SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


FORM
10-KSB












/x/
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For
      the fiscal year ended December 31,
2008
 
 or
 
 / /
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For
      the transition period from
____________





Commission
File Number 000-49676





ARTFEST INTERNATIONAL,
INC.


(Name of
Small Business Issuer)








Delaware
                30-0177020(State
      of incorporation or organization)
                (I.R.S.
      employer identification
no.)








The Madison Building, 15851 Dallas Parkway, Suite
      225, Addison, Texas
                75001(Address
      of principal executive offices)
                (Zip
      Code)





Issuer's
telephone number, including area code: (877) 278-6672





Securities
registered under Section 12(b) of the Exchange Act: Common Stock, par value
$.001








Securities
registered under Section 12(g) of the Exchange
Act:         NONE

















Check if
the Issuer is not required to file reports pursuant to Section 13 or 15(d) of
the Exchange Act. [   ]





Check
whether the Issuer: (1) has 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 issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.





Yes
[X]   No  [   ]





Check if
disclosure of delinquent filers in response to Item 405 of Regulation S-K is not
contained in this form, and no disclosure will be contained, to the best of the
Issuer's knowledge, in definitive information or proxy statements incorporated
by reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB [   ].





Indicate
by check mark whether the Issuer is a shell company as defined in Rule 12-b-2 of
the Exchange Act. Yes [  ] No [X]





The
Issuer’s revenues during its fiscal year ended December 31, 2008 were
$38,536.





As of
April 10, 2009, the aggregate market value of the registrant's Common Stock held
by non affiliates of the Issuer as computed by reference to the closing price of
such stock on such date was approximately $556,619.71.





As of
April 10, 2009, 213,263,003
shares of the Issuer's Common Stock were issued and outstanding.





Transitional
Small Business Disclosure Format:





Yes      No  X





Documents
incorporated by Reference:  A Proxy Statement is incorporated into
Part III, Item 13 by reference to the Company’s Form 14A, which was filed with
the Securities and Exchange Commission on February 27, 2008.  A Form
S-8 Registration Statement which was filed with the Securities and Exchange
Commission on October 29, 2008.














TABLE
      OF CONTENTSPART
      I
              PAGEItem
      1. Description of Business
              5Item
      2. Description of Property
              17Item
      3. Legal Proceedings
              17Item
      4. Submission of Matters to a Vote of Security
    Holders
              17PART
      II
              18Item
      5. Market for Common Equity and Related Stockholder Matters and Small
      Business Issuer Purchases of Equity Securities
              18Item
      6.  Management's Discussion and Analysis or Plan of
      Operation
              20Item
      7. Financial Statements
              27Item
      8. Changes In and Disagreements with Accountants On Accounting and
      Financial Disclosure
              27Item
      8A. Controls and Procedures
              27Item
      8B. Other Information
              29PART
      III
              30Item
      9. Directors, Executive Officers, Promoters, Control Persons and Corporate
      Governance; Compliance with Section 16(a) Of the Exchange
      Act
              30Item
      10. Executive Compensation
              32Item
      11. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
              33Item
      12. Certain Relationships and Related Transactions
              33Item
      13. Exhibits
              34Item
      14. Principal Accountant Fees and Services
              35SIGNATURES
              36FINANCIAL
      STATEMENTS
              38EXHIBITS3(i)
              Articles
      of Incorporation****3(ii)
              Bylaws****4
              Stock
      Option Plan *10
              Acquisition
      Agreement **20
              Proxy
      *21
              Subsidiaries
      of the Small Business Issuer22
                23
              Published
      report regarding matters submitted to vote of security holders
      ***
                Form
      S-8 Registration statement*****31.1
              Rule
      13a-14(a)/15d-14(a) Certification31.2
              Rule
      13a-14(a)/15d-14(a) Certification32.1
              Section
      1350 Certification32.2
              Section
      1350 Certification





*  Incorporated
by reference to the Company’s Form 14A, which was filed with the Securities and
Exchange Commission on February 27, 2008.





**  Incorporated
by reference to the Company’s Form 8-K/A, which was filed with the Securities
and Exchange Commission on January 18, 2008.








***  Incorporated
by reference to the Company’s Form 8-K which was filed with the Securities and
Exchange Commission on April 18, 2008.





****  Incorporated
by reference to the Company’s 2007 10-K which was filed with the Securities and
Exchange Commission on April 25, 2008.





*****  Incorporated
by reference to the Company’s Form S-8 Registration statement which was filed
with the Securities and Exchange Commission on October 29, 2008.





PART I





DISCLOSURE
OF FORWARD-LOOKING STATEMENTS





Statements
in this Form 10-KSB that are not statements of historical or current fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other unknown factors that
could cause our actual results to be materially different from the historical
results or from any future results expressed or implied by such forward-looking
statements. In addition to statements that explicitly describe such risks and
uncertainties, readers are urged to consider statements labeled with the terms
"believes," "belief," "intends," "anticipates" or "plans" to be uncertain and
forward-looking. The forward-looking statements contained herein are also
subject generally to other risks and uncertainties that are described from time
to time in our reports filed with the Securities and Exchange
Commission.








ITEM
1.  DESCRIPTION OF BUSINESS





DESCRIPTION
OF OUR BUSINESS





Introduction





Artfest
International, Inc. (the "Company", "we", "us", "our") is publicly traded on the
Over the Counter Bulletin Board under the symbol (ARTI.OB).  We
currently market, sell, and print paintings and autographed limited-edition
celebrity photographs which are reproduced on canvas using the Giclée and
lithograph processes.  Giclée creatings fine art prints from a digital
source using ink-jet printing.  Lithography creates fine art prints
utilizing a chemical process to apply ink to a flat surface using a printing
plate.  The Giclée method is used to reproduce signed and numbered
limited editions of fine art, and autographed limited-edition celebrity art from
existing photographs.  Our products, fine art reproductions and
celebrity collectibles (hereinafter, our “Products”) will be sold utilizing a
direct marketing system, as well as over the Internet through independent
contractors known as Associate Members (“Associate Members”).  We have
also commenced operating and managing a full-scale television network called the
Art Channel NetworkTM (the “Art Channel Network”) which broadcasts art and other
creative-related programming and is currently syndicated to 20,000,000
viewers in 218 independent TV market nation-wide, and which our management
believes will eventually be broadcast to over 40,000,000 households via
satellite and cable.  In addition to art-centric programming, we
intend to use the Art Channel Network to broadcast advertising for our
Products.





Value
Proposition





Combines
the high margins & universal appeal of artistic reproductions with direct
marketing.  Added legitimacy of the Art Channel Network to educate,
promote awareness of the arts, entertain and promote product sales.According to
Mac Report, a media company that provides a Web-based forum for public and
private issuers, the worldwide market for collectibles is worth $120 Billion
annually.  With the penetration of the personal computer and the
Internet into most nations, this market is predicted to grow at a healthy pace
over the next two decades.





In
February 2007, the Art Channel officially launched a 2-month test run that
amassed over 350 members and experienced gross revenues of over $400,000.
According to these numbers, on a per member basis, this translates into $571 per
month or $6,857 a year in per member revenues to the Art Channel.





Direct Marketing and Sales &
Independent Dealers: This model is centered on an Associate Rewards
Referral / Party Plan System modeled after companies like Home Interiors,
Tupperware, Pampered Chef and Avon.  This ARTI Virtual Commissions
Reward Card System is patent-pending protected because of the new and exciting
applications it brings to this direct-sales business model.  New Art
Dealers receive special training from the artists themselves and a personalized
e-commerce Art Channel Galleries website.





We intend
to utilize three (3) sales strategies.


(1)
            Direct
      Marketing and Sales: We will utilize an Associate Rewards Referral / Party
      Plan System modeled after companies like Home Interiors, Tupperware,
      Pampered Chef and Avon.(2)
            Internet
      Driven: We will offer our Associate Members a state-of-the-art website
      which is a completely automated, turn-key online business building system
      which will create unlimited spam-free traffic to our Associate Members’
      websites.  This system uses our software technology, which our
      management believes is unmatched in the industry.(3)
            Our
      signed and numbered fine art and autographed celebrity collectibles will
      be marketed and sold through independent contractors known as our
      “Associate Members”.  Individuals can become Associate Members
      by enrolling and agreeing to the terms and conditions for a free
      information and ecommerce personalized Company
  website.






5




Description of Our Products and
Services







Products
& Services




We will
be careful to set a limiting boundary on anything creative that may not be sold
via Artfest. As long as it is creative, of quality and there is demand our
creative managers will take it in consideration. Artfest will list museum
quality reproductions, originals & collectables.





Quality Reproductions: The
Giclée technique was designed to reproduce, and protect rare and valuable pieces
of art.  The average person will not easily recognize a Giclée reproduction
and original. The Giclée method is used to reproduce Signed and Numbered Limited
Editions of Fine Art, and Autographed Limited-Edition Celebrity Art from
existing photographs.  Images are generated from high resolution digital
scans and printed with archival quality inks onto various substrates including
canvas, fine art, and photo-base paper. The Giclée printing process provides
better color accuracy than other means of reproduction.





RFID: Fraud is a big problem
in the collectables and art community.   Artfest has engaged
Prova, Inc. for access of state of the art RFID technology.  The Prova
Company enables Artfest to validate reproduction numbers, replace damaged goods,
and prove providence.  The relationship with Prova will allow for insurance
underwriting on the Company’s goods.





Major
products include original pictures, drawings, prints, photographs, and
sculptures. Prints include lithographs, Giclées, serigraphs/silkscreens,
posters, and etchings. Art dealers may also sell collectibles, books, or artist
supplies. Services include framing, delivery, and hanging. Companies may provide
appraisals, especially for expensive artwork. High-end dealers may help
individuals or museum curators find specific pieces of art or develop
collections.





Collectables: Artfest will
offer collectables of all kinds from statues to reproductions.  The
accelerate offerings of collectables, Artfest has partnered with CSD
Sports.





Sports Memorabilia:We will
start offering guaranteed authenticity sports memorabilia. We will look to
engaging sports personalities and professional players.  Artfest
recently entered into a distribution agreement with Celebrity Sports to gain
access to sports memorabilia products.





Hero Art:What we call hero
art is the artwork of the beloved. Shunned by the "high art" community, many
famous and well liked people feel compelled to create. Though not master
pieces of epic scale the adoring public would love to have a piece of their
hero. Whether a music performer, sports star, business giant, fashion designer,
author, actor or television personality, Artfest will be happy to create the
distribution.


MyArtfest.com
serves as a concierge, a referral service between artists, private collectors,
interior designers, retailers, wholesalers, and gallery operators who buy, sell
and trade valuable art and home décor. This subscriber service offers e-commerce
visibility and convenience.  Subscribers can post items for sale or trade,
search for their perfect item, and post information about themselves. 
New items will be uploaded regularly and fresh artists and galleries constantly
featured so buyers will have reason to return again and again to
MyArtfest.com.





The Buyers Awards Program:We
appreciate our buyers – and to support our sellers we are offering FREE art
incentives to Buyers.  MyArtfest.com provides a gallery of art choices from
which the buyer can choose. The procedure for claiming awards is easy
and convenient.





Designer Members (Pending)
will receive auto-renewed subscription fees that will pay for base services
while add-on fees, such as premier placement of an item and attention-getting
icons, color and bolding will be charged on an opt-in basis.




Buyers
and sellers will find a simple, one page registration process that takes
only a minute to sign up. Although it is not required to register if all they
want to do is view listings on this site, the site will encourage them to
take advantage of all the other free features that registering has to
offer.





6


Art Investment Programs: Every
financial advisor knows that collectables as an asset class offer the highest
risk-reward ratio. As Artfest creates a viable secondary market our newscasters
will report on the business of art as auctions, trades and swaps take
place. People will want to know how their assets that hang on their wall or
in their vault are being traded.





The
Giclée technique was designed to reproduce, and protect rare and valuable pieces
of art by using an ink-jet printing technique to recreate images from a digital
source.  The average person will not easily recognize the difference
between a Giclée reproduction and an original work of art.





In order
to quickly respond to anticipated competition, and in order to keep the public
up to date on our current offerings, we produce our own television
series.  This allows us to keep television programming fresh and
inclusive of our latest offerings.





We are
currently marketing a business opportunity to individuals by allowing them to
become our Associate Members.  After individuals become Associate
Members, they will be able to sell our Products using our state-of-the-art
website.





Business
Profitability Prospects


Our
management believes that we have substantial potential for both short and long
term profitability because our management believes that the fine art and
autographed limited-edition celebrity collectable concept will offer a valued
product for art collectors, art dealers, and fans of sports, movies and
music.





With the
proliferation of personal computers and Internet access in most nations, our
management believes it is likely that the worldwide market for collectibles will
grow at a healthy pace over the next two decades.





There are
several companies which are experiencing phenomenal success in the art
reproduction direct-sales industry.  One of these companies which uses
a direct-sales approach has enjoyed $136 million in sales in less than 21
months.  Another company in 1996 sold 66.7% of its ownership for
$930,000,000.  These figures are even more impressive considering that
our management believes that the artists whose works were sold by these
companies are relatively unknown.





The idea
of limited-edition signed and numbered fine art and celebrity collectibles
creates unlimited opportunities to quickly expand into International markets as
well.  International access to the Internet allows us to expand to
countries all around the world.  Our website, when completed, will
support multiple languages, multiple payment methods used around the world and a
global debit card system for commissions.





Our
management believes that the art, music and sports collectibles industry as a
whole has experienced unprecedented growth over the past two decades and the
trend is for even more growth for the future.  Our management further
believes that the ever changing and expanding world of fine art and celebrity
memorabilia provides a never ending source of new and exciting product
offerings.  Our management believes that our fine art and autographed
and numbered celebrity collectibles appeal to all age groups, allowing us to
maximize our penetration of this expanding market.








STRATEGIC
PLAN





Our
motive is to build value and increase market penetration with vertically
integrated companies and service providers. The strategic acquisitions, or “Roll
Ups”, is a part of Artfest’ global expansion plan that includes Media, Art,
Memorabilia and Distribution companies that will compliment and enhance
Artfest's sophisticated business model.





7


Direct Marketing and Sales &
Independent Dealers: This model is centered on an Associate Rewards
Referral / Party Plan System modeled after companies like Home Interiors,
Tupperware, Pampered Chef and Avon.  This ARTI Virtual Commissions
Reward Card System is patent-pending protected because of the new and exciting
applications it brings to this direct-sales business model.  New Art
Dealers receive special training from the artists themselves and a personalized
e-commerce Art Channel Galleries website.





Internet Driver:This strategy
offers Art Channel Associates and Members a state-of-the-art website that is a
completely automated and turn-key online business building system that will
create unlimited traffic SPAM FREE to the Art Channel Associate and Members
websites.  This system uses Artfest’s proprietary technology process
that is unmatched in the industry.





Art Channel
Network:  Artfest international is in negotiations to set up
its own television network which will be referred to as the Art Channel
Network.  It will be an additional source of advertising revenue &
art sales leveraged from the years of production experience of the management
team.








THE
MARKET





Total
annual sales in the Art Industry: $120 Billion annually.


According
to Daniel Gross of MoneyBox Magazine, "Fine art is making huge financial news
this week, what with cosmetics-heir-turned-super-collector Ronald Lauder paying
$135 million for a Gustav Klimt painting and Sotheby's and Christie's posting
gigantic numbers at their Impressionist and Modern art auctions.





Consumer
spending and home decorating trends drive demand. The profitability of
individual companies depends on effective merchandising and marketing. Large
companies have advantages in buying, financing, and marketing. Small companies
can compete effectively by offering unique products, providing superior customer
service, or serving a local market. Average annual revenue per worker is
$200,000.




Art
dealers compete with a wide range of retailers, including Internet retailers,
auction houses, mass merchandisers, and home decor and framing service
shops.





According
to Mac Report, a media company that provides a Web-based forum for public and
private issuers, the worldwide market for collectibles is worth $120 Billion
annually. With the penetration of the personal computer and the Internet into
most nations, this market is predicted to grow at a healthy pace over the next
two decades.





The art
dealer industry includes about 6,000 stores with combined annual revenue of $4
billion. The Thomas Kinkade Company is one of the largest art dealers in the US:
most companies have only a single location. The industry is highly fragmented:
the top 50 companies hold 30 percent of industry sales.





8





MARKETING
PLAN





Marketing
Plan




Artfest
models its distribution strategy similar to Home Interiors Inc.,
www.homeinteriors.com,However, providing high quality, limited edition, signed
and numbered fine art and celebrity endorsed collectibles.  Artfest
operates and markets itself to its Members through four distinct sales channels
that are associated with the following high quality and reputation orientated
brands:





Initial
Distribution is through the members of MyArtfest.com.  Four member
types are structured with prices and features specific to their
needs.





Business
members can buy and sell.  They can post an unlimited number of items for
durations of 1 to 90 days.  Their subscription-based membership runs for 90
day increments with an automatic renewal by credit card.  Members can
opt-out at any time.  Business members are defined as those holding a
retail license and a physical and/or Internet presence.





Artist
Members can buy and sell.  They can post and unlimited number of items for
durations of 1 to 90 days.  Their subscription-based membership runs for 90
day increments with an automatic renewal by credit card.  Members can
opt-out at any time.  Artist members are defined as those only
selling their own works.




Private
Collectors can buy and sell.  There is no registration or subscription fee
for these members.  They "pay as they go" for each 90-day posting and a
referral fee when they wish to contact a Seller. The per occurrence-per item
price is much higher than the subscription rates so private collectors are
defined as buyers who primarily want to buy, but will also occasionally sell
items that no longer fit in their home or matches their design
plan.





Artfest AUCTIONS – Online
Auctions My Artfest TM (www.myartfest.com) is an internet auction website that
operates and generates revenue similar to eBay. Through this online revenue
medium, galleries, wholesalers, artists, dealers, and private collectors have an
art focused venue to auction their fine art and collectibles.





Artfest
also intends to operate and manage a full-scale television network which will
broadcast to over 40,000,000 households via satellite and cable, full power and
low power distribution, art and other creative related programming. It is also
intended that this television medium, which will be referred to as the Art
Channel Network, will be used as an additional premier marketing tool to market
and sell Artfest’s products thus creating additional market share for the
Company’s products.





Artfest NETWORKS – National TV
Syndication and Art Channel Art Channel NetworkTM (www.artchannel.tv) provides a
range of multi-cultural programming including artist documentaries, live
paintings, artist collections, artist interviews, live concerts and other art
centric content that is available online and that is syndicated to 20 million
viewers in 218 independent TV markets nationwide. Artfest is working towards
broadcasting its content via IP TV online and acquiring larger slivers of
satellite time and such so that it can eventually broadcast art centric content
24 hours a day, 7 days a week realizing an Art Channel that is similar to the
History Channel, Home & Garden Channel, etc.





The Art
Channel will be yet another division of Artfest. We will capitalize upon
our management experience in broadcasting and production. We already have
content available and being in the sector of art/creativity, we will have
endless subject matter. We have the ability to inexpensively have the
ability to convert such content into valuable and entertaining
shows.





We will
feature short documentaries about movements in all aspects of the human drive to
create from the pre-historic to the contemporary.





9


Artists
who have signed on to Artfest will be featured on the Art Channel. This
will allow for additional content, artist branding and a push for our members so
they can show legitimacy as well as stir demand for the creative enterprise of
each talent.





Being a
full television station we will of course garner another revenue stream of those
who wish to target the art consuming demographic through advertising. The larger
the reach and better the content the more we can charge for add
time.





Infomercials:
The main revenue driver for Art Channel will be to feature contracted artists
and their creations. Infomercials are inexpensive to produce and will drive
a large portion of revenues.


Partnerships/Auctions:
Having live TV capabilities give us the ability to have auctions and
partnerships with auction houses, art dealers, antique dealers and private
sellers. It will also be a prime place to showcase our
artists.





Artfest DIRECT – Direct-Sales
Model Art Channel GalleriesTM (www.artchannelgalleries.com) is a wholly owned
subsidiary of Artfest functioning as a direct-sales proprietary self-replicating
e-commerce venue. Membership is free and includes a member branded, direct-sales
e-commerce website having full back office support including a merchant account,
just-in-time inventory, and fulfillment. Fine art is available in high quality
and popular formats including Giclée Lithography, and Serigraph.





Artfest GALLERIES – Brick and
Mortar Galleries and Celebrity Events Artfest GalleriesTM are brick and mortar
galleries that showcase fine art and collectibles in a traditional gallery
setting. On an ongoing basis, Artfest will have luncheons, and weekend gala’s
locally in Dallas, Texas. Artfest will also showcase new artists, special
exhibits, and celebrity events in different markets internationally all with the
mindset of attracting new Members to www.artchannelgalleries.com.





Artfest
plans to leverage the many diverse skills and marketing opportunities that
present themselves.  Since Artfest has a multi-dimensional sales platform
and product line there will be an appearance of complication. They will add
synergies, positive feedback loops and diversify revenues. It will be our job
here to simplify and give an orderly account on how best to
proceed.





In all
aspects of business we will seek to widen and deepen our economic moat.  By
leveraging our strengths in multiple lines of business we will create a fully
diversified art and collectables company. Below are tactics that we will
use to increase market dominance, diversify revenue streams and expand
internationally.




Artist
Lockdown: Success breeds success and as we reach a tipping point more artists
will see others have been successful with our program.  They will start to
seek us out.  Most artists struggle to make any kind of living.  We
offer a program where they can take control of their destiny and find the
rewards of their creative genius.  As first to market we will be able to be
first in the land rush of artists, affording us the most liked and top selling
artists. Once we have them and they are receiving payment very few
leave. They will tell their artists friends and word spreads throughout
this small community quickly.





Direct
Artist Education: Artists now have a vested interest to educate and help the
members sell. At our Galleries the artists themselves (with our help) will
teach and instruct members on the qualities, motivations and expiations to the
art. Selling art is telling a story. Who better to tell the story then
the artist? This also has many effects as the members then build an
emotional connection to not just the art but the artist themselves.





International
expansion: It is the goal of Artfest to expand globally. As of now we
already have by signing some of the hottest Russian artists and are beginning to
market in Moscow. However our intention is to have a true global company
with the majority of sales outside the US. Art is the only median that
breaks through the language barrier. We will continue to exploit our
Russian and European sales and the focus our expansion on China, the United
Kingdom and South America.





10





OUR
SALES CHANNELS AND ASSOCIATED COMPANY BRANDS





The
Company operates and markets itself to our Associate Members through four
distinct sales channels which are associated with the following high quality and
reputation orientated brands:





Artfest DIRECT –
Direct-Sales Model


Art Channel GalleriesTM
(www.artchannelgalleries.com),our wholly owned subsidiary, is our
direct-sales proprietary Internet-based company where Associate Members can
buy, sell, and trade limited edition signed and numbered fine art and
collectibles.  Membership is free and Associate Members will be able to
create their own website which will bear our brand name.  People who become
Associate Members will have full support from us, including help setting up
their own website, utilizing our software which allows the Associate Member to
utilize a global debit card system, and place and fulfill orders for limited
edition signed and numbered fine art and collectibles from customers.  Fine
art is available in high quality and popular formats including Giclée,
lithography, and serigraph, which uses a stencil to create sharp lines upon the
medium.





Artfest NETWORKS – National
TV Syndication and Art Channel


Art Channel NetworkTM
(www.artchannel.tv), our wholly owned subsidiary,provides a range of
multi-cultural programming including artist documentaries, live paintings,
artist collections, artist interviews, live concerts and other art centric
content which is available online and which is syndicated to twenty million
viewers in 218 independent television market nation-wide.  We are
working towards broadcasting our content via Internet Protocol television
(“IPTV”) online and acquiring larger slivers of satellite time so that we can
eventually broadcast art centric content 24 hours per day, 7 days per
week, creating an Art Channel Network which is similar to the History
Channel, Home & Garden Channel, etc.





Artfest GALLERIES – Brick
and Mortar Galleries and Celebrity Events


Artfest GalleriesTMcurrently
consists of one brick and mortar gallery which showcases fine art and
collectibles in a traditional gallery setting. On an ongoing basis, we will have
luncheons and weekend gala’s locally in Dallas, Texas. We anticipate that we
will soon open additional brick and mortar galleries to expand Artfest
GalleriesTM.  We will also showcase new artists, special exhibits, and
celebrity events in different markets in the United States and internationally
in order to attract new Associate Members to www.artchannelgalleries.com.





Artfest AUCTIONS – Online
Auctions


My Artfest TM (www.myartfest.com)is an internet auction website which operates and generates revenue
similar to eBayTM. Through this online revenue medium, galleries, wholesalers,
artists, dealers, and private collectors have an art-focused website to auction
their fine art and collectibles.




11


Art
Curator Board




In
February 2008 the Company established an Art Curator Board which has the
responsibility to review, evaluate, advise and recommend artists and their art
which has been submitted for inclusion by Artfest International, ArtChannel
Galleries and Art Channel TV.  The Art Curator Board is under the
direction of its Curator, Harry Thompson and consists of six members including
Mr. Thompson as depicted below..





Harry Thompson: B.A., Speech
& Theatre, Georgetown College, M.A. Drama, Baylor University PhD Studies in
Theatre Arts completed at University of Indiana, Director and Professor of
Theatres at University level in multiple states; artistic consultant and
designer for The Dallas Ballet and The Joffrey Ballet in New York City,
Co-Founder of Maverick Productions, a Texas corporation for the production of
motion pictures and television directed and produced in U.S.A., France,
Switzerland, and Germany, art work in collections in U.S., Canada, England,
Europe, and Africa.





Guy Vance Brown: Bachelor of
Architecture, Texas Tech University 1979, currently Principal Architect and
President of Guy Vance Brown Architects, PC, Dallas, Texas, experience in
construction and engineering provides insight into the importance of working
with others and giving attention to details and thoroughness.





Art Rogers:B.A. Architecture,
Miami University, Ohio; M.A. Architecture, Rice Institute, Texas; Diplome
Mention Tres Bien, L'Cole des Beaux Arts, Fontainbleu, France;  MFA
Program in Theatre, Trinity University; licensed architect, state of Texas since
1996, member American Institute of Architects, National Council of Architectural
Examiners, Board Certified Studies under Donald Barthlme at Rice and under Paul
Baker at The Dallas Theatre Center where he was an actor and set designer,
apprenticed under architect O'Neil Ford, an associate of O'Neil Ford and
Associates, and founded The Artchitects' Studio in Dallas, all encompassing 37
years of architectural practice.





Rosalyn a. Eads:Formal
Degrees: B.S. Degree in Education and Speech 1962; special interest in theatre
arts with performance as stage manager for university theatre productions
educator from 1962-1970; Odessa, Pasadena and Cleburn teaching music and art;
sustained lifetime interest in theatre, museums and concerts.





Harriette Flachmeier:
University of Texas Music Education professional musician & composer; Member
of Texas Music Educators; Member of consultant trainers of the southwest for
transactional analysis; Richland Community College member of Dallas
communications council; 1983 International film workshops in Portland, Maine
focus: scoring for motion pictures; inaugurated classical guitar and piano
program at Richland College, Dallas, Texas; classical guitar and piano program
at Richardson Recreation Center; choral music program faculty at Hockaday
School, Dallas, Texas since 1986; performance with David Wren for the actors
guild of New York; composed and published work by Augsburg Press, 1965; member
of Vasa, an order of America Carl XVI Gustav Lodge for preservation and
promotion of Scandinavian heritage; extended travel in Spain as part of the
Hockaday School program, 2005 including visits to all major art galleries and
museums; extended travel in Scandinavia in June 2007 including art galleries and
museums in Sweden, Denmark and Norway.





Julien P. Devereux: Formal
Degrees: B.A. Degree, Austin College; former regional director of Cornell
Companies, overseeing a corporate division with 300 employees, five programs and
seventeen million dollars in budgets; founder and owner of Julien Devereux and
friends, representing artists, illustrators and photographers in the advertising
industry; founder and owner of the creative center, serving graphic arts
professionals; owner of counseling center of Dallas - consulting, counseling and
coaching; former director of the Dallas county judicial treatment
program.





12


Marketing
Strategy


We will
utilize a direct-sales strategy to sell our Products to Associate Members and
preferred customers.





Direct-Sales
Marketing


One of
the most tried and successful ways to sell a product is through a direct-sales
strategy.  With a direct-sales strategy, customers are identified and
sold our Products by Associate Members who receive a commission for each
sale.  Furthermore, if an Associate Members enrolls another individual
as an Associate Member, then the initial Associate Member will receive a
percentage of the commission for every sale made by the other Associate
Member.





Using a
direct-sales model allows us to penetrate the market without having to spend
large amounts of capital before sales are commenced.  The highest cost
for customer acquisition is the commissions paid on the sales by Associate
Members; however, these commissions are paid only after the
sale and shipment of the product.  The commissions are paid to the
selling Associate Member and other Associate Members entitled to any commission
receive their commission from the selling Associate Member.  All
commissions, overrides and bonuses are paid after the sale and shipment of the
product.





Typically,
commissions are paid between one week and one month after the
sale.  We will utilize a “Virtual Commission Account”, which, on
average, will credit commissions daily and allow an Associate Member to withdraw
available deposits within 7-10 days after the sale.  We will provide a
30 day money-back guarantee on all sales except Products which have been
opened.  Any commissions which have been paid to an Associate Member
prior to the return of a sold item must be returned to us.





Direct-Sales
Strategy Potential


The
direct-sales industry increased at a compounded annual growth rate from 1993
through 2003 of 7.5% compared with 5% for traditional retail sales (excluding
auto and auto parts sales) and 3.3% for the overall United States
economy.  This healthy growth rate has meant that the industry has
achieved sales totaling nearly $30 billion in the United States and $88.4
billion overseas. With numbers like these the investment community has begun to
take notice of the direct-sales industry.





Direct-Sales
Logistics Software and Distribution


Choosing
a direct-sales strategy for marketing and selling our product raises certain
issues.  The most common issues are commission and Associate Member
management and product distribution and fulfillment. As to the issue of
commissions and Associate Member management, our management believes that the
best way to manage Associate Members and to make sure they are paid as agreed is
by the use of the proper computer software.  There are many companies
which specialize in Associate Member management software.  Pricing
ranges from approximately $25,000 to as high as $250,000.00.  The more
elaborate an Associate Member compensation plan (the plan that tracks the
commission structure on sales), the more elaborate and involved the software
which is needed to manage it.  In view of the fact that proper
software is such an important part of our business model, as our Company grows,
we will have to invest sufficient funds in software development to ensure that
our software satisfies our future needs.





Our
management believes that we utilize one of the most innovative and revolutionary
compensation plans in the direct-sales industry.  Management believes
that by targeting a global market and using a global system to pay commissions
to Associate Members, we will cultivate a strong loyalty among our Associate
Members.





We will
attempt to develop the same loyalty among our customers as well.  To
try to accomplish this goal, we will utilize customer rewards cards, which have
enjoyed fabulous success in many other sectors (retail and restaurant most
notably).





Our
Products which customers order are produced by one of a small number of
manufacturers after the order has been placed, which virtually eliminates the
need to maintain certain levels of inventory on hand.  This inventory
process allows us to produce only the art which is sold.  The
relatively few of our Products in our inventory which are produced before an
order for such product has been placed will be warehoused in our corporate
office “vault” in Dallas TX.





13


Final
preparation of our Products, such as stretching and framing of canvases, is kept
in-house in order to minimize cost and eliminate communication
issues.  This process can be fully automated and integrated with our
sales tracking software.





Internet
Marketing – Software and Website


In
addition to our direct-sales marketing strategy, we will utilize web-based
marketing and customer relationship management tools.  In view of the
fact that we will ship our Products and have Associate Members all over the
world, it will be vital for us to use the Internet for marketing, customer
acquisition, sales, collection of funds and data tracking.





The
Internet is the most important overall sales tool for us and the Associate
Members.  The importance of an attractive, professional and
ultra-functional website cannot be overstated.  Prospective Associate
Members and customers may judge a company which they have not visited by the
design of that company’s website.  The Associate Members’ websites are
likely to be their most important marketing tool.





Customers
and Target Market


Our
customer base could potentially include everyone who admires fine art, sports,
movie, music, or a celebrity of any kind.  Our management believes
that when we release a new edition of fine art or autographed and numbered
collectible, a new customer base is created. Our management believes that our
customer base could span the globe.  We will reach a variety of
markets through the use of Internet marketing, Art Channel Network programming
and advertising, and the Artfest Galleries’ brick and mortar
galleries.





Pricing
Strategy


Pricing
must reflect our unique product position, competition, perceived value as well
as reasonable return on investment. Our management believes that we are
positioned as a high quality collectible art and celebrity brand.  We
want to position our Products as a completely new opportunity for our
customers.  Other companies sell products which have an inflated price
to support their marketing plan.  We intend to market a product which
we hope will have a very personal appeal to each customer, which will in turn
increase the value of our product to the customers.





Product
Packaging


Our
Products will be packaged in a black high-quality art shipping tube with a heavy
duty vinyl seal for tamper-proof protection.  Our products are also
available in two canvas stretching versions: museum stretched or gallery
stretched and are also available in a selection of custom framing options. Our
Products will be shipped worldwide by Art Channel Galleries utilizing an
international shipping company.





Brand
Image


Brand
image is very important to our overall and long-term success.  We
already have over 40 artists under exclusive contract, and most of these artists
have also become Associate Members.  Celebrity and artist involvement
is an important part of brand image.  These artists will make personal
appearances at live events and trade shows to help promote awareness of our
brand name.  There are other considerations including logos,
containers, label design, color schemes, website designs, and marketing which we
will utilize to take advantage of our relationships with
celebrities.





Customer
Acquisition


In a
traditional business, much of the customer acquisition cost is expended prior to
the customer purchasing a product.  However, most of our customer
acquisition costs are paid after the sale of product as noted
above.





14


Nevertheless,
there are expenditures which must be made in order to optimize the potential of
a product like ours.  The biggest outlay will be in technology
implementation, live promotional events and television advertising.





The bulk
of the cost of the distribution and commission management software will be with
respect to its development and implementation.  Thereafter,
maintenance and updating our software will be less expensive.  Once in
place, management believes that this technology will require a small amount of
administrative upkeep.





Market
Penetration – Geographic Considerations


One of
the advantages of our business model is that there is no geographic exclusivity
given to any Associate Member.  Each Associate Member will be able to
sell our Products to any customer no matter what the customer’s location, and
without regard to the location of any other Associate Member.





Additionally,
the market penetration will also be dependent upon the success of our Internet
marketing.  The creation of a state-of-the-art website which utilizes
artist and celebrity name recognition will be the key to our successful market
penetration and dominance.





Artfest
International, successfully negotiated a distribution contract with its
strategic partner , Luxor International, and with a Russian distributor , New
Media Corp. This relationship will open new markets in Russia and other former
Soviet Union Republics.





Proposed
Studio Acquisition


In August
2008 the Company entered into a Purchase and Sale Agreement to acquire a 35,000
square foot facility located in Dallas, TX that was constructed to handle the
demanding requirements of top recording artists as well as the major film,
television and commercial requirements of Fortune 500 corporations and their
entertainment divisions..  Bands and artists such as the Jonas
Brothers, Ice Cube, Miser, Rouge, Justin Timberlake, Miley Cyrus, P. Diddy,
Mariah Carey, Usher and others have recorded in the studio.  Artfest
will be able to develop and produce high quality advertising and programming for
traditional as well as Internet television through the Company’s television
subsidiary, ArtChannel TV that will bring viewers and advertisers to our art and
collectibles direct marketing site as well as to our social networking site,
www.MyArtfest.com.  The
facility currently generates revenues over $500,000 annually and the Company
dramatically expects to increase revenues dramatically once the acquisition is
completed.  The Company is currently reviewing financing options to
conclude the transaction during 2009.





Proposed
Charity Sports Distributor Acquisition


In
February 2009 the Company entered into a Letter of Intent to acquire Charity
Sports Distributor, Inc. (d.b.a. CSD Sports Framing and Memorabilia) which was
founded in 1996. CSD is a vertically integrated Texas based custom framing
company which specializes in the design, production, and distribution of
authentic framed autographed sports and entertainment collectibles and art
pieces.  CSD’s distribution avenues include B2B and B2C sales, charity
fundraising auctions, professional and college sports team’s pro shops,
e-stores, online auctions and a revolutionary in-game silent auction concept
known as Home Game Auction.  CSD’s thirteen (13) year experience in
the professional and college sports marketplace has developed an extensive
client list which consists of hundreds of private charities and over forty (40)
professional and college teams, including the Dallas Cowboys, Washington
Redskins, Oakland Raiders, Houston Rockets, Dallas Mavericks, Cleveland
Cavaliers, Phoenix Suns, Arizona Diamondbacks, Dallas Stars, Ohio State, Texas,
Texas A&M, Oklahoma, Alabama, Georgia, Auburn, Florida State and
UCLA.





The
Company expects to complete the acquisition during the Second Quarter of 2009
and be in a position to launch the distribution of CSD’s product line through
Art Channel Galleries, the marketing arm and wholly owned subsidiary of Artfest
International, Inc., during the Second Quarter 2009. The addition of CSD’s
product line in the Second Quarter would compliment and expand the Company’s
ongoing product promotions and special purchase packages that are directed
towards introducing a select number of acclaimed artists to our members.
Presently, the Company is reviewing several financing options in order to
complete this synergistic acquisition as efficiently as possible in light of the
Company having completed its required due diligence.





15


CSD
recorded revenues in calendar year 2008 of $3.3 million. Upon closing, CSD will
operate as a wholly owned subsidiary of Artfest International, Inc.





The
Company believes that the acquisition of CSD will result in the immediate
expansion and enhancement of our current product offerings and will lead to an
expansion of the Company’s current audience.  Furthermore the
acquisition will enable the Company to vertically integrate framing and canvas
stretching operations and enable the company to increase the overall
profitability of our existing product lines.





“CSD’s
innovative framing is widely regarded as the premier quality brand in the
autographed memorabilia marketplace, and by joining teaming with Artfest
International, CSD would posses one of the most expansive product portfolios in
the autographed collectibles industry.





Competition


Essentially
all home-based businesses and Internet-based marketing opportunities are our
competitors as we vie for the attention and resources of a finite number of
prospective distributors.  Other direct competition includes other
direct sales and marketing organizations, such as Mary Kay and Tupperware that
sell their exclusive products through their direct sales network. Although there
is nothing that disallows a member of Mary Kay to become a member of Artfest,
and vice versa, becoming members of these other similar direct sales companies
compete with the members’ time in putting forth efforts in selling art through
Artfest.





There is
one other company which we are aware of in a similar space that is selling art
through a direct sales network.  This other company is in its early
stages of development and it is unknown how many artists and members that they
have.





Penny
Stock


If the
trading price of our Common Stock remains below $5.00 per share, trading in our
securities may be subject to the requirements of the Securities and Exchange
Commission's rules with respect to securities trading below $5.00, which are
referred to as "penny stocks". These rules require the delivery prior to any
transaction of a disclosure schedule explaining the penny stock market and all
associated risks and impose various sales practice requirements on
broker-dealers who sell "penny stocks" to persons other than established
customers and accredited investors, which are generally defined as institutions
or an investor individually or with their spouse, who has a net worth exceeding
$1,000,000 or annual income, individually exceeding $200,000 or, with their
spouse, exceeding $300,000. For these types of transactions the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to the sale.
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 Common Stock, which could severely limit its market price and
liquidity.





REPORTS
TO SECURITY HOLDERS


We have
not in the past provided an annual report to our shareholders and do not intend
to do so.





The
public may read and copy any materials we file with the Securities and Exchange
Commission, ("SEC"), at the SEC's Public Reference Room at 100 F Street N.E.,
Washington, D.C. 20549.  The public may 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 (http://www.sec.gov) which contains reports,
proxy and information statements, and other information regarding issuers which
file electronically with SEC.





16


ITEM
2.  DESCRIPTION OF PROPERTY





We do not
currently own any real estate, plants, or machinery used to manufacture our
products.  We currently lease office space for our four (4) employees
at The Madison Building, 15851 Dallas Parkway, Suite 600, Addison, Texas
75001.  The Company is currently subletting the approximate 2,500 sq.
ft. office space at the rate of $5,000 per month from another company until the
main lease expires at the end of May 2009, at which time we may enter into
negotiations for a long term lease with the landlord of the building or relocate
to another office space in the immediate proximity to our current
location.





ITEM
3.  LEGAL PROCEEDINGS





We are
not presently a party to any pending legal proceedings.





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





On March
28, 2008, an Annual Meeting (the “Annual Meeting”) of Stockholders of the
Company was held.  Stockholders owning a majority of the issued and
outstanding shares approved the following: (i) the holders of 19,472,606 shares
of common stock voted for Edward Vakser,  Anzhelika Tassan and Larry
D. Ditto, to be re-elected as members of the Board of Directors to serve until
our next Annual Meeting of Stockholders or until their successors are duly
elected and qualified, while the holders of 1,829,988 shares of common stock
voted against the proposal; (ii) the holders of 20,902,594 shares of common
stock voted for the authorized capital of the Company to be increased from forty
million (40,000,000) shares of Common Stock to five hundred and two million
(502,000,000) shares of stock of which five hundred million (500,000,000) shares
shall be Common Stock, par value $.001 and two million (2,000,000) shares shall
be Preferred Stock, par value $.001, while the holders of 400,000 shares of
common stock voted against the proposal; (iii) the holders of 21,242,594 shares
of common stock voted to approve the proposed qualified stock option plan, while
the holders of 59,640 shares of common stock voted against the proposal and (iv)
the holders of 21,302,594 shares of common stock voted to ratify the Board of
Directors’ selection of Eugene M. Egeberg, C.P.A. as the auditor for the Company
for the 2007 fiscal year, and no shareholders voted against this
proposal.





The Stock
Option Plan, which was adopted at the Annual Meeting, allocates 20,000,000
shares of the Company’s common stock to be set aside for issuance pursuant to
the said  plan.  Common stock may be issued to both
employees and non-employees pursuant to the Stock Option Plan.  The
purpose of the Stock Option Plan is to provide a method to give incentives to
those persons or entities who, in the sole and absolute discretion of the Board
of Directors of the Company (the “Board”), are responsible for the management,
growth and/or protection of the business of the Company and who are making and
can continue to make substantial contributions to the success of the Company’s
business including, but not limited to, present and future officers, directors,
employees, consultants and professional advisors of the Company or any future
parent corporation or any subsidiary corporation of the Company.  The
Stock Option Plan was attached to the Company’s Form 14A filed with the
Securities and Exchange Commission on February 27, 2008.




17






PART
II





ITEM
5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES





Our
Common Stock has been quoted on the OTC Bulletin Board since October 9, 2007 and
is quoted on the OTC Bulletin Board under the symbol ARTI.  Prior to
such date management is not aware of the quotation or trading of the Common
Stock through any other medium.  The range of high and low bid
quotations, without adjustment for retail markup, markdown or commissions, for
the periods, are indicated below.





Because
our stock did not begin trading until October 9, 2007, only prices for the
fourth quarter of 2007 are available while prices for all four quarters in 2008
are available.









2007High
                                                    Low4th Quarter
                                                      1st
      Quarter
                                                      2nd
      Quarter
                                                      3rd
      Quarter
                                                      4th
      Quarter
                                                    $1.18
                                                      2008
                                                      $
      1.05
                                                      $
      .08
                                                      $.01
                                                      $
      .01
                                                    $1.00
                                                      2008
                                                      $
      0.20
                                                      $
      .009
                                                      $
      .007
                                                      $
      .004








Reporting
of quotations for our Common Stock does not evidence an established public
trading market for such stock, and holders of our Common Stock may not be able
to liquidate their investment at acceptable prices.  Moreover, such
quotations reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not be indicative of actual trading
transactions.





As of
April 9, 2009 there were approximately 270 holders of record of our Common
Stock.  We have not paid any dividends on our Common Stock during
either of the past two fiscal years and have no intention of paying dividends
during the forthcoming fiscal year.





18





SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.





At the
Annual Meeting, Stockholders voted to adopt the proposed Stock Option
Plan.  The effective date of the Stock Option Plan was March 28, 2008,
and no shares have been issued pursuant to the Stock Option Plan to
date.









Equity
      Compensation Plan InformationPlan
      category
                Number
      of securities
                  to
      be issued upon exercise
                  of
      outstanding options,
                  warrants
      and rights
                  
                  (a)
                Weighted-average
                  exercise
      price of
                  outstanding
      options,
                  warrants
      and rights
                  
                  (b)
                Number
      of securities
                  remaining
      available for
                  future
      issuance under
                  equity
      compensation
                  plans
      (excluding
                  securities
      reflected in
                  column
      (a))
                  
                  (c)Equity
      compensation
                  plans
      approved by
                  security
      holders
                0
                0
                20,000,000Equity
      compensation
                  plans
      not approved by
                  security
      holders
                0
                0
                0Total
                0
                0
                20,000,000








RECENT
SALES OF UNREGISTERED SECURITIES





The
following securities of our Company were sold without registration for the
periods indicated:





Purchaser
            Number of Shares
            Sale Price
            Date of SaleLARRY
      D. DITTO
            500,000
            $50,000
            3/31/2008SILVERMAN
      FAMILY TRUST
            150,000
            $15,000
            1/9/2008W.
      E. MONTGOMERY
            30,000
            $1,500
            2/26/2008ROYAL
      FOX MANAGEMENT, LLC
            100,000
            $5,000
            2/26/2008





All other
unregistered securities sold by the Company during the past three years, but
prior to September 30, 2008, have been included in the Company’s 10-QSB
filings.  All of the above noted securities were issued directly by
the Company, and no commissions or fees were paid in connection with any of
these transactions.  The transactions were private, and the Company
endeavored to comply both with Regulation D, and also Section 4(2) of the
Securities Act of 1933, as amended, as exemption(s) from
registration.  The Company exercised reasonable care to assure that
the purchasers of the securities are not underwriters and were “accredited
investors” under Regulation D and/or sophisticated investors.





19


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





The
following discussion and analysis provides information which we believe is
relevant to an assessment and understanding of our results of operations and
financial condition.  This discussion should be read in conjunction
with the financial statements and notes thereto appearing elsewhere
herein.








RESULTS OF
OPERATIONS





Overview





Until the
Company begins to generate significant cash flows through operations, the
Company continues to seek both equity investment through the sale of
unregistered securities and debt capital as its sources of
liquidity.





Our
current plan, in summary, as of December 2007, is focused primarily on corporate
and securities law considerations in completing a process of updating filings
with both applicable state and Federal agencies, as needed, including the SEC,
and related efforts.  Management believes the success of the business,
potential in the future, needs a stable foundation as a public
company.  The first part is compliance with laws and regulations,
primarily updating and keeping current filings with the SEC, and next
establishing the business as a “trading” entity upon a stock exchange such as
the OTC Bulletin Board.  At the same time, it is important to continue
core business pursuits, such as operational improvements, and become a
profitable business.  We anticipate obtaining funding to address cash
flow needs through private placements, loans and similar fundraising
initiatives.  Our plan is subject to many risks.  There can
be no assurance of success. See Part III, Item 9, Loan Obligation and Management
Restructuring, and other information, contained in the Company Form 10-KSB
report for the fiscal year ended December 31, 2004, and the subsequent filings
and amendments, if any.





Year
ended December 31, 2008 compared with the year ended December 31,
2007




Revenue





Revenue for the year ended
December 31, 2008, was $38,536, a decrease of 88.23% as compared to $327,663 for
the year ended December 31, 2007.  Revenue decreased for the year
ended December 31, 2008, as compared with the year ended December 31, 2007,
largely
as a result of our acquisition of The Art Channel, Inc. (“Art Channel”) during
the year ended December 31, 2007.  Gross profit margin (loss)
for the year ended December 31, 2008, was $17,506, or 45% of revenues, compared
to a loss of $(264,880), or -80.84% of revenues, for the same period in
2007.  The
decrease was due to our acquisition of Art Channel during the year ended
December 31, 2007, and the costs associated with operating a new business
attempting to establish itself in the
marketplace.





20


Expenses
from Operations





Total
expenses, comprised mostly of general and administrative expenses were
$1,178,132 for the year ended December 31, 2008, a net increase of $596,855
compared to $608,277 for the full year ended December 31, 2007.





The increase in operating
expenses for the year ended December 31, 2008, was
mainly due to expenses inherited from the acquisition of Art Channelas well
as the start-up costs associated with Artfest International, Inc’s business
development expenses.




Other
Expenses




Other
expenses for the year ended December 31, 2008 was $- as compared to other
expenses of $20,321 for the year ended December 31, 2007.




Net
Income




We had net loss of
$1,160,626 for the year ended December 31, 2008, an increase of 29.8% as
compared to net loss of $893,477 for the year ended December 31,
2007.  The increase was mainly due to an
increase in operating expenses which increased 168.48% compared with the year
ended 2007, and an
increase in gross profit (loss) which increased 1341.94% compared with the year
ended 2007.





LIQUIDITY AND CAPITAL
RESOURCES





Liquidity
and capital resources





Cash
balance amounted to $(2,196) and $315 as of December 31, 2008 and December 31,
2007, respectively.








Operating
activities





Net cash used by operating
activities for the year ended December 31, 2008 was $(680,610) compared to
$333,262 provided in the year ended December 31, 2007.  This change
was mainly due to the
acquisition of Art Channel, and the expansion of our operations entailed in said
acquisition.





The Company had a net loss
of $1,160,626 for the year ended December 31, 2008 compared to a net loss of
$893,477 for the prior year.   The
difference in both net income and   were mainly due to the
acquisition of Art Channel.











21


Investing
activities





Net cash
used by investing activities was $113,728 for the year ended December 31, 2008
compared to $115,803 used in the same period of 2007.





Financing
activities





Net cash
provided by financing activities was $794,338 for the year ended December
31, 2008 compared to net cash used of  $449,126 in the same
period of 2007.  The
increase was primarily a result of an increase in notes
payable.





Off-Balance
Sheet Arrangements





We have
no off-balance sheet arrangements.





Material
Commitments





We have
no material commitments during the next twelve (12) months.





Purchase of Significant
Equipment





We do not
intend to purchase any significant equipment during the next twelve (12)
months.





RISK
FACTORS





Risks
Related To Our Business





The
Company has a limited history with no assurance of profitability.





Our
anticipated expansion of our operations will place a significant strain on our
management, systems and resources.  In addition to training and
managing our workforce, we will need to continue to develop and improve our
Products and enter into contracts with more artists who will sell their works of
art through us.  There can be no assurance that we will be able to
efficiently or effectively manage the growth of our operations, and any failure
to do so may limit our future growth.





We cannot
assure you that we will achieve any of our goals or realize profitability in the
immediate future or at any time.





We
need additional financing to continue to reproduce artwork and to meet our
capital requirements.





We will
need additional financing to meet our capital requirements.  We
currently have no arrangements to obtain additional financing and we will be
dependent upon sources such as:






            funds
      from private sources such as, loans and additional private
      placements,






            funds
      from public offerings, and






            future
      earnings, if any.







22




In view
of our limited operating history, our ability to obtain additional funds is
limited.  Additional financing may only be available, if at all, upon
terms which may not be commercially advantageous.





We
may experience significant fluctuations in our operating results





Our
revenues and operating results may fluctuate from quarter to quarter and from
year to year due to a combination of factors, including, but not limited to, the
level of sales and variations in expenses with respect to fulfilling customer
orders.  Our revenues and operating results may also fluctuate based
upon the number and extent of potential financing activities in the
future.  Thus, there can be no guarantee that we will be able to
sustain profitability on a quarterly or annual basis.





We
may not be able to manage our growth effectively, which could adversely affect
our operations and financial performance.





The
ability to manage and operate our business as we execute our development and
growth strategy will require effective planning.  Significant rapid
growth could strain our management and other resources, leading to increased
cost of operations, an inability to ship enough of our Products to meet
customers demand and other problems that could adversely affect our financial
performance. We expect that our efforts to grow will place a significant strain
on our personnel.  Our ability to manage future growth effectively
will also require us to successfully attract, train, motivate, retain and manage
new employees and continue to update and improve our operational, financial and
management controls and procedures.  If we do not manage our growth
effectively, our operations could be adversely affected, resulting in slower
growth and a failure to achieve or sustain profitability.





We
currently rely upon a few suppliers for our Products which exposes us to a
potential financial risk.





We rely
upon a small number of producers of art reproductions and
collectibles.  If we subsequently lose any of these printers or
manufacturers, we will be forced to seek other suppliers for production of our
Products.  Should we fail to locate suppliers of Products that are
willing to produce them at the same or similar price, we may be forced to have
our Products produced at a higher price.  Should this occur, our
profit margin may be lower than expected.  Should the price of our
Products rise too high, we may be unable to continue operations.





We
have no written agreement or contract for future production which places us at
financial risk.





Our sales
transactions with customers are based upon purchase orders periodically received
by us or by our Associate Members.  Except for these purchase orders,
we have no written agreements with customers for future orders or for future
sales.  If we fail to maintain an adequate level of orders from
customers, or fail to obtain new customers, our revenues will substantially
decrease and we may not be able to continue operations.





We
compete against a number of companies which are in a better position to offer
competitive products at a lower price.





We
compete against numerous companies selling competitive products, many of which
have financial and technical resources, name recognition, market access, and
commercial connections and capabilities that far exceed ours.  Due to
intense competition, we may have to reduce our prices, thereby adversely
affecting our operating margins in our operations.  This will lead to
lower sales, lower gross margins, and lower net profits.








23








We
may be subject to additional risks associated with doing business in foreign
countries.





In the
future, we may distribute our Products in foreign countries, and would then face
significant additional business risks associated with doing business in those
countries.  In addition to the language barriers, different
presentations of financial information, different business practices, and other
cultural differences and barriers which may make it difficult to evaluate
business decisions or transactions, ongoing business risks result from the
international political situation, uncertain legal systems and applications of
law, prejudice against foreigners, corrupt practices, uncertain economic
policies and potential political and economic instability which may be
exacerbated in various foreign countries.  There can be no assurance
that we would be able to enforce business contracts or protect our intellectual
property rights in foreign countries.





In doing
business in foreign countries we may also be subject to such risks, including,
but not limited to, currency fluctuations, regulatory problems, punitive
tariffs, unstable local tax policies, trade embargoes, expropriation, corporate
and personal liability for violations of local laws, possible difficulties in
collecting accounts receivable, increased costs of doing business in countries
with limited infrastructure, risks related to shipment of raw materials and
finished goods across national borders and cultural and language
differences.  We also may face competition from local companies which
have longer operating histories, greater name recognition, and broader customer
relationships and industry alliances in their local markets, and it may be
difficult to operate profitably in some markets as a result of such
competition.  Foreign economies may differ favorably or unfavorably
from the United States economy in growth of gross national product, rate of
inflation, market development, rate of savings, and capital investment, resource
self-sufficiency and balance of payments positions, and in other
respects.








Our
directors and officers will have substantial influence over our operations and
control substantially all business matters.





Our
officers are also directors, and are the only persons responsible for conducting
our day-to-day operations.  We will not benefit from the multiple
judgments that a greater number of directors or officers may provide, and we
rely completely upon the judgment of such people in making business decisions,
with the assistance of our one outside director on matters which require the
judgment of the Board of Directors.





Our
success is dependent upon the continued services of management and we currently
have no key man insurance on any key personnel.





Our
success is dependent on the continued efforts of Edward Vakser, currently our
President and Chief Executive Officer, and Anzhelika Tassan, currently our
Secretary and Chief Marketing Officer.  The loss of either Mr. Vakser
or Ms. Tassan would have a material adverse effect on our
operations.  We anticipate that we will need to hire additional
skilled personnel in all areas of its business in order to
grow.  There can be no assurance that we will be able to retain our
existing personnel or attract additional qualified employees in the future, the
failure of which would have a material adverse effect on our business, financial
condition and results of operations.  We do not currently maintain
"key man" life insurance on the life of any of our employees.  To the
extent that the services of key personnel become unavailable, we will be
required to retain other qualified persons and there can be no assurance that we
will be able to employ qualified persons upon acceptable terms.








24


Our
success could be hindered by the limited protection afforded by our intellectual
property and proprietary rights.  There are potential costs for
enforcement or defense of these rights.





Any
inability to adequately protect our proprietary technology could harm our
ability to compete.  Our future success and ability to compete depends
in part upon our proprietary technology and our trademarks, which we attempt to
protect with a combination of patent, copyright, trademark and trade secret
laws, as well as with our confidentiality procedures and contractual
provisions.  These legal protections afford only limited protection
and may be time-consuming to obtain and maintain.  Further, despite
our efforts, we may be unable to prevent third parties from infringing upon or
misappropriating our intellectual property.





Our
intellectual property may not be adequate to provide us with competitive
advantage or to prevent competitors from entering the markets for our
services.  Additionally, our competitors could independently develop
non-infringing technologies or services which are competitive with, equivalent
to, and/or superior to our technology or service.  Monitoring
infringement and/or misappropriation of intellectual property can be difficult,
and there is no guarantee that we would detect any infringement or
misappropriation of our proprietary rights.  Even if we do detect
infringement or misappropriation of our proprietary rights, litigation to
enforce these rights could cause us to divert financial and other resources from
our business operations, and even if we had a legitimate claim there can be no
assurance that we would have the financial resources to enforce our rights
effectively.  Further, we intend to provide our services
internationally, and the laws of some foreign countries do not protect our
proprietary rights to the same extent, as do the laws of the United
States.








Litigation
arising out of intellectual property infringement could be expensive and disrupt
our business.





We cannot
be certain that our name and the services we offer in conjunction with our name
does not, or will not, infringe upon the intellectual property rights held by
third parties, or that other parties will not assert infringement claims against
us. From time to time, we may be involved in disputes with these third parties.
Any claim of infringement of proprietary rights of others, even if ultimately
decided in our favor, could result in substantial costs and diversion of our
resources. Successful claims against us may result in an injunction or
substantial monetary liability, which could, in either case, significantly
impact our results of operations or materially disrupt the conduct of our
business. Even if we had a legitimate claim of non-infringement, there can be no
assurance that we would have the financial resources to enforce our rights
effectively. If we are enjoined from using a technology, we will need to obtain
a license to use the technology, but licenses to third-party technology may not
be available to us at a reasonable cost, or at all.





From time
to time, other companies and individuals may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies or marks that are important to the gaming or
telecommunications industries or our business.  We will evaluate each
such claim relating to our services and, if appropriate, seek a license to use
the protected technology. There can be no assurance that we will be able to
obtain licenses to intellectual property of third parties on commercially
reasonable terms, if at all. In addition, we could be at a disadvantage if
our competitors obtain licenses for protected technologies with more
favorable terms than we do. If we are unable to license
protected technology used in our services, we could be prohibited
from marketing those services or may have to market services without
desirable features. We could also incur substantial costs to redesign our
services or to defend any legal action taken against us. If our services
should be found to infringe protected technology, we could be enjoined from
further infringement and required to pay damages to the infringed party.
Any of the foregoing could have a material adverse effect on the results of
our operations and our financial position.








25


Being
a public company involves increased administrative costs, which could result in
lower net income and make it more difficult for us to attract and retain key
personnel





As a
public company, we incur significant legal, accounting and other expenses. In
addition, the Sarbanes­ Oxley Act of 2002, as well as rules subsequently
implemented by the SEC, has required changes in corporate governance practices
of public companies.  We expect that these rules and regulations will
result in substantial legal and financial compliance costs and make some
activities more time consuming.  For example, in connection with being
a public company, we may have to create several board committees, implement
additional internal controls and disclose controls and procedures, retain a
transfer agent and financial printer, adopt an insider trading policy and incur
costs relating to preparing and distributing periodic public reports in
compliance with our obligations under securities laws.  These rules
and regulations could also make it more difficult for us to attract and retain
qualified members of our board of directors, particularly to serve on our audit
committee, and qualified executive officers.
















































26


ITEM
7.  FINANCIAL STATEMENTS





The
financial statements required by this item are set forth beginning on page
F-1.








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





Thomas
Bauman, CPA (“Mr. Bauman”), by letter dated January 16, 2008, which was received
by Artfest International, Inc. (the “Registrant”) on or about February 8, 2008,
resigned as the independent certified accountant of the Registrant.





The
Registrant did not have any disagreements with Mr. Bauman on any matter of
accounting principles or practice, financial statement disclosure, or auditing
scope or procedure for the Registrant’s fiscal years ended December 31, 2005 and
December 31, 2006, or thereafter through January 16, 2008, the date of Mr.
Bauman’s resignation letter.  Mr. Bauman’s reports on the Registrant’s
financial statements for the past two fiscal years ended December 31, 2005 and
December 31, 2006, and thereafter through January 16, 2008, did not contain an
adverse opinion or a disclaimer of opinion, and was not qualified as to audit
scope or accounting principles, but was qualified, however, as to Registrant’s
ability to continue as a going concern.





The
Registrant engaged Eugene M. Egeberg, CPA (“Mr. Egeberg”) as of February 18,
2008 as its certifying accountant to audit the Registrant’s financial statements
for the year ended December 31, 2007.  In connection with the
Registrant’s acquisition of Art Channel in December 2007, Art Channel utilized
Mr. Egeberg, who was then Art Channel’s independent certified accountant, to
audit Art Channel’s financial statements for the period from its inception
through September 30, 2007, and to prepare unaudited pro forma consolidated
balance sheets which were included in the Registrant’s 8-K which was filed with
the Securities and Exchange Commission on January 18, 2008.





Mr.
Egeberg did not provide the Registrant with advice regarding the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Registrant’s
financial statements, that was an important factor considered by the Registrant
in reaching a decision as to an accounting, auditing or financial reporting
issue.  During the two most recent fiscal years ended December 31,
2005 and December 31, 2006 the Registrant did not consult with Mr. Egeberg on
any matter that was the subject of a disagreement or a reportable event as
defined in the regulations of the Securities and Exchange
Commission.








Item
8A. Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




The
Company’s Chief Executive Officer and Chief Accounting Officer have
evaluated the effectiveness of the Company’s disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the
fiscal period ending December 31, 2008 covered by this Annual Report
on Form 10-KSB. Based upon such evaluation, the Chief Executive Officer and
Chief Accounting Officer have concluded that, as of the end of such period, the
Company’s disclosure controls and procedures were not effective as required
under Rules 13a-15(e) and 15d-15(e) under the Exchange Act. This conclusion is
based upon the inadequacies observed in the company’s internal controls and
procedures.




Management’s
Report on Internal Control Over Financial Reporting




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act) of the Company. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of
America.




27


The
Company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted
in the United States of America, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and
directors of the Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Management,
under the supervision of the Company’s Chief Executive Officer and Chief
Accounting Officer, conducted an evaluation of the effectiveness of internal
control over financial reporting. Based on this evaluation, management concluded
that the Company’s internal control over financial reporting was not effective
as of December 31, 2007.  Following a review of the deficiencies,
management determined that the company’s disclosure controls and procedures were
not effective as of December 31, 2007 and the company has revised its policies
for Internal Controls and Procedures and have been implemented for fiscal year
ending December 31, 2008.  Management concluded that the following
deficiencies were identified in our control process:






·
            We
      did not have adequate transaction controls over the accounting, review and
      processing of certain unusual or complex accounting
      transactions.




·
            We
      did not have a systematic and documented program of internal controls and
      procedures over our accounting and financial reporting process to ensure
      that accounting transactions are recorded, processed, summarized and
      reported on a timely basis in our financial
  disclosures.




·
            There
      is a need for the improved supervision and training of our accounting
      staff.




·
            There
      is deficiency in segregation of duties due to the small size of the
      Company.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management’s report in this Annual Report on Form 10-KSB.




Additional
effort is needed to fully remedy our identified deficiencies as discussed below
and we are continuing our efforts to improve and strengthen our control
processes and procedures. Our management intends to continue to work with our
auditors and other outside advisors, as appropriate, to develop and then apply
our controls and procedures with the goal of achieving adequate and effective
disclosure controls. We believe that with a properly planned, designed and
implemented system of internal controls over financial reporting, our disclosure
controls and procedures are expected to become effective.




There
have been no significant changes in internal controls, or in factors that could
significantly affect internal controls, subsequent to the date the Chief
Executive Officer and Chief Accounting Officer completed their
evaluation.




28


Changes
in Internal Control Over Financial Reporting




No change
in the Company’s internal control over financial reporting occurred during the
quarter ended December 31, 2008, that materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.





ITEM
8B. OTHER INFORMATION





None.









































29







PART
III





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





We
accepted the resignations from the Board of Directors of Eric Hansen and Mark
Gordon pursuant to the terms of the Acquisition Agreement dated December 26,
2007.





Our Board
of Directors was simultaneously filled by the Board of Directors of Art Channel,
which consisted Mr. Edward Vakser and Ms. Anzhelika Tassan.  The Board
subsequently appointed Edward Vakser as President and Chief Executive Officer,
and Anzhelika Tassan as Secretary and Chief Marketing Officer.





Our
present executive officers and directors, their ages and present positions are
as follows:





Name
                  Age
                  Position
                  First
      Year
                    Elected/AppointedEdward
      Vakser
                  45
                  President,
      CEO, Director
                  2007Anzhelika
      Tassan
                  35
                  Secretary,
      CMO, Director
                  2007Larry
      D. Ditto
                  68
                  Director
                  2003





All of
our directors will hold office until the next meeting of shareholders and until
their successors have been duly elected and qualified.  All of our
executive officers will hold office until the next annual meeting of the
directors and until their successors have been duly appointed and
qualified.





Edward
Vakser, who has served as the President and Chief Executive Officer of Art
Channel and its predecessors since 2004, now holds the same position with the
Company.  For the past 24 years, Mr. Vakser has been involved in a
multitude of enterprises including owning the second largest staging company in
North Texas and producing some of the largest corporate and entertainment
industry events.  He has been awarded several growth and performance
industry awards.  For over 10 years, Mr. Vakser has been working on
several intellectual property concepts including Art Channel, 3D Concert,
Wrestling, Ultimate Fighting and Extreme Sports, along with a multitude of art,
recording, and performing artists.  Mr. Vakser was also the President
and Chief Executive Officer of Revolve Communications, a full service
Communications, Production, Event, Presentation and Staging Company, from
2003-2005, and was the President and Chief Executive Officer of Intelecon
Services, Inc., a business which leased equipment for motion picture and video
production, from 1992-2003.





Anzhelika
Tassan, who has served as the Secretary and Chief Marketing Officer of Art
Channel and its predecessors since 2004, now holds the same position with the
Company.  Ms. Tassan, one of the co-founders of Art Channel, has been
involved in the production and multimedia industry for over 12
years.  Ms. Tassan, one of the co-founders of Art Channel, has been
involved in the production and multimedia industry for over 12
years.  She has been involved and coordinated multimedia designs and
developments for large scale projects and currently specializes in developing a
variety of digital marketing media campaigns including interactive programs,
corporate branding tools and web-based training modules.  As an
innovator of new CD-ROM/DVD development, she helped pioneer a new interactive
technology for a Stereoscopic 3D Interactive CD training program.  Ms.
Tassan has developed award-winning multimedia marketing and training programs
for such clients as Huffines CommunitiesTM, DeWitt Marketing, Dallas Woodcraft,
Siepela Industries, Wilbow Corporation, Inc., Nokia, Dr. Pepper/7-Up, Valerian
Properties, Ericsson, Marlin Atlantis, Haggard Properties, Macfarlan, Leman
Development, Feature Presentations, Trinity Industries, Alcatel, IDB Systems,
Williams Entertainment, EDS, Rainforest Creations, and Nortel
Networks.  Ms. Tassan has also been the President and Chief Executive
Officer of TNT Media Productions, LTD. since 2003, was the Vice President of
Revolve Communications from 2000-2003, and was the Director for Multimedia and
Marketing for Intelecon Services, Inc. from 1996-2003.






30





Jacob D.
Cohen  served as the Company’s Chief Operating Officer in 2008 and
resigned from his position in June 2008.  Mr. Cohen also served as the
Controller and Vice President of Finance for Art Channel and since 2007, and
held the same positions with the Company in 2007 until becoming Chief Operating
Officer in 2008.  Mr. Cohen served from 2002 through 2004 as the Chief
Executive Officer of Advertise Network, which made digital signs, as a broker
for Solomon Advisors, a securities broker-dealer, from 2003 through 2004, an
investment banker for Allegiance Capital, an investment bank, from 2004-2005 and
is the sole shareholder and officer and director for Cohen Enterprises, a
private company used for Mr. Cohen’s private consulting work, from 2005 to the
present.  Mr. Cohen graduated from Brandeis University in 2001 with a
Bachelor of Science in economics and finance.





Larry D.
Ditto served as the Company’s President and Chief Executive Officer until
December 2007.  Mr. Ditto has been involved with the Company since
early 2005 as its then CEO and was later appointed President and Chairman of the
Board of Directors.  In 1979, Mr. Ditto became President, CEO, and 50%
owner of a business that provided group purchasing programs for nursing
homes.  He specialized in negotiating agreements with suppliers for
purchases of hundred of millions of dollars.  The company was sold in
1996 to its largest competitor and he accepted a work/consulting agreement with
the new owners.  His contract ended in 2006.  In 1967 Mr.
Ditto completed an MA in elementary administration and entered the doctoral
program at Michigan State University as a teaching fellow.





There are
no arrangements or understandings among Edward Vakser, Anzhelika Tassan, Jacob
Cohen and/or Larry D. Ditto and any other persons, pursuant to which Edward
Vakser, Anzhelika Tassan and Larry D. Ditto were selected as
directors.





Edward
Vakser and Anzhelika Tassan are brother and sister.





Edward
Vakser, Anzhelika Tassan, Jacob Cohen and Larry D. Ditto each failed to file on
a timely basis Forms 3 and 5 as required by Section 16(a) during
the most recent fiscal year.

























31


CODE OF
ETHICS





The
Company has adopted a code of ethics for its principal executive officer,
principal financial officer, principal accounting officer or controller due to
the small number of executive officers involved with the Company.  The
Board of Directors will continue to evaluate, from time to time, whether a code
of ethics should be developed and adopted.








ITEM
10.  EXECUTIVE COMPENSATION





The
following table sets forth certain information as to our principal executive
officer for our fiscal years ended December 31, 2008 and 2007.  No
other executive officer received compensation which exceeded $100,000 from the
Company in our fiscal years ended December 31, 2008, 2007 and 2006.




SUMMARY
      COMPENSATION TABLEName
      and Principal Position
                            Year
                            
                            Salary
                              ($)
                            
                            Bonus
                              ($)
                            
                            Stock
                              Awards
                              ($)
                            
                            Option
                              Awards
                              ($)
                            
                            Non-Equity
                              Incentive
      Plan Compensation
                              ($)
                            
                            Nonqualified
                              Deferred
                              Compensation
                              Earnings
                              ($)
                            
                            All
      Other
                              Compensation
                              ($)
                            
                            Total
                              ($)Larry
      D. Ditto
                            2007
                            
                            $200.00
                            
                            $0
                            
                            $0
                            
                            $0
                            
                            $0
                            
                            $0
                            
                            $0
                            
                            $200.00DirectorLarry
      D. Ditto
                            2008
                            
                            $0
                            
                            $0
                            
                            $0
                            
                            $0
                            
                            $0
                            
                            $0
                            
                            $0
                            
                            $0DirectorEdward
      Vakser
                            2008
                            
                            $20,00.00
                            
                            $0
                            
                            $10,000.00
                            
                            $0
                            
                            $0
                            
                            $0
                            
                            $0
                            
                            $30,000.00DirectorAnzhelika
      Tassan
                            2008
                            
                            $5,000.00
                            
                            $0
                            
                            $5,000.00
                            
                            $0
                            
                            $0
                            
                            $0
                            
                            $0
                            
                            $10,000.00Director





We do
currently have employment agreements with Edward Vakser, Anzhelika Tassan, and
J. Scott Tassan, who will be Vice President of Production and who is the husband
of Anzhelika Tassan, during the current fiscal year.











32





ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS





We
have provided below information as of April 10, 2009 concerning the beneficial
ownership of our Common Stock by (i) all persons whom we know to own
beneficially 5% or more of our Common Stock, (ii) each of our directors and
executive officers individually, and (iii) all of our directors and executive
officers as a group.








Title
      of Class
                  Name
      & Address of Beneficial Owner
                  Amount
      & Nature of Beneficial Owner
                  Percent
                    of
      ClassCommon
      Stock
                  Edward
      Vakser
                    15851
      Dallas Parkway, Suite 225
                    Addison,
      TX 75001
                  29,020,000
                  15.5%Common
      Stock
                  Anzhelika
      Tassan and Scott Tassan
                    15851
      Dallas Parkway, Suite 225
                    Addison,
      TX 75001
                  29,020,000
                  15.5%Common
      Stock
                  Larry
      D. Ditto
                    17
      Via Belmonte
                    Rancho
      Santa, CA 92688
                  12,500,000
                  6.7%Common
      Stock
                  All
      Directors & Officers as a Group (consisting of 3
    persons)
                  70,540,000
                  37.7%





ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





On March
31, 2008, Larry Ditto, a Director, purchased 500,000 shares of unregistered
securities via a subscription agreement for $50,000 in cash.








33


PART
IV





ITEM
13.  EXHIBITS





Exhibits
and Financial Statements:





1.  Financial
Statements





The
following financial statements are included on pages F-1 to F-10 of the
Financial Statements in this Report.





(i)
            Report
      of Independent Accountant(ii)
            Balance
      Sheets as of December 31, 2008 and December 31, 2007(iii)
            Statements
      of Income for the fiscal years ended December 31, 2008and
      2007(iv)
            Statements
      of Cash Flows for the fiscal years ended December 31,2008
      and 2007(v)
            Statements
      of Changes in Stockholders' Equity for the fiscalyears
      ended December 31, 2008 and 2007(vi)
            Notes
      to Financial Statements








EXHIBITS.





Exhibit
            ExhibitNumber
            Description3(i)
            Articles
      of Incorporation****3(ii)
            Bylaws****4
            Stock
      Option Plan *10
            Acquisition
      Agreement **20
            Proxy
      *21
            Subsidiaries
      of the Small Business Issuer22
              23
            Published
      report regarding matters submitted to vote of security holders
      ***
              Form
      S-8 Registration Statement*****31.1
            Rule
      13a-14(a)/15d-14(a) Certification31.2
            Rule
      13a-14(a)/15d-14(a) Certification32.1
            Section
      1350 Certification32.2
            Section
      1350 Certification





*  Incorporated
by reference to the Company’s Form 14A, which was filed with the Securities and
Exchange Commission on February 27, 2008.





**  Incorporated
by reference to the Company’s Form 8-K/A, which was filed with the Securities
and Exchange Commission on January 18, 2008.





***  Incorporated
by reference to the Company’s Form 8-K which was filed with the Securities and
Exchange Commission on April 18, 2008.





****
Incorporated by reference to the Company’s 2007 10-K which was filed with the
Securities and Exchange Commission on April 25, 2008.





*****  Incorporated
by reference to the Company’s Form S-8 Registration Statement which was filed
with the Securities and Exchange Commission on October 29, 2008.








34


ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.





OUR
INDEPENDENT ACCOUNTANT





The
Registrant engaged Eugene M. Egeberg, CPA (“Mr. Egeberg”) as of February 18,
2008 as its certifying accountant to audit the Registrant’s financial statements
for the year ended December 31, 2007 and for theyear ended December 31,
2008.  In connection with the Registrant’s acquisition of The Art
Channel, Inc. in December 2007, The Art Channel utilized Mr. Egeberg, who was
then The Art Channel’s independent certified accountant, to audit The Art
Channel’s financial statements for the period from its inception through
September 30, 2007, and to prepare unaudited pro forma consolidated balance
sheets which were included in the Registrant’s 8-K which was filed with the
Securities and Exchange Commission on January 18, 2008.





1. AUDIT
FEES.




Our audit
fees for the years ended December 31, 2008 and 2007 were as
follows:




2008
                
                
                2007$
                6,200
                
                
                $
                19,000




2. TAX
FEES.




Our tax
return fees for the years ended December 31, 2008 and 2007 were as
follows:




2008
                
                
                2007$
                2000
                
                
                $
                3,500




3. ALL
OTHER FEES.




2008
                
                
                2007$
                0
                
                
                $
                0








PRE-APPROVAL
POLICIES AND PROCEDURES





Our
financial statements for the fiscal year ended December 31, 2008 have been
audited by our independent accountant, Mr. Egeberg.  Each year our
Board of Directors pre-approves all audit and tax related services prior to the
performance of such services.  The percentage of hours expended on the
audit by persons other than Mr. Egeberg was zero.








35





SIGNATURES





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





Artfest
      International, Inc.(Registrant)By:
      /s/ Edward
      VakserEdward
      Vakser, President, CEO and Director (Principal Executive Officer and
      Principal Financial Officer)Date:  April
      14, 2009





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





By:
      /s/ Anzhelika
      TassanAnzhelika
      Tassan, Secretary, ChiefMarketing
      Officer and DirectorDate:  April
      14, 2009By:
      /s/ Larry D.
      DittoLarry
      D. Ditto, DirectorDate:  April
      14, 2009











36


EUGENE
M EGEBERG


CERTIFIED
PUBLIC ACCOUNTANT


834
SOUTH MILTON AVENUE


BALTIMORE,
MARYLAND  21224


Telephone
(410) 218-1711  Fax (410) 374-8121








To the
Board of Directors and Stockholders


Artfest
International, Inc.


15851
Dallas Parkway, Suite 600


Addison,
TX 75001








INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM’S REPORT





We have
audited the accompanying balance sheet of Artfest International, Inc. as of
December 31, 2008, and the related statements of operations and changes in
stockholder’s deficit and cash flows for the year then
ended.   These financial statements are the responsibility of the
companies’ management.  Our responsibility is to express an opinion on
these financial statements based on our audits.





We
conducted our audits in accordance with U.S. generally accepted auditing
standards as well as standards required by the Public Companies Accounting
Oversight Board.  Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement.    An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.  An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.  For
comparison purposes, the financial information from 2007 was based on our audit
and filings.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Artfest International, Inc. as of
December 31, 2008, and the results of its operations and its cash flows for the
year then ended in conformity with U.S. generally accepted accounting
principles.











Eugene M
Egeberg


April14,
2009

























37









ARTFEST
INTERNATIONAL, INC.


BALANCE
SHEET


DECEMBER
31, 2007 & 2008


AUDITED




ASSETS


2008
                
                
                2007Current
      AssetsCash
      and cash equivalents
                
                $
                (2,196)
                
                
                $
                315Prepaid
      Expenses
                
                
                -
                
                
                
                -Accounts
      Receivable
                
                
                351,000
                
                
                
                351,000Total
      Current Assets
                
                
                344,352
                
                
                
                351,315Non-Current
      AssetsOther
      Assets
                
                $
                130,217
                
                
                
                8,000Total
      Non-Current Assets
                
                
                130,2117
                
                
                
                8,000Property,
      Plant and Equipmentat
      cost, net of accumulated depreciation
                
                
                58,464
                
                
                
                75,435TOTAL
      ASSETS
                
                $
                537,485
                
                
                $
                434,750LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      payable and Accrued Liabilities
                
                $
                675,840
                
                
                $
                159,725Current
      Portion of Notes Payable (Note 8)
                
                
                460,873
                
                
                
                226,620Deferred
      Revenue
                
                
                351,000
                
                
                
                351,000Rewards
      Payable
                
                
                475,361
                
                
                
                473,317Total
      Current Liabilities
                
                
                1,963,074
                
                
                
                1,210,662Non-current
      LiabilitiesLoans
      Payable (Note 8)
                
                
                784,497
                
                
                
                769,547TOTAL
      LIABILITIES
                
                $
                2,747,571
                
                
                $
                1,980,209Stockholders’
      Equity:
                    Preferred
      Stock - $.001 par value – 2,000,000
                    Shares
      authorized, no shares issued and outstandingCommon
      Stock - $.001 par value – 500,000,000shares
      authorized, 168,763,003 issued andoutstanding
                
                $
                168,763
                
                
                $
                36,231Additional
      paid-in capital
                
                
                671,198
                
                
                
                253,243Retained
      earnings (deficit)
                
                
                (3,050,047
                )
                
                
                (1,834,933
                )TOTAL
      STOCKHOLDERS EQUITY
                
                $
                (2,210,086
                )
                
                $
                (1,545,460
                )TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                $
                537,485
                
                
                $
                434,750


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




38


ARTFEST
INTERNATIONAL, INC.


STATEMENT
OF INCOME AND EXPENSES


FOR THE
YEARS ENDED DECEMBER 31, 2008 & 2007


AUDITED





2008
                
                
                2007Revenue
                
                $
                38,536
                
                
                $
                327,663Cost
      of Revenue
                
                
                21,030
                
                
                
                592,543Gross
      Profit (Loss)
                
                
                17,506
                
                
                
                (264,880Operating
      Expenses
                
                
                1,178,132
                
                
                
                608,277Net
      Income (Loss) from Operations
                
                
                (1,160,626
                )
                
                
                (873,157
                )Other
      Income (Expense), Net
                
                
                -
                
                
                
                (20,321
                )Net
      Income (Loss)
                
                $
                (1,160,626
                )
                
                $
                (893,477
                )Weighted
      average number of common sharesoutstanding
      – basic and fully diluted
                
                
                124,305,179
                
                
                
                36,230,629Net
      (Loss) per share – basic and fully diluted
                
                $
                0.00
                
                
                $
                0.00


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





39











ARTFEST
INTERNATIONAL, INC.


STATEMENT
OF CASH FLOWS


FOR THE
YEARS ENDED DECEMBER 31, 2007 & 2008


AUDITED





2008
                
                
                2007Cash
      Flows From Operating ActivitiesNet
      income (loss)
                
                $
                (1,160,626
                )
                
                $
                (893,477
                )Adjustments
      to reconcile net income (loss) tonet
      cash (used) provided by operating activities:Increase
      in Depreciation
                
                
                16,971
                
                
                
                37,493Increase
      in Inventory
                
                
                9,568
                
                
                
                -(Increase)
      in Receivables
                
                
                91,500
                
                
                
                (351,000)Increase
      in Accounts Payable and Accrued Expenses
                
                
                562,069
                
                
                
                48,844Increase
      in Rewards Payable
                
                
                2,044
                
                
                
                473,317Increase
      in Deferred Revenue
                
                
                -
                
                
                
                351,000Increase
      in Prepaid Expenses
                
                
                -
                
                
                
                561Net
      cash (used) by operating activities
                
                
                (680,610
                )
                
                
                (333,262
                )Cash
      Flows From Investing ActivitiesDecrease
      in Notes Receivable
                
                
                91,500Purchase
      of property, plant and equipment
                
                
                (22,228
                )
                
                
                (115,803)Net
      cash used in investing activities
                
                
                (113,728
                )
                
                
                (115,803Cash
      Flows From Financing ActivitiesIssuance
      of Common Stock
                
                
                (30,545)
                
                
                
                36,032Decrease
      in Notes Payable
                
                
                249,203
                
                
                
                226,620Increase
      in Loans Payable
                
                
                115,225
                
                
                
                126,633Increase
      in Retained Earnings
                
                
                -
                
                
                
                71,088Increase
      in Contributed Capital
                
                
                460,455
                
                
                
                (11,247Net
      cash used in financing activities
                
                
                740,203
                
                
                
                449,126Net
      decrease in cash and cash equivalents
                
                
                2,511
                
                
                
                61
                )Cash
      and cash equivalents, Beginning of Period
                
                
                315
                
                
                
                255Cash
      and cash equivalents, December 31, 2008 and
      December
      31,2007
                
                $
                (2,196)
                
                
                $
                315








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




40


ARTFEST
INTERNATIONAL, INC.


CHANGES
IN STOCKHOLDERS’ EQUITY


FOR THE
YEARS ENDED DECEMBER 31, 2007 & 2008


AUDITED





2007Common
                
                
                Additional
                
                
                RetainedStock
                
                
                Paid
      In Capital
                
                
                Earnings
                
                
                TotalBalance
      at January 1, 2007
                
                $
                198
                
                
                $
                264,490
                
                
                $
                (1,012,542
                )
                
                $
                (747,854
                )Stock
      Purchased
                
                
                16,399
                
                
                
                -
                
                
                
                -
                
                
                
                16,399Additional
      Paid in Capital
                
                
                19,634
                
                
                
                (11,247
                )
                
                
                -
                
                
                
                8,387Retained
      Earnings Adjustment
                
                
                -
                
                
                
                -
                
                
                
                71,087
                
                
                
                71,087Net
      Income
                
                
                -
                
                
                
                -
                
                
                
                (893,478
                )
                
                
                (893,478
                )Balance
      at December 31, 2007
                
                $
                36,231
                
                
                $
                253,243
                
                
                $
                (1,834,933
                )
                
                $
                (1,545,460
                )2008Common
                
                
                Additional
                
                
                RetainedStock
                
                
                Paid
      In Capital
                
                
                Earnings
                
                
                TotalBalance
      at January 1, 2008
                
                $
                36,231
                
                
                $
                253,243
                
                
                $
                (1,834,933
                )
                
                $
                (1,545,459
                )Stock
      Purchased
                
                
                780
                
                
                
                -
                
                
                
                -
                
                
                
                780Additional
      Paid in Capital
                
                
                70,720
                
                
                
                417,955
                
                
                
                -
                
                
                
                488,675Retained
      Earnings Adjustment
                
                
                61,032
                
                
                
                -
                
                
                
                (54,488
                )
                
                
                6,544Net
      Income
                
                
                -
                
                
                
                -
                
                
                
                (1,160,626
                )
                
                
                (1,160,626
                )Balance
      at December 31, 2008
                
                $
                168,763
                
                
                $
                671,198
                
                
                $
                (3,050,047
                )
                
                $
                (2,210,086
                )


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








41








ARTFEST
INTERNATIONAL, INC.


(A
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS


(Audited)











Note 1 - History and
organization of the company





The
Company was incorporated on February 21, 2002 (Date of Inception) under the laws
of the State of Delaware.  Artfest International Inc. provides sales,
marketing, financial and e-commerce systems to the industries of Arts, Antiques,
Collectibles and Luxury Goods. The markets are serviced by artists, dealers,
galleries, and manufacturers of reproductions and luxury goods.





On
December 28, 2007, the Company acquired 100% of The Art Channel, Inc. in
exchange for 8,000,000 shares of Artfest International, Inc. stock, which were
issued to the former shareholders of The Art Channel, Inc.





Pursuant
to the Acquisition Agreement of March 2008, the Company agreed to issue an
additional 20,000,000 shares of stock to former Art Channel, Inc.
shareholders for the acquisition, and an additional 1,500,000 shares of stock to
the Company's Director, Larry D. Ditto.





Note 2 - Accounting policies
and procedures





Cash and
cash equivalents


The
Company maintains a cash balance in a non-interest-bearing account that
currently does not exceed federally insured limits. For the purpose of the
statements of cash flows, all highly liquid investments with an original
maturity of three months or less are considered to be cash equivalents. There
were no cash equivalents as of December 31, 2008.





Fixed
Assets


Property
and equipment are recorded at historical cost. Minor additions and renewals are
expensed in the year incurred. Major additions and renewals are capitalized and
depreciated over their estimated useful lives. Depreciation is calculated using
the straight-line method over the estimated useful lives as
follows:








Computer
      equipment
            3
      yearsOffice
      equipment
            4
      yearsProprietary
      Software
            3
      yearsFurniture
      and Fixtures
            7
      years





Property
and Equipment consist of the following:





Office
      equipment
                
                $
                3,240Proprietary
      software
                
                $
                60,500Furniture
      and Fixtures- Art
                
                $
                41,095Less-accumulated
      depreciation
                
                
                (46,371)
                )Total
      PP&E (net of depreciation)
                
                $
                58,464








42





Impairment
of long-lived assets


Long-lived
assets held and used by the Company are reviewed for possible impairment
whenever events or circumstances indicate the carrying amount of an asset may
not be recoverable or is impaired. No such impairments have been identified by
management at December 31, 2008.





Revenue
recognition


The
Company recognized revenue and gains when earned and related costs of sales and
expenses when incurred.





Advertising
costs


The
Company expenses all costs of advertising as incurred. There were nominal
advertising costs included in selling, or general and administrative expenses in
2008 or 2007.





Loss per
share


Net loss
per share is provided in accordance with Statement of Financial Accounting
Standards No. 128 (SFAS # 128) "Earnings Per Share". Basic loss per share is
computed by dividing losses available to common stockholders by the weighted
average number of common shares outstanding during the period. The Company had
no dilutive common stock equivalents, such as stock options or warrants as of
December 31, 2008.





Reporting
on the costs of start-up activities


Statement
of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up Activities",
which provides guidance on the financial reporting of start-up costs and
organizational costs, requires most costs of start-up activities and
organizational costs to be expensed as incurred. SOP-98-5 is effective for
fiscal years beginning after December 15, 1998. With the adoption of SOP-98,
there has been little or no effect on the Company's financial
statements.





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 revenue and
expenses during the reporting period. Actual results could differ from those
estimates.





Fair
value of financial instruments


Fair
value estimates discussed herein are based upon certain market assumptions and
pertinent information available to management as of December 31, 2008 and 2007
respectively. The respective carrying value of certain on-balance-sheet
financial instruments approximated their fair values. These financial
instruments include cash and accounts payable. Fair values are assumed to
approximate carrying values for cash and payables because they are short term in
nature and their carrying amounts approximated fair values or they are payable
on demand.





Income
Taxes


Deferred
income tax assets and liabilities are computed annually for differences between
the financial statement and tax basis of assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable on the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.





Segment
reporting


The
Company follows Statement of Financial Accounting Standards No. 130,
"Disclosures About Segments of an Enterprise and Related Information". The
Company operates as a single
segment and will evaluate additional segment disclosure requirements as it
expands its operations.





Dividends


The
Company has not yet adopted any policy regarding payment of dividends. No
dividends have been paid or declared since inception.





Recent
pronouncements


In June
2001, SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and
Other Intangible Assets", were issued. SFAS No. 141 requires that all business
combinations


initiated
after June 30, 2001 be accounted for using the purchase method of accounting,
and that identifiable intangible assets acquired in a business combination be
recognized as an assets apart from goodwill if they meet certain criteria. The
impact of the adoption of SFAS No. 141 on our reported operating results,
financial position and existing financial statements disclosure is not expected
to be material.





SFAS No.
142 applies to all goodwill and identified intangible assets acquired in a
business combination. Under the new standard, all goodwill and indefinite-lived
intangible assets,


include
the acquired before initial application of the standard, will not be amortized
but will be tested for impairment at least annually. The new standard is
effective for fiscal years beginning after December 15, 2001. The impact of the
adoption of SFAS No. 142 on our reported operating results, financial position
and existing financial statement disclosure is not expected to be
material.





43


In July
2001, SFAS No. 143, "Accounting for Asset Retirement Obligations", was issued
which requires the recognition of a liability for an asset retirement obligation
in the period in which it is incurred. When the liability is initially recorded,
the carrying amount of the related long-lived asset is correspondingly
increased. Over time, the liability is accreted to its present value and the
related capitalized charge is depreciated over the useful life of the asset.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The
impact of the adoption of SFAS No. 143 on the Company's reported operating
results, financial position and existing financial statement disclosure is not
expected to be material.








In August
2001, SFAS No. 144, "Accounting for the Impairment of Disposal of Long-lived
Assets", was issued. This statement addresses the financial accounting and
reporting for the impairment of disposal of long-lived assets and broadens the
definition of what constitutes a discontinued operation and how results of a
discontinued operation are to be measured and presented. The provisions of SFAS
No. 144 are effective for financial statements issued for fiscal years beginning
after December 15, 2001. The impact of the adoption of SFAS No. 144 on our
reported operating results, financial position and existing financial statement
disclosure is not expected to be material.





Stock-Based
Compensation


The
Company accounts for stock-based awards to employees in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related


interpretations
and has adopted the disclosure only alternative of SFAS No. 123, "Accounting for
Stock-Based Compensation". Options granted to consultants, independent
representatives and other non-employees are accounted for using the fair value
method as prescribed by SFAS No. 123.





Year
end


The
Company has adopted December 31 as its fiscal year end.





Note 3 - Going
concern





The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. As shown in the accompanying financial statements,
the Company has incurred a net loss of $3,050,047 for the period from February
21, 2002 (inception) to December 31, 2008. The future of the Company is
dependent upon its ability to obtain financing and upon future profitable
operations from the development of its new business opportunities. Management
has plans to seek additional capital through a public offering of its common
stock. The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amount of the
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.





Note 4 - Income
taxes





The
Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), which requires
use of the liability method. SFAS No. 109 provides that deferred tax assets and
liabilities are recorded based on the differences between the tax bases of
assets and liabilities and their carrying amounts for financial reporting
purposes, referred to as temporary differences. Deferred tax assets and
liabilities at the end of each period are determined using the currently enacted
tax rates applied to taxable income in the periods in which the deferred tax
assets and liabilities are expected to be settled or realized.





The
provisions for income taxes differs from the amount computed by applying the
statutory federal income tax rate to Income before provision for income taxes.
The source and tax effects of the differences are as follows:











U.S.
      federal statutory rate
            34.00
      %Valuation
      reserve
            34.00
      %Total
            0.00
      %











As of
December 31, 2008, the Company has a net operating loss carryforward of
approximately $3,050,047 for tax purposes, which will be available to offset
future taxable income. This carryforward will expire in various years through
2027.





44


Note 5 - Stockholders'
Equity





The
Company was authorized to issue 40,000,000 shares of its $0.001 par value common
stock as of December 31, 2007.





On
November 19, 2002 the Company issued 19,832,000 shares of its $0.001 par value
common stock as founders' shares to acquire 100% of the outstanding shares of
Artfest International, Inc., a Delaware Corporation for a net book value of
$19,832.





On
December 31, 2007 the Company issued 8,000,000 shares of its $0.001 par value
common stock as partial payment to shareholders of The Art Channel, Inc. in a
100% acquisition.   As of December 31, 2007, the Company’s
authorized shares were 40,000,000.





In
January 2008, the Company issued 125,000 restricted shares of its $0.001 common
stock to two consultants as compensation for services rendered.





In
February 2008, the Company issued 145,000 restricted shares of its $0.001 common
stock to consultants and advisors as compensation for services
rendered.





In March
2008, the Company amended its Certificate of Incorporation to increase its
authorized common stock to 500,000,000 shares,  par value $0.001, and
2,000,000 shares of preferred stock, par value $0.001.   The
Company then issued an additional 21,500,000 shares of common stock to
complete the acquisition of The Art Channel, Inc.





In May
2008, the Company issued 4,500,000 shares of its $0.001 par value common stock
to Beryl Zyskind for consulting services.





In June
2008, the Company issued 39,300,000 restricted shares of its $0.001 common stock
to employees, advisors and consultants as compensation for services
rendered.





On
October 29, 2008 the Company filed a Form S-8 Registration with the Securities
and Exchange Commission and subsequently issued 25,000,000 shares of its $0.001
par value common stock to advisors and consultants as compensation for services
rendered.





In
November 2008, the Company issued 4,999,999 restricted shares of its $0.001
common stock to consultants as compensation for services rendered.








Note 6 - Warrants and
options





As of
December 31, 2008, there were no warrants outstanding; there are 1,600,000
options outstanding to acquire additional shares of common stock.








Note 7 - Related party
transactions





Office
space and services were provided without charge by the Chief Executive Officer.
Such costs are immaterial to the financial statements and, accordingly, have not
been reflected therein.





The
officers and directors of the Company are involved in other business activities
and may, in the future become involved in other business opportunities. If a
specific business opportunity becomes available, such person may face a conflict
in selecting between the Company and their other business interest. The Company
has not formulated a policy for the resolution of such conflicts.





Note 8 - Loans and Notes
Payable





On
January 5, 2003, the Company purchased a 2002 Chevrolet Avalanche through GMAC
for $29,717. The note calls for a term of 5 years at a rate of 5.9% beginning on
February 24, 2003, and maturing on December 24, 2007.  As of the
report date, the Company had defaulted on the note and the vehicle was returned
to GMAC for sale. GMAC has sold the vehicle and credited the company with
$10,491 leaving a balance due of $ 8,315.





The
Company has $769,547 in loans payable to shareholders and $226,620 in short-term
notes. The notes call for varying interest rates ranging from 1% to 12% per
annum, and contain a stock payment option payable at the lender's
discretion.  As of the report date, the Company is in default on all
of its short term notes payable to shareholders and non-shareholders. Management
has not formulated a repayment plan, and no  contingency plan has been
established in the event that the lenders seek legal remedies.





On May
22, 2007, the Company signed a loan payable to Brothers Realty & Investment
Group, LLC for $120,000 due on May 22, 2008.  This loan accrues
interest at 12% per annum.





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On July
5, 2007, the Company signed a loan payable to Brothers Realty & Investment
Group, LLC for $35,000 due on July 5, 2008.   This loan accrues
interest at 12% per annum.





On August
26, 2007, the Company signed a loan payable to Andy Haase in the amount of
$30,000 due on August 26, 2008.  The loan accrues interest at 10% per
annum.  The original amount was $35,000, with a $5,000 payment having
been made in July 2007.




On April
3, 2007, the Company signed a loan payable to Dale Bagwell for $20,000 due on
April 3, 2008. The loan accrues interest at 10% per annum.   The
original amount was $25,000, with a $5,000 payment having been made in July
2007.





On
December 7, 2007 the Company signed a loan payable to Patrick Haxton in the
amount of $15,000 with no fixed due date.  The loan is non-interest
bearing.








Note
9 - MATERIAL SUBSEQUENT EVENTS AND CONTINGENCIES





In
February, 2009 the Company issued 12,500,000 restricted common shares to
consultants and advisors in lieu of cash compensation.
  On March
27, 2009 the Company issued 17,500,000 restricted common shares to a former
employee, Jacob D. Cohen, as partial payment on a Convertible Promissory Note,
dated June 1, 2008 in the amount of $87,250.00 bearing interest at 10% per annum
in lieu of a cash payment.  The shares issued represented a partial
principal payment of $43,500.00.
  On April
1, 2009 the Company issued 14,500,000 restricted common shares to a former
employee, Jacob D. Cohen, as final payment on a Convertible Promissory Note
dated June 1, 2008 in the amount of $87,250.00 bearing interest at 10% per annum
in lieu of a cash payment. The shares issued represented the final principal
payment of $43,750.00 and accrued interest of
$7,144.00.












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