the Investors a security
        interest in substantially all of our assets and intellectual property as
        well as
        registration rights.
 
 We
        simultaneously issued to the Investors seven year warrants to purchase
        10,000,000 shares of our common stock at an exercise price of $.15.
 
 In
        connection with the recent financing and pursuant to a Structuring Agreement,
        we
        also issued to Lionheart Associates, LLC d/b/a Fairhills Capital (“Lionheart”)
        warrants representing the right to purchase up to 582,609 shares of our common
        under the same terms as the Warrants issued to the Investors.
 
 The
        Investors have contractually agreed to restrict their ability to convert
        the
        Notes and exercise the Warrants and receive shares of our common stock such
        that
        the number of shares of our common stock held by them and their affiliates
        after
        such conversion or exercise does not exceed 4.99% of the then issued and
        outstanding shares of CMEG’s common stock.
 
 In
        the
        event of full conversion of the aggregate principal amount of the Notes of
        $1,000,000, we would have to register a total of 23,809,524 shares of common
        stock. This amount is calculated as follows:
 
 The
        aggregate principal amount of the Notes is $1,000,000. The estimated conversion
        price of the Notes is $0.042 based on the following: $0.06 was the average
        of
        the lowest three (3) trading prices for our shares of common stock during
        the
        twenty (20) trading days prior to the closing date of the transaction, less
        a
        40% discount. Thus, at a discounted price-per-share of $0.042, 23,809,524
        shares
        of the Company's common stock would be issuable upon conversion of $1,000,000
        into common shares of the Company ("Conversion Shares") and would be
        registered.
 
 46
 
  The
        following table shows the effect on the number of shares issuable upon full
        conversion, in the event the common stock price declines by 25%, 50% and
        75%
        from its the most recent trading price.
 
 Price
                  Decreases By12/27/2006
              25%
              50%
              75%Average
                  Common Stock Price (as defined above)
              $0.060
              $0.045
              $0.030
              $0.015Conversion
                  Price
              $0.036
              $0.027
              $0.018
              $0.009100%
                  Conversion Shares
              23,809,524
              37,037,037
              55,555,556
              111,111,111
 
 There
        is
        no limit to the number of shares that we may be required to issue upon
        conversion of the Notes as it is dependent upon our share price, which varies
        from day to day. This could cause significant downward pressure on the price
        of
        our common stock.
 
 **Off-Balance
        Sheet Arrangements**
 
 We
        do not
        have any off-balance sheet arrangements, financings, or other relationships
        with
        unconsolidated entities or other persons, also known as “special purpose
        entities” (SPEs).
 
 **Critical
        Accounting Estimates**
 
 The
        preparation of our financial statements in conformity with accounting principles
        generally accepted in the United States of America requires our management
        to
        make certain estimates and assumptions that affect the reported amounts of
        assets and liabilities and disclosure of contingent assets and liabilities
        at
        the date of the financial statements and the reported amounts of revenues
        and
        expenses during the reporting period. As such, in accordance with the use
        of
        accounting principles generally accepted in the United States of America,
        our
        actual realized results may differ from management’s initial estimates as
        reported. A summary of our significant accounting policies are detailed in
        the
        notes to the financial statements which are an integral component of this
        filing.
 
 Management
        evaluates the probability of the utilization of the deferred income tax asset
        related to the net operating loss carryforward. The Company has estimated
        a
        $3,187,402 deferred income tax asset related to net operating loss carryforward
        and other book/tax differences at December 31, 2005. 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.
 
 
 47
 
 *Acquired
        Technology and Intangible Assets*
 
 Statement
        of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
        Assets" ("SFAS 142"), establishes accounting and reporting standards for
        recording, valuing and impairing goodwill and other intangible assets. The
        adoption of SFAS 142 did not have an impact on the Company's financial condition
        or results of operations for fiscal year 2004. However, as the Company's
        business model is heavily dependent on acquiring intangible assets, this
        pronouncement is expected to have a material impact on the Company's financial
        condition and results of operations in future periods, should the Company
        survive as an ongoing concern.
 
 *Deferred
        Compensation*
 
 The
        Company had in the past negotiated contracts to grant common stock in exchange
        for future (prepaid) services with various other companies and individuals.
        Where the other companies are independent or have minimal common stock ownership
        in the Company, those prepaid expenses had been presented in the accompanying
        balance sheet as an asset. Where the other companies or individuals have
        significant stock ownership or are functioning as, or similar to, employees,
        officers or directors, such prepaid services were presented on the balance
        sheet
        as deferred compensation and a reduction to total equity.
 
 It
        is
        Company policy to expense those items which have been unused after the
        contractual period or after one year, if not used. Other prepaid expenses
        where
        services are being used are amortized over the life of the contract. As of
        December 31, 2005, all deferred compensation had been expensed. As a result,
        there were no deferred compensation issues in 2004 or in 2005.
 
 *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 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.
 
 48
 
  
 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.
 
 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.
  *Derivative
          Instruments*
 
 In
          June
          1998, the Financial Accounting Standards Board issued Statement of Financial
          Accounting Standards No. 133, “Accounting
          for Derivative Instruments and Hedging Activities,” as
          amended by Statement of Financial Accounting Standards No. 137, “Accounting
          for Derivative Instruments and Hedging Activities - Deferral of the Effective
          Date of Financial Accounting Standards Board No. 133,” and
          by
          Statement of Financial Accounting Standards No. 138, “Accounting
          for Certain Derivative Instruments and Certain Hedging Activities - an
          Amendment
          of Financial Accounting Standards Board Statement No. 133,” which
          is
          effective for all quarters of fiscal years beginning after June 15, 2000.
          This
          statement establishes accounting and reporting standards for derivative
          instruments, including certain derivative instruments embedded in other
          contracts, and for hedging activities. We adopted Statement of Financial
          Accounting Standards No. 133 beginning January 1, 2004. The adoption of
          Statement of Financial Accounting Standards No. 133 did materially impact
          our
          results of operations with our convertible notes payable entered into in
          December 2006.
  *New
        Accounting Pronouncements*
 
 The
        companies that were previously subject to the requirements of Statement of
        Financial Accounting Standards No. 53 are following the guidance in American
        Institute of Certified Public Accountants Statement of Position 00-2, *“Accounting
        by Producers or Distributors of Films,”* issued
        in
        June 2000.
 
 Statement
        of Position 00-2 establishes new accounting and reporting standards for all
        producers and distributors that own or hold the rights to distribute or exploit
        films. Statement of Position 00-2 provides that the cumulative effect of
        changes
        in accounting principles caused by its adoption should be included in the
        determination of net income in conformity with Accounting Principles Board
        Opinion No. 20, *“Accounting
        Changes.”*
 
 We
        adopted the Statement of Position on January 1, 2004. The new rules also
        require
        that advertising costs be expensed as incurred as opposed to the old rules
        which
        generally allowed advertising costs to be capitalized as part of film costs
        and
        amortized using the individual-film-forecast method. Due to the significant
        advertising costs incurred in the early stages of a film’s release, we
        anticipate that the new rules could significantly impact our results of
        operations for the foreseeable future.
 
 
 49
 
 
 
 *Accounting
        for Films*
 
 In
        June
        2000, the Accounting Standards Executive Committee of the American Institute
        of
        Certified Public Accountants issued Statement of Position 00-2 “Accounting by
        Producers or Distributors of Films” (“SoP 00-2”). SoP 00-2 establishes new
        accounting standards for producers or distributors of films, including changes
        in revenue recognition, capitalization and amortization of costs of acquiring
        films and accounting for exploitation costs, including advertising and marketing
        expenses. We elected adoption of SoP 00-2 effective as of April 1, 2004.
  
 The
        principal changes as a result of applying SoP 00-2 are as follows:
 
 •
        Advertising and marketing costs, which were previously capitalized to investment
        in films on the balance sheet and amortized using the individual film forecast
        method, are now expensed the first time the advertising takes place.
 
 We
        capitalize costs of production, including financing costs, to investment
        in
        motion pictures. These costs are amortized to direct operating expenses in
        accordance with SoP 00-2. These costs are stated at the lower of unamortized
        motion picture costs or fair value (net present value). These costs for an
        individual motion picture or television program are amortized in the proportion
        that current period actual revenues bear to management’s estimates of the total
        revenue expected to be received from such motion picture over a period not
        to
        exceed ten years from the date of delivery.
 
 Management
        plans to regularly review, and revise when necessary, its total revenue
        estimates, which may result in a change in the rate of amortization and/or
        write-down of all or a portion of the unamortized costs of the motion picture
        to
        its fair value. No assurance can be given that unfavorable changes to revenue
        estimates will not occur, which may result in significant write-downs affecting
        our results of operations and financial condition.
 
 *Revenue
        Recognition*
 
 Revenue
        from the sale or licensing of motion pictures is recognized upon meeting
        all
        recognition requirements of SoP 00-2. Revenue from the theatrical release
        of
        motion pictures is recognized at the time of exhibition based on the company’s
        participation in box office receipts. Revenue from the sale of DVDs in the
        retail market, net of an allowance for estimated returns, is recognized on
        the
        latter of shipment to the customer or “street date” (when it is available for
        sale by the customer). Under revenue sharing arrangements, rental revenue
        is
        recognized when we are entitled to receipts and such receipts are determinable.
 
 Revenues
        from television licensing are recognized when the motion picture is available
        to
        the licensee for telecast. For television licenses that include separate
        availability “windows” during the license period, revenue is allocated over the
“windows.” Revenue from sales of international territories are recognized when
        the feature film is available to the distributor for exploitation and no
        conditions for delivery exist, which under most sales contracts requires
        that
        full payment has been received from the distributor.
 
 For
        contracts that provide for rights to exploit a program on multiple media
        (i.e.
        theatrical, video, television) with a fee for a single motion picture where
        the
        contract specifies the permissible timing of release to various media, the
        fee
        is allocated to the various media based on management’s assessment of the
        relative fair value of the rights to exploit each media and is recognized
        as the
        program is released to each media. For multiple-title contracts with a fee,
        the
        fee is allocated on a title-by-title basis, based on management’s assessment of
        the relative fair value of each title. Cash payments received are recorded
        as
        deferred revenue until all the conditions of revenue recognition have been
        met.
 
 *Income
        Taxes*
 
 The
        Company recognizes future income tax assets and liabilities for the expected
        future income tax consequences of transactions that have been included in
        the
        financial statements or income tax returns. Future income taxes are provided
        for
        using the liability method. Under the liability method, future income taxes
        are
        recognized for all significant temporary differences between the tax and
        financial statement bases of assets and liabilities.
 
 *Capital
        Structure*
 
 The
        Company has adopted Statement of Financial Accounting Standards No. 129,
        "Disclosure of Information about Capital Structure" ("SFAS 129"), which requires
        companies to disclose all relevant information regarding their capital
        structure. 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.
        In
        2004, Eagle advanced $127,341 and in 2005 Eagle advanced $125,288. In accordance
        with the anti-dilutive provision, the amount of stock due Eagle is calculated
        on
        a quarterly basis. This anti-dilution provision to the agreement could have
        a
        material adverse effect on our shareholders as it might continue for a
        substantial period of time and as a result the dilutive effect to the
        shareholders cannot be fully determined until the funding from Eagle ceases.
 
 On
        January 5, 2005, the Company designated two classes of preferred stock, Class
        A
        Convertible Preferred Stock and Class B Convertible Preferred Stock. Both
        classes have a par value of $.001 and 10,000,000 shares authorized. The Series
        A
        is reserved for employees, consultants and other professionals retained by
        the
        Company and the Series B is reserved for the Board of Directors. On June
        30,
        2005, the Company issued 5,100,000 shares of each Class A Convertible and
        Class
        B Convertible Preferred Stock to Robert Atwell. The Company recorded expense
        of
        $3,366,000 in connection with the Preferred Stock issuances.
 
 50
 
  
 **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, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005**
 **REVENUE**
 
 **Cumulative
                  During Development**
              
              **Year
                  Ended December 31,****Stage**
              
              **2006**
              
              **2005**
              
              **%
                  Change**Net
                  Revenues
              $58,568
              
              $
                  0
              
              $0
              
              (0%)
 
 
 
 We
        did
        not generate any revenue for the year ended December 31, 2006. Historically,
        the
        original business model we were pursuing 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.
 
 
 
 
 51
 
 **COST
        OF SERVICES**
 
 **Cumulative
                  During Development**
              
              **Year
                  Ended December 31,****Stage**
              
              **2006**
              
              **2005**
              
              **%
                  Change**Cost
                  of Services
              $95,700
              
              $0
              
              $0
              
              (0%)
 
 Our
        cost
        of services historically was comprised principally of consulting services
        provided by contract individuals on behalf of our customer’s business model we
        were structuring at that time. We provided no services that generated revenue
        for the year ended December 31, 2006, and had no costs of services. To the
        degree that we generate consulting revenue in future periods, consulting
        services provided by officers during such periods are to be matched to revenue
        associated with such services and recorded as costs of services. In future
        periods, we 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**
              
              **2006**
              
              **2005**
              
              **%
                  Change**Sales
                  & MarketingExpenses
              $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, 2005 compared
        to
        the year ended December 31, 2006, 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, 2004 or
        2005.
        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**
              
              **2006**
              
              **2005**
              
              **%
                  Change**Research
                  & DevelopmentExpenses
              $252,550
              
              $0
              
              $0
              
              (0%)
 
 
 Since
        inception, research and development expenses have consisted primarily of
        costs
        related to the acquisition, testing, design, development and enhancement
        of
        certain technologies we held rights to and which we intended to use in the
        future to meet our internal needs or the needs of ventures we might have
        invested these technologies with. While the total dollar amount of research
        and
        development expenses was zero during 2006 and there were none in 2005, the
        percentage change in research and development expenses, from the year ended
        December 31, 2004 compared to the year ended December 31, 2005, is explained
        by
        no research and development activity during 2005. Prior to 2004, 100% of
        our
        research and development expenses required settlement in cash. Since inception,
        the majority, $252,550 or 82.07% of our research and development expenses,
        has
        related to rights to technologies we acquired in exchange for our common
        stock.
        In future quarters, we do not anticipate entering into similar agreements
        to
        acquire technologies.
 
 52
 
  
 **GENERAL
        AND ADMINISTRATIVE**
 
 
 **Cumulative
                  During**
                **Developmentt**
              
              **Year
                  Ended December 31,****Stage**
              
              **2006**
              
              **2005**
              
              **%
                  Change**General
                  & AdministrativeExpenses
              $10,147,473
              
              $1,554,907
              
              $4,500,141
              
              (65%)
 
 
 The
        company has incurred $10,147,473 of general and administrative expenses since
        its inception. General and Administrative expenses were $1,554,907 for the
        year
        ended, December 31, 2006, compared to $4,500,151 for the year ended, December
        31, 2005.
  The
        general and general administrative expenses for the year were comprised of
        $590,000 of officer’s salaries, $646,235 of professional services and fees,
        $70,137 for legal and accounting fees, and $170,444 was paid to Eagle Consulting
        for fees in accordance with a funding agreement entered in March 2003.
        Additionally, $15,581 in expenses related to the Cannes Film Festival was
        incurred during the second quarter of 2006. Other costs, $29,708 for marketing,
        seminars and trades $5,980, telephone costs $9,250, rent $17,572 and other
        administrative costs. These expenses were related to the pursuit of the
        Company’s plan of operation to produce and distribute motion
        pictures.
 
 In
        summary, general and administrative expenses during 2006 consisted primarily
        of
        officer compensation, professional services and stock options. The decrease
        in
        general and administrative expenses for the year ended December 31, 2006,
        compared to the year ended December 31, 2005, was large and due preferred
        stock
        issued to Robert Atwell resulting in expense of over $3,300,000 in 2005.
        The
        primary expense during the year ended December 31, 2006 was for Officers
        salaries, Professional fees (legal and accounting), Professional services
        (film
        industry consultants) and Eagle consulting. These expenses amounted to
        $1,133,740 or 73% of all general and administrative expenses for the year
        the
        ended, December 31, 2006.
 
 Details
        of expenses for calendar year ended, December 31, 2005: Professional Fees
        -
        legal & accounting $72,798, Professional Services - film industry
        consultants $213,371 and Eagle Consulting $127,713 (paid in stock). Under
        an
        agreement Eagle consulting (Robert Atwell) provided funds necessary to pay
        all
        operating expenses (except those paid in stock) during the year ended, December
        31, 2005. Other general and administrative expenses included advertising
        and
        marketing costs of $172,116 (related primarily to Cannes Film Festival and
        other
        film industry trade shows) and the related travel costs of $42,636. Costs
        related to film industry shows, advertising, public relations, marketing
        and
        related travel costs were $214,752 or 20% of all general and administrative
        expenses for the year ended, December 31, 2005. Office rent and supplies,
        dues
& subscriptions, stock transfer and maintenance fees, utilities, and other
        expenses were $57,765, representing the remaining operating expenses or 6%
        of
        all general and administrative expenses for the year ended, December 31,
        2005.
 
 **IMPAIRMENT
        OF LONG-LIVED ASSETS AND IMPAIRMENT OF INVESTMENTS IN OTHER COMPANIES**
 
 
 **Cumulative
                  During Development**
              
              **Year
                  Ended December 31,****Stage**
              
              **2006**
              
              **2005**
              
              **%
                  Change**Impairment
                  of Assets
              $2,402,338
              
              $0
              
              $0
              
              (0%)Impairment
                  ofInvestments
                  inOther
                  Companies
              $
                  710,868
              
              $
                  0
              
              $
                  0
              
              (0%)
 
 
 
 53
 
 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
 
 Our
        financial results since inception are indicative of the extent to which
        impairment of investments and assets can impact our operating results. Since
        inception, impairment of investments in other companies accounts for $710,868,
        or approximately 6% of our $11,824,859 net loss, whereas impairment of
        long-lived assets has accounted for $2,402, 338, or approximately 20% of
        our net
        loss since inception. Together, these two expense categories account for
        26% of
        our net loss from inception and through the year ended December 31, 2005.
 
 An
        impairment loss is recorded in the period in which we determine that the
        carrying amount is not recoverable. This requires the Company to make long-term
        forecasts of its future revenues and costs related to the assets subject
        to
        review. These forecasts may require assumptions about demand for the Company's
        products and services, future market conditions and technological developments
        in order to support fair value and avoid impairment. Significant and
        unanticipated changes to these assumptions could require a provision for
        impairment in a future period.
 
 **INCOME
        TAXES**
 
 There
        is
        no current or deferred tax expense for the period from January 1, 2006 to
        December 31, 2006 due to net losses from operations by the Company. As of
        December 31, 2006 we had federal net operating loss carryforwards of $5,489,252,
        compared to operating loss carryforwards of $4,437,000 as of December 31,
        2005.
        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**
              
              **2006**
              
              **2005**
              
              **%
                  Change**Net
                  income (loss)
              ($14,173,211)
              
              ($2,348,351)
              
              ($4,500,141)
              
              (48%)Net
                  income (loss) per share
              ($0.30)
              
              ($0.02)
              
              ($0.05)Weighted
                  average shares outstanding
              46,984,139
              
              94,012,109
              
              83,688,182
 
 The
        net
        loss for 2006 was less than 2005 due to cost of preferred stock issued to
        Robert
        Atwell, the companies CEO. Losses for 2006 included interest expenses of
        $822,925, due to the accounting of financing received at the end of
        2006.
 
 The
        accompanying financial statements have been prepared assuming that the Company
        will continue as a going concern. The Company has had minimal revenues, has
        experienced an accumulated deficit of $14,173,211 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.
 
 We
        have
        incurred net losses from operations in each fiscal year since our inception.
        The
        changes in components of our net loss are important. Impairment of assets
        accounted for 0% of our net loss in 2003, 2004 and 2005, 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 2006 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
        and
        2005 of our business model, impairments should hopefully no longer be an
        issue.
 
 54
 
  
 General
        and administrative expenses accounted for a higher proportion of our net
        loss in
        2004 and 2005 compared to 2002 and 2003. In 2003, general and administrative
        expenses represented 252% of our net loss, whereas this caption represented
        58%
        of our net loss in 2002. In 2005, however, general and administrative expenses
        of $4,500,141 accounted for 38% of our cumulative net loss. We anticipate
        that
        these expenses could continue in 2006, 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 2006. 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
            January 29, 2007, the Company was informed in writing that Epstein, Weber
&
Conover, P.L.C. had been acquired by Moss/Adams, CPA’s and would no longer be
            able to perform our audits as of January 12, 2007. On January 29, 2007,
            the
            company engaged Malone & Bailey, CPA’s as its Certifying Accountant for 2006
            year end audit. During 2006, quarterly reviews were performed by Epstein,
            Weber
& Conover. The Company has no consulting arrangements or other services
            that
            are performed by Malone-Bailey, CPA’s or by Epstein, Weber & Conover and/or
            Moss/Adams, CPA’s.
 
 On
            March
            16, 2004, the Company engaged Epstein, Weber & Conover, P.L.C., Certified
            Public Accountants of Scottsdale, Arizona as its new Certifying Accountant.
            The
            Company did not have any consulting arrangements with Epstein, Weber
&
Conover, P.L.C., Certified Public Accountants prior to their appointment.
 
 On
            March
            15, 2004, we terminated the services of James C. Marshall, C.P.A., P.C.,
            (“Marshall”) and dismissed them as the Certifying Accountant of the Company upon
            the recommendation of the Company’s audit committee.
 Marshall
          was engaged by the Company on March 9, 2003 and subsequently reviewed the
          Company’s quarterly filings through September 30, 2003. The Company had no
          disagreements with James C. Marshall, CPA, P.C. during 2003.
 
 55
 
  
 **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 not effective at the reasonable
          assurance level and in compliance with Section 404 of the Sarbanes-Oxley
          Act.
          While conducting the audit of the financial statements as of and for the
          period
          ended December 31, 2006, our independent auditors found numerous audit
          adjustments that indicated a material weakness in our controls over financial
          reporting. It is our plan with additional funding to devote more resources
          to
          this very critical function.
 
 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, 2006
        that
        has materially affected, or is reasonably likely to materially affect, our
        internal control over financial reports.
 
 **Code
        of Ethics**
 
 We
        have
        adopted a Code of Business Conduct that applies to all our directors, officers
        (including our principal executive officer and principal financial officer)
        and
        employees. The Code of Business Conduct can be found on our website at www.camelotfilms.com .
        We plan
        to also post on this section of our website any amendment to the Code of
        Business Conduct, as well as any waivers that are required to be disclosed
        in
        accordance with Securities and Exchange Commission or market regulations.
 
 
 
 
 
 
 
 56
 
 **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, 2005, the principal
        offices
        and positions with the Company held by each person and the date such person
        became a director or executive officer of the Company. Each serves until
        the
        next annual meeting of stockholders.
 
 **Name**
              
              **Age**
              
              **Position**
              
              **Date
                  of Appointment**Robert
                  P. Atwell
              
              53
              
              President,
                  Chief Executive Officer, Chairman
              
              March
                  19, 2003George
                  Jackson
              
              46
              
              Secretary,
                  Chief Financial Officer, Director
              
              April
                  1, 2005Michael
                  Ellis
              
              56
              
              Chief
                  Operating Officer
              
              March
                  2006Jane
                  Olmstead, CPA
              
              52
              
              Director
              
              December
                  1, 2004Rounsevelle
                  Schaum
              
              74
              
              Director
              
              October
                  2002
 
 
 
 Robert
        P.
        Atwell, 53, 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.
 
 Mr.
        Ellis, 56, has served as our Chief Operating Officer since March 2006, and
        had
        been a consultant to us since November 2005. Mr. Ellis offers over 25 years
        of
        senior executive management experience with an emphasis on technology-driven
        enterprises from NYSE and NASDAQ listed corporations to emerging-growth
        startups. He possesses broad expertise in finance, marketing, technology
        and
        operations with an emphasis on growing revenues, profits and market valuations
        for both publicly traded and private entities. Over the years, his
        highly-effective teams have consistently translated aggressive goals into
        efficiently executed and highly profitable programs. Successes encompass
        managing “Profit and Loss” at $450 million and “Capital Expenditures” at $500
        million annually, overseeing centerpiece development for the most popular
        destination attraction in the United States, to rebuilding a NASDAQ global
        entertainment enterprise, producing record profits for all.
 
 Before
        joining us, Mr. Ellis served as a management consultant bringing “leading-edge”
operational methodologies and technologies, financial savvy plus worldwide
        contacts to entrepreneurial startup, turnaround and high-growth companies.
        Mr.
        Ellis typically functioned in senior executive roles to quickly diagnose,
        design
        and implement revenue and profit growth strategies for entities involved
        in
        entertainment, hospitality, Internet services, information technologies,
        telecom, electronics, retail, international trade, real estate services and
        construction management.
 
 Prior
        to
        his consulting endeavors, Mr. Ellis served as the Senior Vice President for
        Showscan Entertainment, a NASDAQ traded global manufacturer, producer,
        distributor and licensor of state-of-the-art, location based entertainment
        attractions plus special venue film and digital media. He performed as both
        the
        COO and CTO, updating Showscan’s strategic plan, creating new
        business/technology alliances and rebuilding the corporate infrastructure.
        Worldwide responsibilities included operations, engineering, construction,
        electronics manufacturing, supply chain management, customer services, product
        development plus film/digital media production and post, sales, marketing,
        licensing and distribution. In addition, Ellis managed Showscan’s largest
        customer accounts including Gardaland, Imagine Japan, Universal Studios,
        Futuroscope, Tokyo Dome and Fox Studios.
 
 Previously,
        Mr. Ellis was the Corporate Director of Engineering for Knott’s Berry Farm and
        was responsible for overseeing design and construction of Mall of America,
        Knott’s Camp Snoopy, a $100+ million, seven acre enclosed theme park in
        Minneapolis, MN. In this lead role, Mr. Ellis built a distinguished project
        team
        of international consultants and contractors while managing design, construction
        and operations planning activities. Today, Mall of America is the most visited
        destination attraction in the U.S. with over 43 million annual
        visitors.
 
 57
 
  
 Before
        joining Knott’s Berry Farm, Mr. Ellis was a senior executive for divisions of
        PepsiCo including Frito-Lay and Taco Bell where he built and managed numerous
        engineering, technology and operations based organizations while overseeing
        major capital expansion programs.
 
 Mr.
        Ellis
        is a graduate of North Carolina State University and holds a Bachelor of
        Science
        degree in Electrical Engineering.
 
 George
        Jackson, 46, was appointed Chief Financial Officer and joined the Board of
        Directors on April 1, 2005. Mr. Jackson has been a Certified Public Accountant
        since 1984. He worked with the public accounting firm of KPMG. While at KPMG
        he
        worked as a consultant and auditor on many film companies including: Carolco
        Films, New World Pictures and others. He was the co-founder, CEO & CFO of
        several fitness center from 1985 to 1999. He was responsible for managing
        companies with over $20 million in revenue, 540 employees in the United States
        and Asia, raising over $10 million in capital and managing the accounting
        departments and preparing financial statements for shareholders in the U.S.
        and
        Asia. He sold all his fitness center assets to Bally Total Fitness in early
        2000, netting a return to shareholders of over 45% on an annual basis. From
        2000
        to present he has developed more fitness centers in Asia and been a director
        to
        several fitness companies.
 
 Mr.
        Jackson graduated from the University of Southern California with a B.S.
        in
        Accounting in 1982.
 
 Jane
        Olmstead, CPA, 52, 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, 74, 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.
 
 **Subsequent
        Events:**
 
 During
        the first quarter of 2006, H. Kaye Dyal resigned his position as director
        of
        Camelot Entertainment Group, Inc.
 
 Mike
        Ellis was hired as Chief Operating Officer of Camelot Entertainment Group,
        Inc.
        during the first quarter of 2006.
 
 *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, she
        temporarily stepped in as interim CFO from December 1, 2004 until March 31,
        2005. We named a permanent CFO during the first quarter of 2005, at which
        time
        Ms. Olmstead , resumed her duties as an independent director and audit committee
        financial expert. Our current CFO, George Jackson is the other audit committee
        member as of the beginning of the second quarter of 2005.
 
 58
 
  
 *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.
 
 *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 2006, 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, 2005, 2004, and 2003.
 
 
 
 
 
 
 
 59
 
 
 **Name
                  and Principal Position**
              
              
              **Year**
              
              
              **Salary**
                **($)**
              
              
              **Bonus**
                **($)**
              
              
              **Stock
                  Awards**
                **($)**
              
              
              **Option
                  Awards**
                **($)**
              
              
              **Non-Equity
                  Incentive Plan Compensation ($)**
              
              
              **Non-Qualified
                  Deferred Compensation Earnings**
                **($)**
              
              
              **All
                  Other Compensation**
                **($)**
              
              **Totals**
                **($)**Robert
                  P. Atwell,(1)
                President,
                  Chief
              
              
              2006
              
              $
              250,000
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              $
              250,000Executive
                  Officer
              
              
              2005
              
              $
              250,000
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              $
              250,000George
                  Jackson,(2)
                Secretary,
                  Chief
              
              
              2006
              
              $
              100,000
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              $
              100,000Financial
                  Officer
              
              
              2005
              
              $
              60,705
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              $
              60,705Michael
                  Ellis,(3)
                Chief
                  Operating
              
              
              2006
              
              $
              200,000
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              $
              200,000Officer
              
              
              2005
              
              $
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              $
              0Jane
                  Olmstead,(4)
                Chief
                  Financial
              
              
              2006
              
              $
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              $
              0Officer
                  (until 3/31/05)
              
              
              2005
              
              $
              31,510
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              $
              31,510
 
 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.
 
 
 
  
 60
 
 Compensation
        of Directors
  It
        is our
        current policy not to pay cash compensation to directors for solely being
        a
        director.
 
 During
        2004 and 2005, 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, 2006, 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, 2006, there were 106,655,743 outstanding shares held by 115
        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**The
                  Atwell Group, Inc. (1)
                100
                  E. San Marcos Blvd. #400
                San
                  Marcos CA 92069
              66,529,415
              62%TOTAL
                  5% Shareholders as a Group
              66,529,415
              62%(1)
                  Includes all shares owned and or under the control of Beneficial
                  Owner
 
 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, 2006, 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
              66,529,415
              62.38%Jane
                  Olmstead
                7474
                  East Arkansas #1204
                Denver
                  CO 80231
              1,859,552
              1.74%George
                  Jackson
                2020
                  Main Street Suite 990
                Irvine,
                  CA 92614
              3,559,955
              3.34%Rounsevelle
                  Schaum
                2020
                  Main St Suite 990
                Irvine,
                  Ca 92614
              1.100,000
              1.03%Michael
                  Ellis
                2020
                  Main Street., Suite 990
                Irvine,
                  CA 92614
              1,589,047
              1.46%
 
  
 61
  Notes:
 
 (1) The
        person listed is an officer and/or director of the Company and the address
        for
        each beneficial owner is 2020 Main Street, Suite 990, Irvine, CA
        92614.
 
 (2) Based on
        106,655,743 shares outstanding as of December 31, 2006.
 
 (3) Includes
        shares issued to The Atwell Group, Inc., Eagle Consulting Group, Inc., and
        The
        Corporate Solution, for which Mr. Atwell is the President, and shares issued
        to
        Mr. Atwell’s wife.
 
 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 year ended, December 31, 2006. All transactions
        are incorporated by reference and can be found through our previous
        filings:
 
 Except
        as
        indicated below, and for the periods indicated, there were no material
        transactions, or series of similar transactions, since the beginning of the
        Company’s last fiscal year, January 1, 2006, or any currently proposed
        transactions, or series of similar transactions, to which we were or are
        a
        party, in which the amount involved exceeds $0.11, and in which any director
        or
        executive officer, or any security holder who is known by us to own of record
        or
        beneficially more than 5% of any class of our common stock, or any member
        of the
        immediate family of any of the foregoing persons, has an interest.
 
 We
        entered into an agreement with Eagle on March 28, 2003, to provide operational
        funding for the Company, which expires on March 28, 2008. Mr. Atwell is the
        Chairman of Eagle. In exchange for twenty percent (20%)of the Company’s
        outstanding common stock on a non-dilutive, continuing basis until the Company
        can secure additional financing from another source, Eagle has agreed to
        provide
        funding for the Company’s annual audit, quarterly filings, accounts payable and
        other ongoing expenses including office, phones, business development, legal
        and
        accounting fees. In addition, Eagle received an option to receive 2,000,000
        cashless options to purchase common shares at $0.03 per share. For each one
        dollar ($1) increase in the price of the Company’s stock, Eagle shall be
        entitled to receive an additional two million options throughout the term
        of the
        agreement. In addition, the Company shall have the first right of refusal
        to
        purchase the options from Eagle for the current market value once Eagle notifies
        the Company that it intends to exercise the options. In the event the Company
        elects not to exercise this first right of refusal, and subject to applicable
        laws, Eagle shall be entitled to exercise the sale of shares or options
        immediately thereafter. As of December 31, 2006, Eagle has not exercised
        its
        right to receive the options and therefore no options have been
        granted.
 
 For
          the
          2006, Eagle has advanced to the Company a total, including interest, of
          $429,182, which covered all of our operating expenses for 2006, including
          general and administrative costs, costs for screenplays and prepaid exhibitor’s
          space. We have issued to Eagle 2,427,101 shares of common stock for repayment
          of
          expenses advanced on behalf of the Company. The stock issued was valued
          at the
          weighted average price per share. Eagle received an additional 1,270,722
          shares
          of common stock for continuing to finance our operations under the agreement
          described above.
 We
        lease
        office space from The Atwell Group, Inc., a privately-held company owned
        by Mr.
        Atwell, our President, Chief Executive Officer and Chairman. The space is
        leased
        on an annual basis for $84,000 per year. The current lease expires on December
        31, 2008.
 
 The
        following transactions are for year ended, December 31, 2005:
 
 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.
 
 62
 
 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, 2005, the Company recorded $125,288 in expenses
        paid
        by an affiliate on behalf of the Company, compared to $127,341 for year ended
        December 31, 2004. The affiliate received 2,046,177 shares of common stock
        for
        repayment of expense advances on behalf of the company. The stock issued
        was
        valued at the weighted average price per share. The affiliate received an
        additional 3,017,478 shares of common stock for continuing to finance the
        operations of the company under the agreement described above. In addition
        the
        Company issued 3,586,881 shares of common stock for repayment of advances
        made
        by an officer of the Company.
 
 **ITEM
        13. EXHIBITS AND REPORTS ON FORM 8-K LIST OF EXHIBITS ATTACHED OR INCORPORATED
        BY REFERENCE PURSUANT TO ITEM 601 OF REGULATION S-B.**
 
 Where
        so
        indicated by footnote, exhibits, which were previously filed, are incorporated
        by reference. For exhibits incorporated by reference, the location of the
        exhibit in the previous filing is indicated in parentheses.
 
  **Exhibit No.**
              
              **Title
                  of Document**
              
              **Location**3.1.1
              
              Certificate
                  of Incorporation
              
              Incorporated
                  by reference as Exhibit 2.1 to Form 10-KSB filed April 17,
                  20013.1.2
              
              Amended
                  Certificate of Incorporation
              
              Incorporated
                  by reference to Form 8-K filed June 29, 20043.2
              
              By-laws
              
              Incorporated
                  by reference as Exhibit 2.1 to Form 10-KSB filed April 17,
                  20014.1
              
              Appointment
                  of Director
              
              Incorporated
                  by reference as Exhibit 4.1 to Form 8-K filed on March 27,
                  20064.2
              
              Securities
                  Purchase Agreement dated December 27, 2006, by and among the Company
                  and
                  New Millennium Capital Partners II, LLC, AJW Qualified Partners,
                  LLC, AJW
                  Offshore, Ltd. and AJW Partners, LLC
              
              Incorporated
                  by reference as Exhibit 4.1 to Form 8-K filed on February 1,
                  20074.3
              
              Form
                  of Callable Convertible Secured Note by and among New Millennium
                  Capital
                  Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd.
                  and AJW
                  Partners, LLC
              
              Incorporated
                  by reference as Exhibit 4.2 to Form 8-K filed on February 1,
                  20074.4
              
              Form
                  of Stock Purchase Warrant issued to New Millennium Capital Partners
                  II,
                  LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
                  LLC
              
              Incorporated
                  by reference as Exhibit 4.3 to Form 8-K filed on January 4,
                  20074.5
              
              Registration
                  Rights Agreement dated December 27, 2006 by and among New Millennium
                  Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore,
                  Ltd.
                  and AJW Partners, LLC
              
              Incorporated
                  by reference as Exhibit 4.4 to Form 8-K filed on January 4,
                  20074.6
              
              Security
                  Agreement dated December 27, 2006 by and among the Company and
                  New
                  Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC,
                  AJW
                  Offshore, Ltd. and AJW Partners, LLC
              
              Incorporated
                  by reference as Exhibit 4.5 to Form 8-K filed on January 4,
                  20074.7
              
              Intellectual
                  Property Security Agreement dated December 27, 2006 by and among
                  the
                  Company and New Millennium Capital Partners II, LLC, AJW Qualified
                  Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC
              
              Incorporated
                  by reference as Exhibit 4.6 to Form 8-K filed on January 4,
                  20074.8
              
              Structuring
                  Agreement with Lionheart
              
              Incorporated
                  by reference as Exhibit 4.7 to Form 8-K filed on January 4,
                  20074.9
              
              Stock
                  Purchase Warrant issued to Lionheart Associates LLC d/b/a Fairhills
                  Capital
              
              Incorporated
                  by reference as Exhibit 4.8 to Form 8-K filed on February 2,
                  200731.1
              
              Certification
                  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 200231.2
              
              Certification
                  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.1
              
              Certification
                  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
              
              Certification
                  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 63
 
 
 **ITEM
        14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**
 Our
          current auditors for 12/31/06 are Malone & Bailey, CPA’s. During the first
          three quarters of 2006, Epstein, Weber & Conover, PLC were our auditors.
          That firm was acquired by Moss/Adams, CPA’s at the end of 2006.
  Epstein,
          Weber & Conover, PLC has been the Company’s independent auditor since March
          of 2004 and were the auditors since 2003. James C. Marshall C.P.A., P.C.,
          was
          the Company's independent auditor for the three quarters ended September
          30,
          2003.
  The
          Principal Accountants performed the services listed below and were paid
          the fees
          listed below:
 AUDIT
        FEES
 
 To
        date
        Malone-Bailey has charged $15,000 for the year ended December 31, 2006 for
        our
        audit.
 
 EWC
        charged  $ 6,920 for review of the quarterly statements during fiscal year
        2006.
 EWC
          charged approximately $14,500 for the year ended December 31, 2005 for
          professional services rendered in connection with the Company’s annual financial
          statements and review of the financial statements included in the Company’s 2005
          Quarterly Reports on Form 10-QSB.
 
 
 64







**CAMELOT
        ENTERTAINMENT GROUP, INC.**
 
 
 **Financial
        Statements as of**
 **December
        31, 2004**
 **And
        Independent Auditors’ Report**
 **(a
        development stage company)**
 
  
 **CAMELOT
        ENTERTAINMENT GROUP, INC.**
 (a
        development stage company)
 
 
 **INDEX
        TO FINANCIAL STATEMENTS**
 REPORT
                    OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - Malone& Bailey,
                    P.C.
                F-2REPORT
                  OF
                  INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - Epstein, Weber
&
                  Conover, PLC
                F-3BALANCE
                    SHEETS AS OF DECEMBER 31, 2006 and 2005
                F-4STATEMENTS
                    OF OPERATIONS FOR 2006, 2005 AND FOR INCEPTION TO DATE
                F-5STATEMENTS
                    OF STOCKHOLDERS' DEFICIT
                F-6
                    - F-7STATEMENTS
                    OF CASH FLOWS FOR 2006, 2005 AND FOR INCEPTION TO DATE
                F-8NOTES
                    TO FINANCIAL STATEMENTS
                F-9
                    TO F-13




F-1





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


F-2
   **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, 2005 and the related
                statements of
                operations, stockholders’ deficit and cash flows for the year then ended. These
                financial statements are the responsibility of the Company’s management. Our
                responsibility is to express an opinion on these financial statements
                based on
                our 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 audit
                provides a reasonable basis for our opinion.
 
 In
                our
                opinion, the financial statements referred to above present fairly,
                in all
                material respects, the financial position of Camelot Entertainment
                Group, Inc.
                as of December 31, 2005, and the results of its operations and cash
                flows for
                the year then ended, , 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, 2005. 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
                31,
                2006
 F-3


**Camelot
                  Entertainment Group, Inc.****(A
                  Development Stage Enterprise)**Balance
                  Sheet**ASSETS**December
                  31,
              
              
              December
                  31,2006
              
              
              2005Current
                  AssetsCash
              
              $
              435,533
              
              $
              3,023Prepaid
                  Expenses
              
              
              6,424
              
              
              8,816Loan
                  Receivable
              
              $
              17,500Deferred
                  Financing Costs
              
              
              74,744Total
                  Current Assets
              
              
              534,201
              
              
              11,839Other
                  Assets
              
              
              10,000Capitalized
                    Scripts Costs
              
              
              75,800
              
              
              18,800Total
                  Other Assets
              
              
              85,800
              
              
              18,800Total
                  Assets
              
              $
              620,001
              
              $
              30,639**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  LiabilitiesAccounts
                  Payable and accured liabilities
              
              $
              103,673
              
              
              86,135Accrued
                  Expenses - other
              
              
              36,952Stockholder
                  advances
              
              
              186,000Scorpion
                  Bay, LLC Note Payable
              
              
              250,000Total
                  Current Liabilities
              
              
              576,625
              
              
              86,135Long
                  Term LiabilitiesSecured
                  Note Payable - NIR Fairhill,
                  net of unamortized discount of $598,479
              
              
              1,521Derivative
                  Liability  Compound embedded
                  derivatives
              
              
              538,890Derivative
                  Liability - Warrant
              
              
              698,390Discount
                  on Notes Payable
              
              
              (598,479
              )Total
                  Long Term Liablilities
              
              
              1,238,801
              
              
              0Total
                  Liabilities
              
              
              1,815,426
              
              
              86,135Stockholders'
                  EquityCommon
                  Stock; Par Value $.001 Per Share; Authorized150,000,000
                  Shares; 106,655,743 Shares and
                  93,649,859Issued
                  and Outstanding respectively
              
              
              106,656
              
              
              93,649Class
                  A Convertible Preferred Stock; Par Value $.01 per share
              
              
              5,100
              
              
              5,100Authorized,
                  issued and outstanding 5,100,000 sharesClass
                  B Convertible Preferred Stock; Par Value $.01 per share
              
              
              5,100
              
              
              5,100Authorized,
                  issued and outstanding 5,100,000 sharesSubscription
                  Receivable
              
              
              (258,072
              )
              
              (258,072
              )Capital
                  in Excess of Par Value
              
              
              13,119,002
              
              
              11,923,586Deficit
                  Accumulated During the Development Stage
              
              
              (14,173,211
              )
              
              (11,824,859
              )Total
                  Stockholders' Equity
              
              
              (1,195,425
              )
              
              (55,496
              )Total
                  Liabilities and Stockholders' Equity
              
              $
              620,001
              
              
              30,639The
                  accompanying notes are an integal part of theses financial
                  statements.


F-4







**Camelot
                  Entertainment Group, Inc.****(A
                  Development Stage Enterprise)**Statement
                  of OperationsFromInception
                  onApril
                  21, 1999For
                  the Year Ended,
              
              throughDecember
                  31,
              
              December
                  31,
              
              December
                  31,2006
              
              2005
              
              2006REVENUE
              
              $
                  -
              
              $
                  -
              
              $
                  58,568Total
                  Revenue
              
              $
                  -
              
              $
                  -
              
              $
                  58,568EXPENSESCosts
                  of services
              
              
              
              
              
              95,700Sales
                  and Marketing
              
              
              
              
              
              53,959Research
                  & Development
              
              
              
              
              
              252,550General
                  & Administrative
              
              1,554,907
              
              4,500,141
              
              10,147,474Impairment
                  of assets
              
              
              
              
              
              2,402,338Impairment
                  of investments inother
                  companies
              
              
              
              
              
              710,868Total
                  Expenses
              
              1,554,907
              
              4,500,141
              
              13,662,889NET
                  OPERATING LOSS
              
              (1,554,907)
              
              (4,500,141)
              
              (13,604,321)OTHER
                  INCOME (EXPENSES)Interest
                  (Expense)
              
              
              (822,925.00
              )
              
              -
              
              
              (832,219
              )Other
                  income (expense)
              
              
              29,480.00
              
              
              -
              
              
              7,828Gain/(loss)
                    for change in derivative liability
              
              
              -
              
              
              -
              
              
              255,500Total
                  Other Income (Expenses)
              
              
              (793,445.00
              )
              
              -
              
              
              (568,891
              )NET
                  LOSS
              
              
              (2,348,352
              )
              
              (4,500,141
              )
              $
              (14,173,211
              )BASIC
                  LOSS PER COMMON SHARE
              
              
              (0.02
              )
              
              (0.05
              )
              $
              (0.30
              )WEIGHTED
                  AVERAGE NUMBER OFSHARES
                  OUTSTANDING
              
              
              94,012,109
              
              
              83,688,182
              
              
              46,984,139The
                  accompanying notes are an integral part of these financial
                  statements.


F-5





**Camelot
                    Entertainment Group, Inc.****(A
                    Development Stage Enterprise)**Statement
                    of Cash FlowsFromInception
                    onApril
                    21, 1999For
                    the Year Ended,
                
                
                throughDecember
                    31,
                
                
                December
                    31,
                
                
                December
                    31,2006
                
                
                2005
                
                
                2006OPERATING
                    ACTIVITIESNet
                    (loss) income for the period
                
                $
                (2,348,352
                )
                $
                (4,500,141
                )
                $
                (14,173,211
                )Adjustments
                    to reconcile net (loss) to cash provided (used) by operating
                    activities:Amortization
                    of deferred financing cost
                
                
                256
                
                
                -
                
                
                256Amortization
                    of discount associated with notes payable
                
                
                1,521
                
                
                -
                
                
                1,521Imputed
                    interest on shareholder loan
                
                
                19,238
                
                
                -
                
                
                19,238Stock
                    issued for interest expense
                
                
                135,150
                
                
                -
                
                
                135,150Loss
                    on derivative liability
                
                
                666,761
                
                
                -
                
                
                666,761Gain
                    on derivative liability
                
                
                (29,480
                )
                
                -
                
                
                (29,480
                )Common
                    stock issued per dilution agreement
                
                
                170,444
                
                
                198,064
                
                
                368,508Value
                    of options expensed
                
                
                -
                
                
                -
                
                
                351,000Gain
                    on extinguishment of debt
                
                
                -
                
                
                -
                
                
                (255,500
                )Depreciation
                
                
                
                
                
                
                
                
                3,997Amortization
                    of deferred compensation
                
                
                -
                
                
                -
                
                
                1,538,927Common
                    Stock issued for services
                
                
                651,088
                
                
                595,010
                
                
                2,533,935-
                
                
                
                
                
                -Common
                    Stock issued for expense reimbursement
                
                
                -
                
                
                
                
                
                22,000Common
                    Stock issued for technology
                
                
                
                
                
                
                
                
                19,167Impairment
                    of investments in other companies
                
                
                -
                
                
                
                
                
                710,868Impairment
                    of assets
                
                
                
                
                
                
                
                
                2,628,360Prepaid
                    services expensed
                
                
                -
                
                
                
                
                
                530,000Expenses
                    paid through notes payable proceeds
                
                
                -
                
                
                -
                
                
                66,489Loss
                    on disposal of property and equipment
                
                
                
                
                
                
                
                
                5,854Preferred
                    Stock issued to shareholder
                
                
                -
                
                
                3,366,000
                
                
                3,366,000Change
                    in assets and liabilities:(increase)
                    decrease in other current assets
                
                
                (15,108
                )
                
                (9,250
                )
                
                (24,358
                )Increase
                    (decrease) in accounts payable & other a/p
                
                
                173,287
                
                
                (14,000
                )
                
                347,766Increase
                    (decrease) in due to officers
                
                
                -**Net
                    Cash provided (used) by operating activities**
                
                
                **(**575,195****
                **)**
                
                **(364,317**
                **)**
                
                **(1,166,752**
                **)**Cash
                    flows from investing activities:Purchase
                    of fixed assets
                
                
                
                
                
                
                
                
                (6,689
                )Purchase
                    of assets-Script Costs/business deposits
                
                
                (67,000
                )
                
                (18,800
                )
                
                (85,800
                )Cash
                    provided (used) from investing activities
                
                
                (67,000
                )
                
                (18,800
                )
                
                (92,489
                )Cash
                    flows from financing activities:Contributed
                    capital
                
                
                
                
                
                
                
                
                25,500Borrowings
                    on related party debt
                
                
                429,182
                
                
                385,000
                
                
                1,016,613Payments
                  on related party debt
                
                
                (125,000
                )
                
                -
                
                
                (125,000
                )Borrowings
                    on debt
                
                
                850,000
                
                
                -
                
                
                855,998Deferred
                    financing cost
                
                
                (75,000
                )
                
                -
                
                
                (75,000
                )Principal
                    payments on long term debt
                
                
                (4,477
                )
                
                -
                
                
                (4,477
                )**Cash
                    provided (used) in financing activities**
                
                
                1,074,705
                
                
                385,000
                
                
                1,693,6340Increase
                    (decrease) in cash
                
                
                432,510
                
                
                1,883
                
                
                434,393Cash
                    at beginning of period
                
                
                3,023
                
                
                1,140
                
                
                1,140Cash
                    at the end of the period
                
                
                435,533
                
                
                3,023
                
                
                435,533**Supplemental
                    cash flow information:**Noncash
                    investing and financial activities:Creation
                    of debt discount
                
                $
                600,000
                
                
                -
                
                $
                600,000Stock
                    issued for related party debt
                
                $
                232,503
                
                
                -
                
                $
                232,503The
                    accompanying notes are an integral part of these financial
                    statements.




F-6







**Camelot
                  Entertainment Group, Inc.****(A
                  Development Stage Enterprise)****STATEMENTS
                  OF CHANGES IN STOCKHOLDERS' EQUITY**(Deficit)AccumulatedAdditional
              
              
              DuringCommon
                  Stock
              
              
              Preferred
                  Stock
              
              
              Paid-In
              
              
              Development
              
              
              Subscription
              
              
              DeferredShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Stage
              
              
              Receivable
              
              
              Compensation
              
              
              TotalBalance
                  at January 1, 2004
              
              
              33,856,433
              
              
              33,857
              
              
              0
              
              
              0
              
              
              5,464,539
              
              
              -6,059,442
              
              
              0
              
              
              0
              
              
              -561,046Shares
                  issued for services
              
              
              100,000
              
              
              100
              
              
              
              
              
              
              
              
              2,900
              
              
              
              
              
              
              
              
              
              
              
              3,000Shares
                  issued for financing
              
              
              6,791,287
              
              
              6,791
              
              
              
              
              
              
              
              
              196,948
              
              
              
              
              
              
              
              
              
              
              
              203,739Subscriptions
                  receivable for financing agreement
              
              
              0
              
              
              0
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -116,069
              
              
              
              
              
              -116,069Net
                  (loss) for the three months ended March 31, 2004
              
              
              0
              
              
              0
              
              
              
              
              
              
              
              
              
              
              
              -103,522
              
              
              
              
              
              
              
              
              -103,522
              ,Balance
                  at March 31, 2004
              
              
              40,747,720
              
              $
              40,748
              
              $
              0
              
              $
              0
              
              $
              5,664,387
              
              
              (6,162,964
              )
              
              ($116,069
              )
              $
              0
              
              
              ($573,898
              )Share
                  issued for services
              
              
              24,009,000
              
              
              24,009
              
              
              
              
              
              
              
              
              1,085,500
              
              
              
              
              
              
              
              
              
              
              
              1,109,509Share
                  issued for financing
              
              
              7,604,562
              
              
              7,605
              
              
              0
              
              
              0
              
              
              221,460
              
              
              
              
              
              (316,003
              )
              
              
              
              
              (86,938
              )Advances
                  offset sub a/r
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              174,000
              
              
              
              
              
              174,000Shares
                  issued for debt
              
              
              1,000,000
              
              
              1,000
              
              
              0
              
              
              0
              
              
              39,000
              
              
              
              
              
              
              
              
              
              
              
              40,000Shares
                  issued for amt due
              
              
              1,589,927
              
              
              1,590
              
              
              0
              
              
              0
              
              
              47,000
              
              
              
              
              
              
              
              
              
              
              
              48,590Value
                  of option exercised
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              351,000
              
              
              
              
              
              
              
              
              
              
              
              351,000Net
                  (loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,161,756
              )
              
              
              
              
              
              
              
              (1,161,756
              )Balance
                  as of December 31, 2004
              
              
              74,951,209
              
              
              74952
              
              
              0
              
              
              0
              
              
              7408347
              
              
              (7,324,720
              )
              
              (258,072
              )
              
              
              
              
              (99,493
              )Net
                  (loss) 1st quarter
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (117,096
              )
              
              
              
              
              
              
              
              (117,096
              )**Balance
                  at March 31, 2005**
              
              
              **74,951,209**
              
              
              **74,952**
              
              **$**
              **0**
              
              **$**
              **0**
              
              
              **7,408,347**
              
              
              **(7,441,816**
              **)**
              
              **(258,072**
              **)**
              **$**
              **0**
              
              
              **(216,589**
              **)**Shares
                  issued for
              
              
              4,000,000
              
              
              4,000
              
              
              0
              
              
              0
              
              
              216,000
              
              
              0
              
              
              
              
              
              
              
              
              220,000consulting
                  servicesShares
                  issued for
              
              
              2,276,033
              
              
              2,276
              
              
              0
              
              
              0
              
              
              187,568
              
              
              0
              
              
              
              
              
              
              
              
              189,844officers
                  salariesShares
                  issued to
              
              
              1,848,723
              
              
              1,848
              
              
              0
              
              
              0
              
              
              79,078
              
              
              0
              
              
              
              
              
              
              
              
              80,926Eagle
                  for expenses paidNet
                  Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (486,174
              )
              
              
              
              
              
              
              
              (486,174
              )Subtotals
                  for 2nd quarter
              
              
              8,124,756
              
              
              8,125
              
              
              0
              
              
              0
              
              
              482,646
              
              
              0
              
              
              
              
              
              
              
              
              490,771**Balance
                  at June 30, 2005**
              
              
              **83,075,965**
              
              
              **83,076**
              
              
              **0**
              
              
              **0**
              
              
              **7,890,993**
              
              
              **(7,927,990**
              **)**
              
              **(258,072**
              **)**
              
              
              
              
              **(211,993**
              **)**Net
                  Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (127,024
              )
              
              
              
              
              
              
              $
              (127,024
              )**Balance
                  at Sept 30, 2005**
              
              
              83,075,965
              
              
              83,076
              
              
              0
              
              
              0
              
              
              7,890,993
              
              $
              (8,055,014
              )
              
              ($258,072
              )
              
              
              
              
              (339,017
              )






F-7


**STATEMENTS
      OF CHANGES IN STOCKHOLDERS' EQUITY -
      continued**




**Balance
                at Sept 30, 2005**
            
            
            83,075,965
            
            
            83,076
            
            
            0
            
            
            0
            
            
            7,890,993
            
            $
            (8,055,014
            )
            
            ($258,072
            )
            
            
            
            
            (339,017
            )Shares
                issued for
            
            
            233,547
            
            
            233
            
            
            0
            
            
            0
            
            
            9,767
            
            
            
            
            
            
            
            
            
            
            
            10,000consulting
                servicesShares
                issued for
            
            
            3,538,263
            
            
            3,538
            
            
            0
            
            
            0
            
            
            171,462
            
            
            
            
            
            
            
            
            
            
            
            175,000officers
                salariesShares
                issued to
            
            
            1,452,662
            
            
            1,453
            
            
            0
            
            
            0
            
            
            118,219
            
            
            
            
            
            
            
            
            
            
            
            119,672Eagle
                for expenses paidShares
                issued to Eagle
            
            
            1,762,271
            
            
            1,762
            
            
            
            
            
            
            
            
            120,991
            
            
            
            
            
            
            
            
            
            
            
            122,75320%
                of shares issuedShares
                issued for
            
            
            3,586,881
            
            
            3,587
            
            
            
            
            
            
            
            
            256,354
            
            
            
            
            
            
            
            
            
            
            
            259,941Shareholder
                loans 2005Net
                Loss 4th Quarter
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (3,769,844
            )
            
            
            
            
            
            
            $
            (3,769,845
            )Class
                A Preferred Stock issued
            
            
            
            
            
            
            
            
            5,100,000
            
            
            5,100
            
            
            555,900
            
            
            
            
            
            
            
            
            
            
            
            561,000Class
                B Preferred Stock issued
            
            
            
            
            
            
            
            
            5,100,000
            
            
            5,100
            
            
            2,799,900
            
            
            
            
            
            
            
            
            
            
            
            2,805,000**Balance
                at Dec 31, 2005**
            
            
            **93,649,589**
            
            
            **93,649**
            
            
            **10,200,000**
            
            
            **10,200**
            
            
            **11,923,586**
            
            
            **(11,824,859**
            **)**
            
            **-258,072**
            
            
            
            
            
            -55,496Shares
                issued for
            
            
            5,191,538
            
            
            5,192
            
            
            0
            
            
            0
            
            
            464,808
            
            
            
            
            
            
            
            
            
            
            
            470,000officers
                salariesShares
                issued to Consultants
            
            
            2,009,787
            
            
            2,010
            
            
            
            
            
            
            
            
            179,078
            
            
            
            
            
            
            
            
            
            
            
            181,088Shares
                issued to Eaglefor
                expenses paid
            
            
            1,201,329
            
            
            1,201
            
            
            0
            
            
            0
            
            
            113,120
            
            
            
            
            
            
            
            
            
            
            
            114,321Shares
                issued to Eagle
            
            
            1,270,772
            
            
            1,271
            
            
            0
            
            
            0
            
            
            116,911
            
            
            
            
            
            
            
            
            
            
            
            118,182Shareholder
                loansShares
                issued to Eagle
            
            
            1,832,728
            
            
            1,833
            
            
            0
            
            
            0
            
            
            168,611
            
            
            
            
            
            
            
            
            
            
            
            170,444per
                agreement 20%Net
                Loss 2006
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,348,352
            )
            
            
            
            
            
            
            
            (2,348,352
            )Shares
                issued to
            
            
            1,500,000
            
            
            1,500
            
            
            0
            
            
            0
            
            
            133,650
            
            
            
            
            
            
            
            
            
            
            
            135,150Scorpion
                Bay LLC
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            19,238Imputed
                interest on shareholder loan
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            19,238**Balance
                at Dec 31, 2006**
            
            
            **106,655,743**
            
            
            **106,656**
            
            
            **10,200,000**
            
            
            **10,200**
            
            
            **13,119,002**
            
            
            **(14,173,211**
            **)**
            
            **(258,072**
            **)**
            
            
            
            
            (1,195,425
            **)**






The
      accompanying notes are an integral part of these
      financial statements




F-8


**CAMELOT
            ENTERTAINMENT GROUP, INC.**
 **(A
            Development Stage
            Company)**
 **NOTES
            TO FINANCIAL STATEMENTS FOR THE**
 **YEAR
            ENDED DECEMBER 31, 2006 and 2005**


1.
              BASIS
                  OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
 Organization:
 Camelot
        Entertainment Group, Inc., a Delaware Corporation, is a development-stage
        company which plans to develop, produce, market and distribute 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. Camelot’s
        activities since inception have consisted of raising capital, recruiting
        a
        management team and entering into ventures and alliances with affiliates.
        Camelot has substantially relied on issuing stock to officers, directors,
        professional service providers and other parties in exchange for services
        and
        technology.
 
 Basis
        of Presentation :
 Camelot
        is considered to be a development stage enterprise as defined in Statement
        of
        Financial Accounting Standards No. 7, “Accounting and Reporting by Development
        Stage Enterprises.” Consequently, Camelot has presented these financial
        statements in accordance with that Statement, including losses incurred from
        April 21, 1999 (Inception) to December 31, 2006.
 
 Summary
        of Significant Accounting Policies
 
 Cash
        and cash equivalents: Camelot
        considers all investment instruments purchased with maturities of three months
        or less to be cash equivalents
 
 Script
        Costs :
        Camelot
        capitalizes costs it incurs to buy or develop scripts that will later be
        used in
        the production of films according to the guidelines in SOP 00-02. Camelot
        will
        begin amortization of capitalized film costs when a film is releasd and it
        begins to recognize revenue from the film.
 
 Income
        taxes -
        Camelot
        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. Camelot has
        applied certain assumptions in estimating these fair values. The use of
        different assumptions or methodologies may have a material effect on the
        estimates of fair values.
 
 Use
        of
        Estimates -
        The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenues and expenses during the reporting period.
        Actual results could differ from those estimates.
  Stock
          Based Compensation - Prior
          to December 31, 2005, Camelot accounted for stock based compensation under
          Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based
          Compensation As permitted under this standard, compensation cost was recognized
          using the intrinsic value method described in Accounting Principles Board
          Opinion No. 25, Accounting for Stock Issued to Employees. Effective December
          15,
          2005, Camelot adopted Statement of Financial Accounting Standards No. 123
          (Revised 2004), Share-Based Payment and applied the provisions of the Securities
          and Exchange Commission Staff Accounting Bulletin No. 107 using the
          modified-prospective transition method. Camelot had not issued any options
          to
          employees in the prior periods thus; there was no impact of adopting the
          new
          standard.
  Recently
        Issued Accounting Standards -In
        June
        2006, the FASB issued FASB Interpretation No. 48, “Accounting for
        Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN
        48”), which clarifies the accounting for uncertainty in income tax positions.
        This interpretation prescribes that the Company recognize in its financial
        statements the impact of a tax position that is more likely than not to be
        sustained upon examination based upon the technical merits of the position,
        including resolution of any appeals. The interpretation provides guidance
        on
        derecognition, classification, interest and penalties, accounting in interim
        periods, disclosure and transition. The provisions of FIN 48 are effective
        for
        fiscal years beginning after December 15,
          2006.
  F-9
 **CAMELOT
                ENTERTAINMENT GROUP, INC.**
 **(A
                Development Stage
                Company)**
 **NOTES
                TO FINANCIAL STATEMENTS FOR THE**
 **YEAR
                ENDED DECEMBER 31, 2006 and 2005**
  1.
                BASIS
                    OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES -
                    continued
 Impairment
        of long-lived assets - Impairment of long-lived assets is
        assessed by the Company whenever there is an indication that the carrying
        amount
        of the asset may not be recoverable. Recoverability of these assets is
        determined by comparing the forecasted undiscounted cash flows generated
        by
        those assets to the assets’ net carrying value. The amount of impairment loss,
        if any, is measured as the difference between the net book value of the assets
        and the estimated fair value of the related assets.
 
 Loss
        Per Common Share -
        The
        Company has adopted SFAS No. 128, *Earnings
        per Share,* 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, 2006
 
 2.
              GOING
                  CONCERN
  The
        accompanying financial statements have been prepared assuming that Camelot
        will
        continue as a going concern. Camelot has had minimal revenues, has experienced
        an accumulated defict of $14,173,211 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 Camelot’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 Camelot, or that they would be on
        financially viable terms.
 
 
 3.
              ADVANCES
                  FROM AFFILIATE
 
 In
        2003,
        the Company entered into a consulting agreement Eagle Consulting, that is
        owned
        by the CEO of Camelot 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. The affiliate
        received 1,832,728 shares of common stock with a market value of $170,444
        for
        providing services and for continuing to finance the operations of the company
        under the agreement. See Note. 10 for further explanation.
 
 During
        the year ended December 31, 2006, the Company recorded $429,182. in advances
        by
        an affiliate owned by the CEO, on behalf of the Company, compared to $399,193
        for year ended December 31, 2005. Camelot paid $125,000 of these amounts
        back in
        cash and issued 1,270,772 shares with a market value of $118,181, leaving
        a
        balance owing to this company of $186,000. The affiliate received another
        1,201,329 shares of common stock for repayment of $114,321 in expense advances
        on behalf of the company. The stock issued was valued at the weighted average
        price per share for the year.
   F-10
 **CAMELOT
                ENTERTAINMENT GROUP, INC.**
 **(A
                Development Stage
                Company)**
 **NOTES
                TO FINANCIAL STATEMENTS FOR THE**
 **YEAR
                ENDED DECEMBER 31, 2006 and 2005**
 
 4.
              NOTES
                  PAYABLE
 
 On
        December 27, 2006, Camelot issued a callable secured convertible note payable
        for $600,000 to various holders. The note payable provided for annual interest
        at 8%, was secured by all of the assets of the Company, and matured on April
        27,
        2009. The principle and accrued interest of the note is convertible into
        Camelot’s common stock at a variable conversion price which is 50% of the
        average market price of the common stock of the lowest three trading days
        prior
        to the date of conversion. In addition, these notes have registration rights
        agreements which call for liquidated damages in the event an effective
        registration statement is not filed within a timely basis. In addition, the
        holders of these notes were issued 7-year warrants to purchase 10,582,609
        common
        shares at an exercise price of $0.15 per share.
 
 Of
        the
        proceeds of $600,000 Camelot recognized $75,000 in deferred financing costs
        related to cost of securing the debt. The deferred financing cost will be
        amortized over the life of the notes payable. $256 of the deferred financing
        cost was amortized as of December 31, 2006 and included in interest expense.
 
 Camelot
        evaluated the convertible notes and warrants under Statement of Financial
        Accounting Starndards No. 133, “Accounting for Derivative Instruments” and
        Emerging Issues Task Force 00-19 and determined that the Convertible notes
        contained compound embedded derivative liabilities. The warrants were also
        determined to be liabilities under SFAS 133 and EITF 00-19. Camelot determined
        that the compound embedded conversion features required bi-furcation from
        the
        note instrument and required an estimate of its fair market value. Camelot
        hired
        an independent valuation expert to determine the fair market value of both
        the
        compound embedded derivative and the warrants. The fair market value of the
        compound embedded derivative was estimated using a lattice model incorporating
        weighted average probability cash flow. The fair market value of the warrants
        was estimated using Black Scholes with the major assumptions of (1) calculated
        volatility of 150%; (2) expected term of 7 years; (3) risk free rate of 4.64%
        and (4) expected dividends of zero.
 
 On
        December 27, 2006, the fair market value of the compound embedded derivative
        was
        estimated to be $567,999. On the same date, the fair market value of the
        warrants was estimated to be $698,762. The face amount of the notes payable
        was
        discounted down to zero which will be amortized over the life of the notes
        using
        the effective interest method. The resulting derivative liabilities for the
        warrants and embedded conversion feature were recorded. Camelot recognized
        immediate interest expense of $666,761.
 
 At
        December 31, 2006, Camelot estimated the fair value of the derivative
        liabilities to be a total of $1,237,280 resulting in a gain on derivative
        liability presented in the statement of operations of $29,480. In addition,
        Camelot amortized $1,521 of the discount on the note payable and this amount
        is
        included in interest expense.
 
 In
        November 2006, Camelot issued a note payable to Scorpion Bay LLC for $250,000
        which matured on March 22, 2007. This note is in default and is recorded
        at its
        full face value at December 31, 2006. In connection with this note, Camelot
        issued 1,500,000 of common with a market value of $135,150. As this note
        has
        matured, this amount was considered to be interest expense.
 
 
 5.
              DUE
                  TO OFFICERS
 
 In
        the
        year ended December 31, 2006, the Company had accrued $470,000 in compensation
        to its officers. The officers accepted their payment in 5,191,538 shares
        of
        common stock valued at $470,000, determined by prorating their annual salary
        on
        a monthly basis and issuing shares based on the average close price for each
        month as determined by the market price report generated by the Over The
        Counter
        Bulletin Board. On December 31, 2006, the Company issued stock to two officers,
        Robert Atwell and George Jackson in full payment for their accrued salaries.
        Michael Ellis, COO, received $120,000 in cash and $120,000 in stock
        issued.
 
 6.
              GENERAL
                  AND ADMINISTRATIVE EXPENSES
 
 The
        company has incurred $10,147,47 3
        of
        general and administrative expenses since its inception. General and
        Administrative expenses were $1,554,907 for the year ended, December 31,
        2006,
        compared to $4,500,151 for the year ended, December 31, 2005.
 
 The
        general and general administrative expenses for the year were comprised of
        $590,000 of officer’s salaries, $646,235 of professional services and fees,
        $70,137 for legal and accounting fees, and $170,444 was paid to Eagle Consulting
        for fees in accordance with an funding agreement entered in March 2003.
        Additionally, $15,581 in expenses related to the Cannes Film Festival were
        incurred during the second quarter of 2006. Other costs, $29,708 for marketing,
        seminars and trades $5,980, telephone costs $9,250, rent $17,572 and other
        administrative costs These expenses were related to the pursuit of the Company’s
        plan of operation to produce and distribute motion pictures.
 
  
 F-11
 **CAMELOT
                ENTERTAINMENT GROUP, INC.**
 **(A
                Development Stage
                Company)**
 **NOTES
                TO FINANCIAL STATEMENTS FOR THE**
 **YEAR
                ENDED DECEMBER 31, 2006 and 2005**
  7.
              INCOME
                  TAXES
  At
        December 31, 2006, Camelot had federal net operating loss carryforwards of
        approximately $5,510,000 that expire from 2013 to 2025 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.
 
 8.
              RELATED
                  PARTY TRANSACTIONS
 
 During
        2006 and 2005, Camelot issued shares of common stock for services rendered,
        cash
        advances, and payment of expenses on behalf of the Company to the CEO and
        affiliates.
 
 On
        January 5, 2005, Camelot 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, Camelot 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.
 
 Camelot
        owed its officers $191,666 in accrued compensation. First quarter accrued
        compensation of $87,500 and second quarter accrued compensation of $104,166.
        The
        company issued a total of 911,459 restricted common shares at a market value
        of
        $87,500 for the first quarter of 2005 services and a total of 1,364,575
        restricted common shares at a market value of $102,343 for second quarter
        2005
        services. The total shares issued for compensation of officers for the first
        and
        second quarter of 2005 was 2,276,034 shares
 
 On
        June
        29, 2005, Camelot issued 347,019 common shares to director and interim chief
        financial officer Jane Olmstead for services during the first and second
        quarters of 2005.
 
 In
        the
        efforts to build a management team the company issued stock to the new
        management team.
 
 George
        Jackson, H K Dyal, Chris Davis and Craig Kitchens each received 1,000,000
        common
        shares for consulting services provided during the second quarter of
        2005.
 
 On
        June
        29, 2005, in accordance with the agreement with Eagle Consulting Group, Inc.
        and
        the Company, upon issuance of the above shares, there will be a total of
        81,227,243 shares outstanding, resulting in 16,245,449 total shares due to
        Eagle
        Consulting Group, Inc. as of June 30, 2005. Eagle Consulting Group, Inc.
        had
        previously been issued 14,396,727 shares, leaving a balance of 1,848,722
        shares
        to be issued. The Company determined that the price per share in connection
        herewith would be .03, based upon the original agreed upon price. With this
        issuance of shares to Eagle Consulting Group, Inc., there will be a total
        common
        stock of 83,075,964 shares, issued, and outstanding.
 
 On
        December 30, 2005, the company owed its officers $175,000 in accrued
        compensation. Third quarter accrued compensation of $87,500 and fourth quarter
        accrued compensation of $87,500. The company issued a total of 3,538,263
        restricted common shares at a market value of $175,000 for the third and
        fourth
        quarter services.
 
 On
        December 30, 2005, in accordance with the agreement with Eagle Consulting
        Group,
        Inc. and the Company, issued the following shares: 1,452,662 for 3 rd and
        4 th quarter
        expenses of $127,712 and 1,762,271 representing 20% of new shares issued
        during
        the year.
 
 On
        December 30, 2005, the company issued 233,547 shares to consultant, Michael
        Ellis for services rendered during the 4 th quarter.
 
 On
        December 29, 2006, the company issued , 2,761,455 restricted shares to Robert
        Atwell, CEO for salary, 1,104,583 restricted shares to George Jackson, CFO
        for
        salary and 1,325,500 restricted shares to Michael Ellis for services Robert
        Atwell was also issued 1,201,329 restricted shares as repayment for company
        expenses paid on personal credit cards, 1,270,772 shares for cash advanced
        to
        the company for general and administrative expenses. An additional, 1,832,728
        shares were issued to Robert Atwell per agreement to continue to personally
        finance the company during this start up phase.
 
 F-12
 **CAMELOT
                ENTERTAINMENT GROUP, INC.**
 **(A
                Development Stage
                Company)**
 **NOTES
                TO FINANCIAL STATEMENTS FOR THE**
 **YEAR
                ENDED DECEMBER 31, 2006 and 2005**
  9.
              COMMON
                  STOCK
 
 As
        of
        December 31, 2006, there were 106,655,743 shares of common stock outstanding.
 
 During
        the year ended December 31, 2006, there were 13,006,154 common shares were
        issued 9,496,369 (73%) were issued to officers and affiliates; 2,009,785
        (15%)
        for professional services, 1,500,000 (12%)  to
        Scorpion Bay, LLC for interest expense on Note Payable.
 
 As
        of
        December 31, 2005, there were 93,649,589 shares of common stock outstanding.
        During the year ended, December 31, 2005 there were 18,698,380 common shares
        issued, the majority of which, 15,111,499 shares (81 %) were issued to officers,
        staff and affiliates. Shares were issued for officers salaries 5,814,296
        (31%),
        shares were issued to Eagle Consulting for expenses and in accordance with
        funding agreement 4,997,656 (27%), and shares were issued to officers, staff
        and
        consultants 4,233,547 (23%). The remaining shares were issued for repayment
        of
        shareholders loans 3,586,881 (19%).
 
 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 affiliated company owned by the CEO of Camelot,
        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, 2006, 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.












F-13







*
      * * * *





**SIGNATURES**
 
 In
        accordance with the requirements of the Securities Exchange Act of 1934,
        the
        registrant has caused this report on Form 10-QSB to be signed on its behalf
        by
        the undersigned, thereunto duly authorized.
 
 CAMELOT
        ENTERTAINMENT GROUP, INC.
 (Registrant)
 
 
 /S/ ROBERT
        P. ATWELL
 Robert
        P.
        Atwell
 Chief
        Executive Officer
 
 
 /S/ GEORGE
        JACKSON
 George
        Jackson
 Chief
        Financial Officer





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