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UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.20549

Form 10-KSB

(MarkOne)

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|   | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year endedDecember  31,  2005 |

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|   | TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGEACT OF 1934 For the transition period from                to                 |

333-96257

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Commissionfile number

TAG ENTERTAINMENTCORP.

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(Exactname of small business issuer as specified in itscharter)

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| Delaware               |  | 13-3851304                          |
| (Stateofincorporation) |  | (IRSEmployer Identification Number) |
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1333 SecondStreet, Suite 240Santa Monica, CA90401

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(Addressof principal executive office)

(310)260-3350

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(Issuer’stelephone number)

Securities registered under Section 12(b) ofthe Exchange Act: NONE

Securities registered under Section12(g) of the Exchange Act: NONE

Check whether the issueris not required to file reports pursuant to Section 13 or 15(d) of theExchange Act. 

Check whether the issuer (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days.Yes        No   

Check ifthere is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B is not contained in this form, and no disclosure will becontained, to the best of the registrant’s knowledge, indefinitive proxy or information statements incorporated by reference inPart III of this Form 10-KSB or any amendment to this Form 10-KSB. [Not applicable]

Indicate by checkmark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes       No

The issuer had revenues of $3,900,000 for thefiscal year ended December  31,  2005.

The aggregatemarket value of the voting stock held by non-affiliates onFebruary  28,  2006 was approximately $14,000,000, based onthe average bid and asked prices of the issuer’s common stock onsuch date.

As of March  31,  2006, the issuer had21,314,948 shares of common stock outstanding.

DOCUMENTSINCORPORATED BYREFERENCE

NONE

TransitionalSmall Business Disclosure Format:Yes       No   

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TAG ENTERTAINMENTCORP.INDEX TO ANNUAL REPORT ON FORM10-KSB

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|                           |  |                                                                                                          |  | PAGE   |
| PartI                          |  |                                                                                                          |  |   |
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| Item1.                         |  | DescriptionofBusiness                                                                                         |  | 1      |
| Item2.     |  | Description ofProperty                                                                                        |  | 34     |
| Item3.                         |  | LegalProceedings                                                                                              |  | 35     |
| Item4.                         |  | Submission Of Matters To A Vote Of the SecurityHolders                                                        |  | 37     |
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| PartII                         |  |                                                                                                          |  |   |
|                           |  |                                                                                                          |  |   |
| Item5.                         |  | Market For Common Equity, Related Stockholder Matters AndSmall Business Issuer Purchases Of EquitySecurities  |  | 37     |
| Item6.                         |  | Management's Discussion And Analysis Or Plan OfOperation                                                      |  | 40     |
| Item7.                         |  | FinancialStatements                                                                                           |  | 49     |
| Item8.                         |  | Changes In And Disagreements With Accountants On AccountingAnd FinancialDisclosure                            |  | 49     |
| Item8A.                        |  | Controls AndProcedures                                                                                        |  | 52     |
| Item8B.                        |  | OtherInformation                                                                                              |  | 54     |
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| PartIII                        |  |                                                                                                          |  |   |
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| Item9.                         |  | Directors, Executive Officers, Promoters and ControlPersons; Compliance With Section 16(a) Of the ExchangeAct |  | 55     |
| Item10.                        |  | ExecutiveCompensation                                                                                         |  | 57     |
| Item11.                        |  | Security Ownership Of Certain Beneficial Owners AndManagement And Related StockholderMatters                  |  | 59     |
| Item12.                        |  | Certain Relationships And RelatedTransactions                                                                 |  | 60     |
| Item13.                        |  | Exhibits                                                                                                      |  | 61     |
| Item14.                        |  | Principal Accountant Fees AndServices                                                                         |  | 63     |
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| Signatures                     |  |                                                                                                          |  |   |
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PARTI

Item 1.  Description ofBusiness

Forward Looking Statements

ThisReport contains statements which constitute forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933 and theSecurities Exchange Act of 1934. These statements are based on manyassumptions and estimates and are not guarantees of future performance.Our actual results may differ materially from those projected in anyforward-looking statements, as they will depend on many factors aboutwhich we are unsure, including many factors which are beyond ourcontrol. The words ‘‘may,’’‘‘would,’’‘‘could,’’‘‘will,’’‘‘expect,’’‘‘anticipate,’’‘‘believe,’’‘‘intend,’’‘‘plan,’’ and‘‘estimate,’’ as well as similarexpressions, are meant to identify such forward-looking statements.Potential risks and uncertainties include, but are not limited to thosedescribed below under ‘‘RiskFactors.’’

As used in this Report,references to the ‘‘we,’’‘‘us,’’ ‘‘our’’refer to TAG Entertainment Corp. unless the context indicatesotherwise. TAG Entertainment Corp. may be referred to herein as‘‘TAG.’’ Our wholly-owned subsidiary, TAGEntertainment USA, Inc. (formerly known as TAG Entertainment, Inc.)will be referred to herein as ‘‘TAG USA.’’TAG and TAG USA may be collectively referred to in this Annual Reportas ‘‘TAG.’’

Overview

TAGEntertainment Corp. and its wholly-owned subsidiary, TAG EntertainmentUSA, Inc. are engaged in the independent production of family orientedfeature films, television programming and other entertainment productsfor theatrical, television and home video distribution. We also seek toacquire rights to other entertainment properties and film libraries. Todate, we have produced and/or obtained the exclusive, worldwidedistribution rights to a total of fifteen feature length motionpictures, which films have been produced either by TAG USA or certainlimited partnerships. Of these films, three were produced during 2005and one additional film is currently in preproduction. We have alsoacquired certain rights to additional feature length motion pictures ofvarying quality and commercial potential. In 2004, we produced 21episodes of the television series Arizona Highways: The TelevisionSeries for local broadcast. We are currently seeking financing (asdiscussed below) to produce additional feature films and purchase otherfamily films and entertainment assets. We also intend to acquirecertain limited partnerships, including those that granted us theexclusive, worldwide distribution rights to their films, five of whichare associated with our Chief Executive Officer. TAG USA was founded in1999 by Steve Austin, our Chairman and Chief ExecutiveOfficer.

Strategy and Source of Revenues

Our strategy isto produce family oriented entertainment products (primarily featurelength motion pictures) appealing to a wide segment of the UnitedStates and the international theatrical and television audience. Webelieve that this target group is more predictable in theirentertainment preferences than other segments of the entertainmentconsumer market, and ‘‘evergreen’’ in thatyounger children are not as likely to reject a motion picture as datedor lacking well known, contemporary stars. Family films are less likelyto generate controversy that might adversely reflect on us and harm theprospects for a successful distribution. These factors also allow us toproduce, market and distribute feature length films with relativelymodest budgets as compared to mainstream motion pictures directedtowards an older, more mature audience.

Our revenues are derivedfrom motion picture production and distribution fees, which includestheatrical, home entertainment, television and internationaldistribution. Theatrical revenues are derived from the theatricalrelease of motion pictures in North America. Home entertainmentrevenues are derived from the sale of video and DVD releases of our ownproductions and acquired films, including theatrical releases anddirect-to-video releases. Television revenues are primarily

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derived from the licensing of our productionsand acquired films to the domestic cable, free and pay televisionmarkets. International revenues are derived from the licensing of ourproductions and acquired films to international markets on aterritory-by-territory basis. Our primary operating expenses includethe following: direct operating expenses, such as amortization ofproduction or acquisition costs, participation and residual expenses;distribution and marketing expenses, which primarily include the costsof theatrical ‘‘prints and advertising’’and of video and DVD duplication and marketing; and general andadministration expenses, which include salaries and other overhead.

Corporate History

We were formerly known as PowerMarketing, Inc., which was originally incorporated under the laws ofthe State of Delaware on August  1,  1995. OnNovember  22,  2004, we consummated a merger with TAG USAin which TAG USA merged with a wholly-owned subsidiary that weestablished for the purposes of the merger. As a result of the merger,TAG USA became a wholly owned subsidiary of Power Marketing and TAG USAcommon stockholders and warrant holders received approximately21,450,000 shares of Power Marketing common stock (and warrants) inexchange for the shares of the TAG USA common stock (and warrants) thatthey owned. Shareholders of TAG USA owned approximately 90% ofour outstanding shares of common stock immediately after themerger.

In connection with the merger, we changed our corporatename to TAG Entertainment Corp., all of our then-current officers anddirectors resigned and Mr. Austin, who was the majorityshareholder, Chief Executive Officer and sole director of TAG USAbecame our Chief Executive Officer, Chief Financial Officer and soledirector. During the 2005 fiscal year, we expanded our board to sixdirectors, four of whom are independent. However, as of March20,  2006, two of these directors resigned from their service onour board.

General Business Developments During the 2005 FiscalYear

Bridge and Preferred Stock Financing

OnMarch  30,  2005, we entered into a Securities PurchaseAgreement with Satellite Strategic Finance Associates, LLC andSatellite Strategic Finance Partners, Ltd. under which we issued$1.0  million in aggregate principal amount of Senior SecuredNotes and warrants to purchase 500,000 shares of common stock. Wereceived gross proceeds of $1,000,000, which have been used for theproduction and distribution of films, including acquisition ofadditional product and/or distribution assets and for general workingcapital. The issuance of these securities was exempt from registrationpursuant to Rule 506 promulgated under Section 4(2) of the SecuritiesAct of 1933, as amended, and may not be offered or sold in the UnitedStates absent registration or an applicable exemption from suchregistration requirement.  

On May  4,  2005,we completed a private placement with Satellite Strategic FinanceAssociates, LLC and Satellite Strategic Finance Partners, Ltd. of 5,000shares of our 6% Series A Convertible Redeemable PreferredStock, par value $.001 per share, and warrants to purchase 2,000,000shares of common stock. The placement was made pursuant to a SecuritiesPurchase Agreement, dated May  3,  2005 and the grossproceeds of this transaction were $5,000,000. We repaid out of thegross proceeds the secured notes that we issued to the investors in thebridge financing completed March  30,  2005 and describedabove. After payment of the notes and offering expenses in the amountof approximately $370,000, we received net proceeds of approximately$3,480,000 from this financing. We are using the net proceeds for theproduction, acquisition and distribution of feature films and generalworking capital. The Preferred Stock is convertible at the option ofthe holder into an initial aggregate amount of 2,000,000 shares ofcommon stock, par value $.001 per share, at an initial conversion priceof $2.50 per share; however, as described below, the conversion ratehas been adjusted to $1.00. In addition, we are required to redeem thePreferred Stock (a) on its maturity date, which is three years from theissue date; (b) upon a change of control; or (c) if we commit a defaultunder the transaction agreements. The warrants have an initial exerciseprice of $2.50 per share, are 

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immediately exercisable and expire in sevenyears. The sale of the Preferred Stock and warrants to the Investorswas exempt from the registration provisions of the Securities Act of1933 pursuant to Section 4(2) of the Securities Act and/or RegulationD. Accordingly, these securities may not be offered or sold in theUnited States absent registration or an applicable exemption from suchregistration requirement.  

Letter of Intent withMyriad Pictures

On March  30,  2005, we enteredinto a Letter of Intent to acquire a privately held company, MyriadPictures, Inc., which is engaged in the film production anddistribution business. The Letter of Intent provided for a purchaseprice of approximately $4,000,000, including an earnout payment of upto $2,000,000. In connection with the execution of the Letter ofIntent, we provided Myriad with a short term loan of $250,000, bearinginterest at the rate of 3% per annum, which Myriad was to usefor working capital and to pay for its acquisition costs pending theclosing (the ‘‘Myriad Loan’’). The MyriadLoan is secured by a lien on the assets of Myriad. As ofFebruary  23,  2006, we notified Myriad that we wereterminating negotiations and the letter of intent, effectiveimmediately. Pursuant to its terms, the Myriad Loan, less certainexpenses incurred by Myriad and its principle stockholders, wasrepayable by March  30,  2006 and we have not receivedrepayment as of the date hereof.

Interests in LimitedPartnerships

In addition to feature films produced directlyby TAG USA and four limited partnerships for which it acts as generalpartner, our Chief Executive Officer has formed five other limitedpartnerships and limited liability companies that have engaged TAG USAto produce and distribute five additional feature length films. Thesecompanies are each managed by Mr. Austin through separateaffiliated companies. TAG USA also acts as the exclusive, worldwidedistributor for both affiliated and unaffiliated limited partnershipsformed for the purposes of financing various movie projects. We areconsidering offering to acquire all of our affiliated and certainunaffiliated limited partnerships for shares of our common stock. Noletter of intent for these acquisitions has been signed and the termsof the proposed acquisitions have not been determined, and there can beno assurance we will be successful in completing the acquisitions.Furthermore, we may determine to acquire less than all of the limitedpartnerships and the structure of any particular acquisition has notbeen determined. However, in the event the acquisitions are completed,the interests of our shareholders will be diluted. The following tablelists each of the limited partnerships that we are currentlyconsidering acquiring, the title of the motion picture it produced andthe identity of its generalpartner.

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| LimitedPartnership           |  | Motion Picture       |  | GeneralPartner                  |
| Majestic FilmPartners LP     |  | Castle Rock          |  | TAGUSA                          |
| Majestic Film Partners II LP |  | No PlaceLike Home    |  | TAG USA                         |
| Majestic Film PartnersIII LP |  | Dumb Luck            |  | TAG USA                         |
| MajesticFilm Partners IV LP  |  | Hansel & Gretel  |  | TAGUSA                          |
| Animal Partners LP           |  | MiracleDogs          |  | Steve Austin Productions, LLC   |
| FamilyFilm Partners VI, LP   |  | The Santa Trap       |  | Austin FamilyEntertainment, Inc |
| Fairy Tale Partners III,LP   |  | Red Riding Hood      |  | Austin Family Entertainment,Inc |
| Motocross Kids LP            |  | Moto XKids           |  | Austin Family Entertainment,Inc |
| Downtown the Movie LP*       |  | Popstar              |  | American Film Ventures,LLC      |
| Supercross The MovieLP*      |  | Supercross           |  | Enriching Entertainment,LLC     |
| American Black Beauty LP     |  | American BlackBeauty |  | Austin Family Entertainment,Inc |
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| * | Denotesthat the subject limited partnership is not affiliated with TAG, TAGUSA or its Chief Executive Officer. |

A description of thesefeature films produced and/or distributed are included below under thecaption ‘‘Films Produced and/or Distributed by TAGUSA.’’

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Industry Overview

MotionPictures

According to the Motion Picture Association of America(the ‘‘MPAA’’), the average theatrical(marketing and negative costs) costs of MPAA member companies (largestudios) in 2005 remained in line with 2004 ($96.8 v. $96.2million), but below the $100  million peak of 2003, despiteincreasing marketing costs of 5.2%. The average theatrical costsof MPAA members’ subsidiaries (defined as studio‘‘classics’’ and specialty studios such asFox Searchlight, Miramax) declined by 6.4% from about$40.4  million in 2004 to $37.8  million in 2005. With theexception of Supercross, we have limited our production costs toa maximum of $10  million for each of our motion pictures.Despite the limited resources generally available to independentstudios, independent films have gained wider market approval andincreased share of overall box office receipts in recent years. Themotion picture industry consists of two principal activities:production and distribution. Production involves the development,financing and production of feature-length motion pictures.Distribution involves the promotion and exploitation of motion picturesthroughout the world in a variety of media, including theatricalexhibition, home entertainment, television and other ancillarymarkets.

In its 2005 MPA Market Statistics for the U.S.Entertainment Industry, the MPAA found that the motion picture industryhas continued its growth, both domestically and internationally andthat, since 1991, box office receipts have steadily increased and hasgrown, overall, by almost $6  billion over the past 20 years. TheMPAA Report shows that box office receipts increased from $7.66billion in 2000 to a high of $9.54  billion in 2004 with a slightdecrease in 2005 to $8.99  billion. The MPAA Report indicatedthat the global box receipts, though down from a high of $25billion in 2004 remained robust at $23  billion in 2005, anamount 46% percent higher than the 2000 box office receipts of$16  billion. In 2005, an all time high was set when 8 movies(all but one was rated PG-13 or lower) each grossed over $200million in the domestic box office. Total theater admissions, however,decreased from about 1.54  billion patrons in 2004 to 1.4billion patrons in 2005, a decrease of about 8.7%. As apercentage of entertainment options available, movie going outdrewtotal attendance at theme parks, sporting events combined (1.4billion to 468  million), the MPAA determined. We believe thisindustry performance and growth potential will enable us tosuccessfully compete in this industry.

TelevisionProgramming

We believe that television programming alsoconstitutes a growth market for us. The continued growth of the cableand satellite television markets, has increased demand for televisionprogramming in general. According to industry data, spending on cableand satellite television increased 10.2% to $76.9  billionin 2002. Cable and satellite television has been one of the mostconsistently fast-growing media segments over the past five years andspending is expected to increase through the near term. Based on suchdata, we believe that the increased capacity for channels on upgradeddigital cable systems and satellite television has led to the launch ofnumerous new networks seeking programming to compete with traditionalbroadcast networks. We believe this will enable us to will enable us tosuccessfully compete in this industry.

Competition

Motion picture production and distribution are highly competitivebusinesses. We face competition from companies within the entertainmentbusiness, as well as from alternative forms of leisure entertainment.We compete with the other major studios, numerous independent motionpicture and television production companies, television networks andpay television systems for the acquisition of literary properties, theservices of performing artists, directors, producers and other creativeand technical personnel and production financing. Numerousorganizations with which we compete in the motion picture industry havesignificantly greater financial and other resources than us.

TheU.S. motion picture industry can be divided into major studios andindependent companies, with the major studios accounting for a largemajority of the number of theatrical releases. The major studios areMGM (including UA Films and Orion), The Walt Disney Company (includingBuena 

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Vista, Touchstone and Miramax Films),Paramount Pictures Corporation, Sony Pictures Entertainment, Inc.(including Columbia Pictures), Twentieth Century Fox Film Corp.,Vivendi Universal Entertainment LLP (including Universal Studios andUniversal Focus) and Warner Bros. (including Turner, New Line Cinemaand Castle Rock Entertainment). The major studios are typically largediversified corporations that have strong relationships with creativetalent, exhibitors and others involved in the entertainment industry,and have global film production and distribution capabilities.

Historically, the major studios have produced and distributed themajority of high grossing theatrical motion pictures released annuallyin the United States. In addition, most of the studios have created oraccumulated substantial and valuable motion picture libraries thatgenerate significant revenues. These revenues can provide the majorstudios with a stable source of earnings that partially offset thevariations in the financial performance of their current motion picturereleases and other aspects of their motion picture operations.

The independent companies generally have more limited production anddistribution capabilities than do the major studios. While certainindependent companies may produce as many films as a major studio inany year, independent motion pictures typically have lower negative andmarketing costs and are not as widely released as motion picturesproduced and distributed by the major studios. Additionally, theindependent companies may have limited or no internal distributioncapability and may rely on the major studios for distribution andfinancing. These companies include Lions Gate Entertainment Corp.,Dreamworks SKG and Newmarket Films.

In addition, our motionpictures compete for audience acceptance and exhibition outlets withmotion pictures produced and distributed by other companies. As aresult, the success of any of our motion pictures is dependent not onlyon the quality and acceptance of a particular picture, but also on thequality and acceptance of other competing motion pictures released intothe marketplace at or near the same time. The number of films releasedby our competitors, particularly the other major film studios, in anygiven period may create an oversupply of product in the market, therebypotentially reducing our share of gross box office admissions andmaking it more difficult for our films to succeed.

Competitionis also intense within the television industry. There are numeroussuppliers of television programming, including the networks, thetelevision production divisions of the major studios and independentproducers, all of which compete actively for the limited number ofavailable broadcast hours. Our programming competes with first-runprogramming, network reruns and programs produced by local televisionstations. Competition is also intense in supplying motion pictures andother programming for the pay television and home video markets.Numerous organizations with which we compete in the television industryhave significantly greater financial and other resources than us.

Our Competitive Strengths and Strategy

Our strategy is toproduce family oriented entertainment products (primarily featurelength motion pictures intended for initial theatrical distribution)appealing to a wide segment of the United States and the internationaltheatrical and television audience. As confirmed by box officereceipts, the family entertainment market has consistently accountedfor a large percentage of the annual gross revenues produced by motionpictures. For example, according to the MPAA, since 1968, nine of thetop 10 grossing movies (based on U.S. Box Office figures) were allrated PG-13 or lower. Overall, sixteen of the top 20 grossing moviesduring same period were rated PG-13 or lower. In 2005, the top threegrossing domestic box office films were, ‘‘Star Wars:Episode III Revenge of the Sith’’ ($380.3 million (ratedPG-13);) ‘‘Harry Potter and the Goblet ofFire’’ ($289.2 million (rated PG-13)) and‘‘The Chronicles of Narnia’’ ($288.8million (rated PG)) all of which were family oriented movies,though each was, notably, the product of major studios with budgets inexcess of one hundred million dollars ($100 Million). Overall,according to the MPAA, 18 of the top 20 grossing films of 2005 wererated PG-13 or lower. This trend, exhibiting a preference for familyoriented films, is also manifested in the sale of home video devices,such as DVDs and videocassettes, where 16 of the top 20 highestgrossing sales of such devices in 2004 are for films which were ratedPG-13 or lower for gross sales of approximately $3.45  billion ona combined 14.55  million units sold.

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We also believe that our target group ismore predictable in their entertainment preferences than other segmentsof the entertainment consumer market, and‘‘evergreen’’ in that younger children arenot as likely to reject a motion picture as dated or lacking wellknown, contemporary stars. Family films are less likely to generatecontroversy that might adversely reflect on us and harm the prospectsfor a film’s successful distribution. These factors also allowus to produce, market and distribute feature length films withrelatively modest budgets as compared to mainstream motion picturesdirected towards an older, more mature audience.

We plan tobuild and capitalize on our film and television libraryby:

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|  | •  | Producing new motion pictures andtelevision series; |

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|  | •  | Aggressivelymarketing and repackaging our library’stitles; |

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|  | •  | Developing new distributionchannels; |

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|  | •  | Acquiring additional motionpictures and televisionseries; |

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|  | •  | Capitalizing on developments intechnology; and |

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|  | •  | Exploiting internationalmarkets. |

Production and Financing

MotionPictures

The production of a motion picture requires thefinancing of the direct costs and indirect overhead costs ofdevelopment, production and production related services. Directproduction and production related service costs include film studiorental, cinematography, post-production costs and the compensation ofcreative, services and other production personnel. Distribution costs(including costs of advertising and release prints) are not included indirect production costs. The following general description is asimplified overview of the complex process of producing anddistributing motion pictures and is intended to aid in understandingthe motion picture business. This overview is provided forinformational purposes only and does not describe what will necessarilyoccur in the production of a motion picture by us. During thefilm-making process, which may take, on the average, approximately 12to 24 months from the start of the development phase to theatricalrelease, a film progresses through several stages. The four generalstages of motion picture production are development, pre-production,principal photography and post-production. A brief summary of each ofthe four general movie production stagesfollows:

Development

In the developmentstage, underlying literary material for a motion picture project isacquired, either outright, through an option to acquire such rights orby engaging a writer to create original literary material. If theliterary material is not in script form, a writer must be engaged tocreate a script. The script must be sufficiently detailed to providethe production company and others participating in the financing of amotion picture with enough information to estimate the cost ofproducing the motion picture. Projects in development do not alwaysbecome completed motion pictures for a wide variety ofreasons.

Pre-Production

During thepre-production stage, the production company usually selects adirector, actors and other key creative and technical personnel,prepares a budget and secures the necessary financing. In casesinvolving unique or desired talent, commitments (sometimes known as‘‘pay or play’’ commitments, under whichtalent must be paid certain fixed compensation, whether or not apicture is actually produced) must be made to keep performers availablefor the picture. Some pre-production activities may occur duringdevelopment.

PrincipalPhotography

Principal photography is the process of filminga motion picture and is the most costly stage in the production of amotion picture. Principal photography may take up to twelve weeks tocomplete 

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for some projects. Bad weather at locations,the illness of a cast or crew member, disputes with local authoritiesor labor unions, a director’s or producer’s decision tore-shoot scenes for artistic reasons and other often unpredictableevents can materially delay the scheduled completion of principalphotography and substantially increase its costs. Once a motion picturereaches the principal photography stage, it usually will be completed,unless the producer is shooting in increments as funds becomeavailable, a practice born out of necessity existing in the independentfeature film world to some degree. The cost of assuring its completioncan sometimes be insured by means of a bonding instrument commonlyknown as a completion bond. Completion bonds however will addsubstantially to the cost of producing a motionpicture.

Post-Production

During thepost-production stage, the editing of the raw footage and the scoringand mixing of spoken-word dialogue, music and sound effects tracks takeplace, and negative and positive master printing elements are prepared.Production costs incurred in connection with motion picture productionare typically divided between above-the-line costs and below-the-linecosts. Above-the-line costs include story rights and screenplay, feesto the producer and director and major members of the cast.Below-the-line costs include fees to creative personnel including thedirector of photography, production designer and casting director,production facilities (sound stage, film lab, editing room) andlocation rentals, equipment rentals, raw materials (raw film stock, setconstruction) and other costs incurred in principal photography andpost-production costs, including the creation of special effects andmusic.

Financing

Independent productioncompanies generally finance their production activities on apicture-by-picture basis. Sources of funds for independent producersinclude bank loans, ‘‘pre-licensing’’ ofdistribution rights in exchange for minimum guarantees, motion pictureparticipation interests, joint ventures and public motion picturesupport programs which include tax funds, tax credit provisions, andother governmental sources of capital for the motion pictureindustry.

Independent production companies generally attempt toobtain all or a substantial portion of their financing for a motionpicture prior to commencement of principal photography, at which pointproduction costs begin to be incurred. Obtaining license agreementswith a distributor or distributors prior to completion of a motionpicture which provide for payment of a minimum guarantee (oftenreferred to as the ‘‘pre-licensing’’ or‘‘pre-selling’’ of motion picture rights),may enable the producer to obtain financing for its project by usingthe contractual commitment of the distributor to pay the minimumguarantee as collateral to borrow production funding. Independentproduction companies typically finance production of their motionpictures pursuant to financing arrangements with banks and otherlenders in which the lender receives an assignment of the productioncompany’s right to payments of minimum guarantees by itsdistributors upon the delivery of the completed motion picture. Thelenders are granted a security interest in the motion picture until thefinancing has been repaid. The independent production company may alsobe able to acquire additional production funds through‘‘gap financing’’, whereby a lender loans aportion of the production costs based on the company’s estimateof the value of certain distribution rights. When the motion picture isdelivered, the independent production company collects the minimumguarantees and uses them to repay the lender. In addition, theindependent production company receives a production fee and generallyretains a participation in net revenues from distribution of the motionpicture.

As part of obtaining motion picture financing,independent production companies may be required by their lenders anddistributors who advance production costs to obtain a completion bondfrom an acceptable completion guarantor which names the lenders,distributors and other parties who advance production costs asbeneficiaries. The guarantor guarantees the completion and delivery ofthe particular motion picture by a certain date and within an agreedbudget and contingency and if the motion picture cannot be completedfor the agreed upon budgeted cost, the completion guarantor isobligated to pay the additional costs necessary to complete and deliverthe motion picture by the agreed upon delivery date. If the completionguarantor fails to complete and deliver such motion picture on time,the completion guarantor is required to pay the financiers anddistributors, if 

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applicable, an amount equal to the aggregateamount the financiers and distributors have loaned or advanced to theindependent producer.

Television Production

Theproduction of television series programming involves the development ofa format based on a creative concept or literary property into atelevision script, the hiring of talent, the filming or taping of theprogram and the technical and post-production work necessary to producea finished program. Television producers may originate projectsinternally or acquire them from others. If a concept is deemed suitablefor development, the studio, network or other producer typicallycommissions and pays for a script. Once a script is ordered, licenseagreements are negotiated with the potential broadcasters of suchprogram. A pilot episode usually is ordered prior to the determinationof whether a series will be produced.

Television production cangenerally be divided into two distinct markets: (a) network production,consisting of production for the broadcast networks (i.e., ABC, CBS,NBC, FOX, UPN and WB) and made-for-cable networks (i.e., pay and basiccable networks) and (b) first-run syndication production. In broadcastnetwork and made-for-cable network production, a network generallyorders a minimum number of initial episodes (approximately six to 13episodes if produced for a broadcast network and approximately 13 to 22episodes if produced for a cable network) of each new series for alicense fee equal to a percentage of the program’s cost. Thebalance of the production cost for such shows (which is customarilylower for made-for-cable productions than for productions made forbroadcast networks) is recouped through international sales and, if aseries is successful, through syndication, second run domestic basiccable, and home entertainment sales. However, it may take up to fouryears until all the production costs are recouped. In the first-runsyndication production business, a producer seeking to launch a newseries, commits to produce a minimum number of episodes if the producercan ‘‘clear’’ the series by selling toindividual television stations in sufficient markets throughout thecountry (generally comprising at least 75 percent of U.S. televisionhouseholds). Once produced, the episodes are immediately available forlicensing to international broadcasters as well and can subsequently belicensed to a domestic basic cable network. This approach generallyinvolves a lower production cost risk and earlier return on investmentthan the network production business; however, first-run syndicatedprogramming generally reduces the potential total return on investmentas compared to successful network production.

Feature Films andTelevision Series We Have Produced and Financed

Since ourinception, we have produced and/or distributed a total of 15 films and21 episodes of the Arizona Highways television series. Of thesefilms, three were produced in 2005 and one additional film is inpreproduction. We have produced these films either independently, whileserving as the general partner of limited partnerships or on a contractbasis on behalf of other limited partnerships, including (in certaincases) entities owned or controlled by our Chief Executive Officer. Ineach case, the limited partnership was created specifically for thepurpose of serving as a vehicle to finance each particular film.Arizona Highways was produced directly by TAG USA for RobinSewell Communications, which retained the distribution rights to thecontent. As described in detail below, the films we produce and/ordistribute are typically financed through the sale (to unaffiliatedinvestors) of limited partnership interests by the limited partnershipentity that holds the ownership rights to the particular films. We havealso raised capital for production costs through sales of equity ordebt securities to accredited and or institutional investors in privateplacements pursuant to the exemption from registration provided byRegulation D under the Securities Act of 1933. In addition, we havebeen able to obtain substantial advances from our distributors for theproduction of certain of our motion pictures.

We have producedone film, ‘‘The Retrievers’’directly and produced four other films through four consolidatedlimited partnerships (each of the Majestic Film Partners entities) forwhich we serve as general partner and we are entitled to receive adistribution fee. Of the other films produced by limited partnershipentities that we do not control, five are for limited partnerships forwhich Steve 

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Austin, through an affiliated entity, servesas general partner. The remainder are limited partnerships that have anunaffiliated general partner. General partner fees are paid to thegeneral partner, as described below under the caption‘‘Limited Partnership Arrangements.’’ Withrespect to these unaffiliated motion pictures, we have entered intoformal production and distribution agreements with the general partner.We include these projects in our library of family oriented featurefilms, which we present to distribution companies. We have, however, noownership interests in these films.

With respect to each of thefilms referred to above, we serve as the producer and/or exclusiveworldwide distributor for each and seek to arrange distribution withsub-licensees for the commercial exploitation of these films. Revenuesreceived from the distribution and exploitation of these films arereceived directly by us or a sub-distributor. We have entered intodistribution agreements with each of the limited partnerships for theworldwide distribution of the motion pictures by or on behalf of suchlimited partnerships, as described in the table set forth below underthe heading ‘‘Films Produced and Distributed by TAGUSA.’’ We will be paid normal and customary industry feesif and in the event it succeeds in arranging for distribution of thesefilms.

Recent Motion Picture ProductionActivity

As summarized below, we recently produced threemotion pictures. In addition, we have one additional film inpre-production. This table is provided for illustrative purposes onlyand the films may never be commercially distributed or completed. Wehave produced these films pursuant to production agreements we haveentered into with non-affiliated limited partnerships that control therights to thefilms.

|                          |  |             |  |                                     |  |                                                                 |  |  |  |  |  |  |  |  |
|--------------------------|--|-------------|--|-------------------------------------|--|-----------------------------------------------------------------|--|--|--|--|--|--|--|--|
| MotionPicture            |  | Producer(s) |  | Stage ofProduction                  |  | Anticipated ReleaseDate                                         |
| TheLegend of WilliamTell |  | TAGUSA      |  | Completed and available fordelivery |  | 2006                                                            |
|                     |  |        |  |                                |  |                                                            |
| WildStallion             |  | TAG USA     |  | Post-Production                     |  | 2006                                                            |
|                     |  |        |  |                                |  |                                                            |
| MiracleDogs 2            |  | TAG USA     |  | Completed                           |  | All Media—Domestic — 2006 International —2006 |
|                          |

Limited PartnershipArrangements

The films we produce and distribute aretypically financed films through the sale (to unaffiliated investors)of limited partnership interests in the limited partnerships that havebeen created as vehicles to finance each particular film. The limitedpartnership interests in the limited partnerships are offered byprivate placement to accredited investors who subscribe for theinterests based on exemptions granted under the Securities Act of1933.

Investors who subscribe to the limited partnershipinterests are entitled to recoup their investment and then share in theprofits with TAG USA, depending on several factors. With respect to thelimited partnerships, including those to which TAG USA is the generalpartner, in the event that the project succeeds in returning proceedsto the partnership from the commercial exploitation of the film, and tothe extent funds are available, the limited partners are entitled toreceive their money back out of 100% of the distributable cashof the limited partnership. The percentage to which a general partneris entitled typically ranges from 10%-25% of thedistributable cash. Distributable cash is the gross partnership revenueminus the limited partnership operating expenses (including fees paidto the distributor), necessary reserves, all costs of the production ofthe film not paid by the partnership (such as loans) and any defermentsor points entitlements. In each case, after the limited partnersreceive their capital contributions in full, plus interest (asapplicable) distributable cash, if any, is typically divided betweenthe general partner and the limited partners on a 60:40 ratio. Theratio may, however, vary depending on the limited partnership entity.The general partner may further distribute a percentage of availablecash to third party distributors and licensees. As describedpreviously, we may make an offer to acquire all of our affiliated andcertain of the non-affiliated 

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limited partnerships for shares of ourcommon stock. However, no letter of intent for these acquisitions hasbeen signed, the terms of the proposed acquisitions have not beendetermined, and there can be no assurance we will be successful incompleting the acquisitions.

Typically, under the distributionagreements between TAG USA and the limited partnerships, TAG USA willpay each of the limited partnerships 70% of all the grossreceipts actually received by TAG USA in connection with the rental andexhibition of the movies in theatres, homes and television, whichamount is reduced by amounts paid to third parties in the form ofdeferrals and deferments. Additionally, TAG USA may, in certaininstances, receive royalties on the sale of each of the movies in DVDor other home video format, including videocassettes, which aretypically on the following terms:

|  |              |                                                                                                                                                                                              |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | wherethe video devices are manufactured and distributed by TAG USA, it willretain 25% of all of the gross receipts received on the sale ofsuch video devices which are sold and notreturned; |

|  |              |                                                                                                                                                                                                                                                                                     |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | where the video devices aredistributed by TAG USA pursuant to a sublicense agreement with anaffiliated entity (where TAG USA is more than 50% owner), thenTAG USA will earn royalties equal to 25% of the affiliatedentity’s gross receipts from the sublicenseddistribution; |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                   |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | where the video devicesare distributed by TAG USA pursuant to a sublicense agreement betweenTAG USA and a party other than an affiliated entity, then TAG USA willearn royalties equal to 75% of the third-party’s grossreceipts from the sublicensed distribution exclusive of manufacturingcharges and out-of-pocket expenses incurred in connection with thegrant of the sublicense; and |

|  |              |                                                                                                                                                                                                                                                                                     |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | where TAGUSA markets the video devices directly to consumers then the royaltiesfor such sales will be equal to the amounts of video devices sold andnot returned multiplied by the average wholesale royalty (defined termin each contract) of video devices containing thepicture. |

Our Films and TelevisionSeries

Films Produced and/or Distributed by TAGand TAG USA

The films that we have produced and/ordistributed are summarized below with principal talent and a briefsynopsis for eachproduction.

|                                            |  |                    |  |                |  |        |  |                                                                                                                                            |  |                                                                                                                                       |  |  |  |  |  |  |  |  |  |  |  |  |
|--------------------------------------------|--|--------------------|--|----------------|--|--------|--|--------------------------------------------------------------------------------------------------------------------------------------------|--|---------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|--|--|--|--|--|--|
| GeneralPartner/LimitedPartnership          |  | MotionPicture      |  | ProductionDate |  | Rating |  | Cast andDirector                                                                                                                           |  | Synopsis                                                                                                                              |
| TAG USA / Majestic Film PartnersLP (1)     |  | Castle Rock        |  | 1999           |  | G      |  | Cast: Ernest Borgnine, Frank Gorshin, PamelaBach, Wolf Larson, Alana Austin and Robert Velasco Director: CraigClyde                        |  | An unruly teenage girl and a young drifter, running fromthe law, find themselves thrown together in a harrowing struggle forsurvival. |
| TAG USA / Majestic Film Partners II LP(1)  |  | No Place Like Home |  | 2000           |  | G      |  | Cast: Judge Reinhold, Joanna Pacula, Bruce Weitz, Richard Moll,Adrienne Barbeau, Alana Austin and Clayton Taylor Director: CraigClyde      |  | After witnessing a celestial collision, two brothersstumble upon a strange young visitor.                                             |
| TAG USA /Majestic Film Partners III LP (1) |  | Dumb Luck          |  | 2000           |  | G      |  | Cast: Scott Baio, Tracy Nelson, RichardMoll, Hal Linden, Eileen Brennan, Joey Miyashima, Todd Bridges andBobby Edner Director: Craig Clyde |  | A simple blind dateplunges a father and son headlong into a mystery full of lies,half-truths and deceptions                           |
|                                            |

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|                                                                    |  |                           |  |                |  |        |  |                                                                                                                                                                                  |  |                                                                                                                                                                                                     |  |  |  |  |  |  |  |  |  |  |  |  |
|--------------------------------------------------------------------|--|---------------------------|--|----------------|--|--------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|--|--|--|--|--|--|
| GeneralPartner/LimitedPartnership                                  |  | MotionPicture             |  | ProductionDate |  | Rating |  | Cast andDirector                                                                                                                                                                 |  | Synopsis                                                                                                                                                                                            |
| TAG USA / Majestic Film Partners IVLP (1)                          |  | Hansel &Gretel        |  | 2001           |  | PG     |  | Cast: Lynn Redgrave, HowieMandel, Delta Burke, Gerald McRaney, Bobcat Goldthwait, Dakota Fanning,Alana Austin, Sinbad, Tom Arnold and Taylor Momsen Director: GaryJ. Tunnicliffe |  | A fractured version of the popular fairy taleclassic.                                                                                                                                               |
| N/A Film produced directly by TAGUSA                               |  | The Retrievers            |  | 2001           |  | G      |  | Cast:Robert Hays, Mel Harris, Alan Rachins, Alana Austin, Taylor Emerson,Betty White and Robert Wagner Director: Paul Schneider                                                  |  | Agolden retriever is pregnant and leads its human family on an adventurethat shows what it means to be a family.                                                                                    |
| SteveAustin Productions, LLC / Animal Partners LP (2)              |  | MiracleDogs               |  | 2002           |  | G      |  | Cast: Kate Jackson, TedShakelford, Stacy Keach, Rue McClanahan, Daniel Roebuck, Alana Austin,Wayne Rogers Director: Craig Clyde                                                  |  | Four puppies,recently abandoned in town, are in need of adoptive homes. The littledogs have a healing effect on people withillnesses.                                                               |
| Austin Family Entertainment, Inc. /Family Film Partners VI, LP (2) |  | The SantaTrap             |  | 2002           |  | G      |  | Cast: Shelley Long, RobertHays, Dick van Patten, Corbin Bernsen, Stacy Keach, Amanda Pays,Adrienne Barbeau Director: John Shepphird                                              |  | It is ChristmasEve and in a case of mistaken identity, Santa Claus is thrown in jailand must be freed in order to save Christmas.                                                                   |
| AustinFamily Entertainment, Inc. / Fairy Tale Partners III, LP(1)  |  | Red Riding Hood           |  | 2005           |  | G      |  | Cast:Lainie Kazan, Joey Fatone, Deb Mazar, Daniel Roebuck, Henry CavillDirector: Randal Kleiser                                                                                  |  | A contemporary musical version of theclassic fairytale.                                                                                                                                             |
| Austin Family Entertainment, Inc./ Motocross Kids LP (3)           |  | Moto XKids                |  | 2003           |  | PG     |  | Cast: Lorenzo Lamas, JoshHutcherson, Gary Busey, Alana Austin Director: RichardGabai                                                                                             |  | Evan Hanson needs to save a local dirt track from amotorcycle gang.                                                                                                                                 |
| American Film Ventures / Downtownthe Movie LP (5)                  |  | PopStar                   |  | 2005           |  | PG     |  | Cast: Aaron Carter, AlanaAustin, Kimberly Kevon Williams, David Cassidy, Leif Garrett, RickOverton, Tom Bosley Director: Richard Gabai                                           |  | Teen popstarJ.C McQueen gets caught playing strip poker with his attractivepersonal teacher and his parents send him back to‘‘regular’’school.                              |
| Enriching Entertainment / Supercross TheMovie LP(4)                |  | Supercross                |  | 2005           |  | PG-13  |  | Cast:Aaron Carter, Steve Howey, Sophia Bush, Mike Vogel, Cameron Richardson,Darryl Hannah, Dan Roebuck, Jeremy McGrath Director: SteveBoyum                                      |  | ‘‘Supercross’’ tells thestory of two brothers who must overcome a series of emotional andphysical obstacles to achieve success in the world of supercrossmotorcycle racing. |
| Austin Family Entertainment, Inc./ American Black Beauty LP (3)    |  | American BlackBeauty      |  | 2005           |  | G      |  | Cast: Dean Stockwell, PeterJason, Leah Lail, Danielle Keaton, Chris Hunter, Ryan LockeDirector: Sam Pillsbury                                                                    |  | Life changes dramatically when Cherylmeets Black Beauty, a beautiful, fast and slightly temperamental younghorse.                                                                                   |
| Wild Stallion Productions, LP / American FilmVentures, LLC (6)     |  | The WildStallion          |  | 2006           |  | PG     |  | Cast: Robert Wagner, PaulSorvino, Connie Selleca, Fred Ward, Miranda Cosgrove, DanielleChurchran                                                                                 |  | Young girl, sent to stay with family friends at anUtah ranch, investigates mysterious disappearances of wildmustangs.                                                                               |
| Animal Film Productions, LP / AmericanFilm Ventures, LLC(6)        |  | Miracle Dogs2             |  | 2006           |  | G      |  | Cast: Janine Turner, PatrickMuldoon, Leslie Ann Warren, Charles Durning and JaleelWhite                                                                                          |  | Young boy seeks to save lost dogs from pair ofmisfits.                                                                                                                                              |
| Timeless Tales II LP / EnrichingEntertainment, LLC (7)             |  | The Legend of WilliamTell |  | 2006           |  | G      |  | Cast: Ed Begley, Jr., CindyWilliams, Robert Torti, Adam Taylor Gordon                                                                                                            |  | A modern take on atimeless legend — a classic underdogstory.                                                                                                                                  |
|                                                                    |

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|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                           |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | TAGUSA will receive fees and royalties for acting as the distributor, asdescribed above, and it (or the general partner) will also receive adistribution from the limited partnership for its service as generalpartner, as described above under the caption ‘‘LimitedPartnershipArrangements.’’ |

|     |                                                                                                                                                                                                                                                                                                                                       |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | TAG USA willreceive fees and royalties as the distributor as described above. Thegeneral partner of the limited partnership will receive an initialdistribution from the limited partnership equal to 25% of thedistributable cash as well as a 60% distribution after thelimited partners receive 100% of their capitalcontribution. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                  |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | TAG USA will receive fees androyalties as the distributor as described above. The general partner ofthe limited partnership will receive an initial distribution from thelimited partnership equal to 10% as well as a 50%distribution after the limited partners receive 100% of theircapital contribution, except in certain circumstance as applicable tothe limited partners in this entity. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (4) | TAG USAwill receive fees and royalties as the distributor equal to 30%of the gross receipts generated by the film plus a producer fee of30% of the gross receipts of the film. TAG USA will also beentitled to receive distributions pari passu with the limitedpartners, in proportion to its investment in the entity. After thelimited partners receive 100% of their capital contribution, TAGUSA and the general partner of the limited partnership will shareequally all subsequent revenues unless TAG exercises its option topurchase the film outright. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (5) | TAG USA willreceive fees and royalties as the distributor equal to 30% ofthe gross receipts generated by the film plus a producer fee of30% of the gross receipts of the film. The general partner ofthe limited partnership will receive an initial distribution from thelimited partnership equal to 25% of the distributable cash aswell as a 60% distribution after the limited partners receive100% of their capitalcontribution. |

|     |                                                                                                                                                                                                                                                  |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (6) | TAG USA will receive adistribution fee equal to 30% of gross revenues inclusive of anysub-distribution fees of up to 25%, not including expenses. TAGUSA will also receive production fees to be paid in installments untilthe delivery of film. |

|     |                                                                                                                                                                                   |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (7) | TAG USA expects toreceive production and distribution fees for this motion picture onterms similar as to those that apply for the motion pictures designatedat footnote 6, above. |

Feature Film RightsAcquired

In September  2002, TAG USA entered into anagreement with Faber International Films, Inc. to acquire certainrights to certain motion pictures that at one time comprised what waspreviously known as the Hemdale Pictures Library. Although the HemdalePictures Library, as acquired by TAG USA, does not includeHemdale’s most successful motion pictures such as‘‘The Terminator’’,‘‘Platoon’’ or ‘‘The LastEmperor’’, it consists of more than sixty-four featurelength motion pictures of varying ages, histories, qualities andcommercial potential. Among the rights which TAG USA acquired under theFaber Agreement, are the rights to distribute and exploit certain filmstheatrically, non-theatrically, by means of various forms of televisionand/or home video.

However, TAG USA did not acquire all rights inall media (and for all methods of distribution) to all of the motionpictures in the Hemdale Pictures Library. We have, however, re-acquiredand/or extended some rights respecting motion pictures previouslyincluded in the Hemdale Pictures Library directly from the holders.Further, we are currently in negotiations with the producers of anumber of other films that were originally within the scope of ouragreement with Faber. We have typically agreed to revenue-sharingarrangements with the producer or grantor of the acquired motionpicture regarding the proceeds derived from the successful distributionof these films.

The following table lists the motion pictures andtheir related rights which we acquired from third parties as well asthe status of any distribution arrangements we have entered into inconnection with thesefilms.

|                              |  |                                                             |  |                                                |  |                          |  |  |  |  |  |  |  |  |
|------------------------------|--|-------------------------------------------------------------|--|------------------------------------------------|--|--------------------------|--|--|--|--|--|--|--|--|
| MotionPicture Title          |  | AcquiredRights/Limitations                                  |  | Producer/Grantor                               |  | DistributionArrangements |
| ThePrincess & the Goblin |  | Rights to all media in the U.S. 7year term.                 |  | Pennaeth Gwerthiant Rhaglenni/S4CInternational |  | UAVCorp.                 |
| Wrangler                     |  | Television and homeentertainment in the U.S. in perpetuity. |  | Hemdale PicturesCorp.                          |  | UAV Corp.                |
| The Polar Bear King          |  | Television and home entertainment in the U.S. 7 yearterm.   |  | Screen Media Ventures LLC                      |  | UAVCorp.                 |
| Shergar                      |  | Home entertainment in theU.S. 7 year term.                  |  | Blue Rider Entertainment, Inc.                 |  | UAVCorp.                 |
| The Littlest Viking          |  | Rights to allmedia in the U.S. 7 year term.                 |  | OdysseyPictures                                |  | N/A                      |
| Mosquito                     |  | Rights to allmedia in the U.S. 7 year term.                 |  | Icebound, Inc.                                 |  | Sci-FiChannel            |
| The Story of Christmas       |  | Rights toall media in the U.S. 7 year term.                 |  | Hemdale CommunicationsInc.                     |  | UAV Corp.                |
|                              |

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TelevisionSeries

In 2004, TAG USA produced and delivered 21 episodesof the television series Arizona Highways: The TelevisionSeries. We produced this series for Robin Sewell Communications andit is being exhibited through local television broadcasts. Thisproduction takes viewers to Arizona’s most spectaculardestinations, exploring its landscape, history, culture and people.Each episode features vital information for tourists, includinglodging, restaurants and activities for visitors. Our production ofthis series was undertaken on a work for hire basis and we recorded atotal $404,000 in revenue from thisarrangement.

Distribution

MotionPictures

Distribution of a motion picture involvescommercial exploitation in the U.S. and international licensing of thepicture for:

|  |              |                       |
|--|--------------|-----------------------|
|  | •  | theatricalexhibition, |

|  |              |                                      |
|--|--------------|--------------------------------------|
|  | •  | videocassettes, laser discsand DVDs, |

|  |              |                                                                                                                                                                                                                |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | presentation on television,including pay-per-view, pay, network, syndication and basic cable,merchandising of the other rights in the motion picture, which mayinclude books, soundtracks, and video games,and |

|  |              |                                                                                                     |
|--|--------------|-----------------------------------------------------------------------------------------------------|
|  | •  | non-theatrical exhibition, whichincludes airlines, cruise ships, hotels and armed forcesfacilities. |

Production companies with distribution divisions,such as the major studios, typically distribute their motion picturesthemselves. Production companies without distribution divisionstypically retain the services of sales agents or distributors toexploit the motion pictures produced by them in various media andterritories, or in all media and territories. Distribution companiesmay directly exploit distribution rights licensed to, or otherwiseacquired by them, for example, by booking motion pictures withtheatrical exhibitors or selling videocassettes to video retailers.Alternatively, they may grant sub-licenses to U.S. or foreignsub-distributors to exploit completed motion pictures.

A salesagent does not generally acquire distribution rights from the produceror other owner of rights in a motion picture or other content, butinstead acts as an agent on behalf of the production company or rightsowner to license distribution rights to such motion picture toterritorial distributors in exchange for a sales agency fee, typicallycomputed as a percentage of gross revenues from licenses arranged bythe sales agent.

A territorial distributor generally licenses andtakes a grant of distribution rights to the motion picture for aspecified term in a particular territory and media, in exchange for adistribution fee calculated as a percentage of gross revenues generatedfrom exploitation of the motion picture by the distributor. Theterritorial distributor often agrees to pay the rights owner of thecontent a certain advance or minimum guarantee upon the delivery of thecompleted motion picture, which amount is recouped by the territorialdistributor out of revenues generated from the exploitation of thecontent in particular media or territories. After receiving its ongoingdistribution fee and recouping the advance or minimum guarantee plusits direct release costs (primarily print and advertising costs), theterritorial distributor pays all or a substantial portion of theremainder of revenues to the producer of such motion picture or therights owner (commonly referred to as overages).

In addition toobtaining distribution rights in a motion picture for a limitedduration, a distributor may also acquire all or a portion of thecopyright in such motion picture or program or license certaindistribution rights in perpetuity. Both major studios and independentmotion picture companies often acquire motion pictures for distributionthrough a customary industry arrangement known as a‘‘negative pickup.’’ Under a‘‘negative pickup’’, the studio orindependent motion picture company agrees to pay a specified minimumguaranteed amount to a production company upon completion of productionand delivery of the motion picture in exchange for all rights to themotion picture.

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Distribution expenses, which consistprimarily of the costs of advertising and preparing release prints, arenot included in production costs. These distribution expenses varywidely depending upon the extent of the release and the nature of thepromotional activities.

In connection with the production anddistribution of a motion picture, major studios and independentproduction companies generally grant contractual rights to actors,directors, screenwriters, owners of underlying rights and othercreative and financial contributors to share in revenues from aparticular motion picture. Except for the most sought-after talent,these third-party participations are generally payable after alldistribution fees, distribution expenses, direct production costs andfinancing costs are recouped in full.

DistributionCycle

Concurrently with their initial release in the U.S.,motion pictures are generally released in Canada and may also bereleased in one or more other international markets. As a generalmatter, a motion picture that is released theatrically is typicallyavailable for distribution in other media during its initialdistribution cycle asfollows:

|                                           |  |                                                        |  |  |  |  |
|-------------------------------------------|--|--------------------------------------------------------|--|--|--|--|
| Marketplace/ Media                        |  | Number of months following initial UStheatricalrelease |
| USTheatrical                              |  |                                                   |
|                                      |  |                                                   |
| InternationalTheatrical                   |  | 0– 4 months                                      |
| U.S. Home Video (initialrelease)          |  | 4 – 6 months                                     |
| U.S.Pay-per-view                          |  | 6 – 9months                                      |
| International Home Video (initialrelease) |  | 6 – 12 months                                    |
| U.S. PayTelevision                        |  | 10 – 12months                                    |
| International Television (pay orfree)     |  | 18 – 24 months                                   |
| U.S. FreeTelevision*                      |  | 24 – 36months                                    |
|                                           |

|  |
|--|
|  |  |
|  |

|   |                                               |
|---|-----------------------------------------------|
| * | Includes network,syndication and basic cable. |

The release periods set forthabove represent standard ‘‘holdbackperiods.’’ A holdback period with respect to a certainmedia in which the motion picture is being released represents a setperiod of time during which release of the motion picture in othermedia is prevented. This ‘‘holdback’’ isdesigned to allow the motion picture to maximize its revenues in themedia in which it is currently being released. Holdback periods areoften specifically negotiated with various distributors on amedia-by-media basis; however the periods set forth above represent ourestimate of customary current holdback periods in the motion pictureindustry.

A substantial portion of a motion picture’stotal revenues is generated in a motion picture’s initialdistribution cycle (generally the first five to seven years after themotion picture’s initial U.S. release), which typically includestheatrical, video, and pay and free television. However, commerciallysuccessful motion pictures generally continue to generate revenues fromthe re-licensing of distribution rights in certain media, includingtelevision and home video, and from the licensing of distributionrights with respect to new media and in emerging markets, in additionto the creation of derivative works based on the motion picture such asremakes, sequels and television series.

Although there has been asubstantial increase over the past fifteen years in the revenuesgenerated from the licensing of rights in media other than U.S.theatrical, such as home video, cable and pay-per-view, the theatricalsuccess of a motion picture remains the most significant factor ingenerating revenues in foreign markets and in other media such astelevision and videocassettes. For example, retail video stores havebeen purchasing fewer copies of home videos of motion pictures thathave not been theatrically released, and purchasing more copies ofmajor studio theatrical successes.

TelevisionDistribution

The U.S. television market is served by networkaffiliated stations, independent stations and cable systems, althoughthe number of independent stations has decreased as many formerlyindependent 

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stations have become affiliated with newnetworks in recent years. During ‘‘primetime’’ hours, network affiliates primarily broadcastprogramming produced for the network. In non-prime time, networkaffiliates broadcast network programming, off-network programming,programming produced for distribution on a syndicated basis andprogramming produced by the local stations themselves. Independenttelevision stations and cable networks, during both prime and non-primetime, produce their own programs and telecast off-network programs orfirst-run programs acquired from independent producers or syndicators.Syndicators generally are companies that sell programming toindependent television stations and network affiliates that wasproduced or acquired by the syndicator for distribution. In addition toproducing directly for television, we seek to license our currenttheatrical motion pictures for television exhibition through agreementspursuant to which our films will be distributed through televisionoutlets.

Television distribution can occur through the following:domestic pay or free television, international pay or free televisionand cable and satellite channels.

Our DistributionAgreements

We license motion picture distribution rights toterritorial distributors that offer our movies worldwide. We seek tocontinue to position ourselves as a supplier of family themed movies toU.S. domestic and international distributors. We believe that ourreputation and that of our management enhances our competitive positionin the global market for feature motion pictures. As discussed above,we produced the Arizona Highways television series for RobinSewell Communications, which retained the distribution rights. During2005, we entered into distribution agreements with unaffiliated limitedpartnerships for three new film projects.

The terms of ourlicense agreements with territorial distributors vary depending on theterritory involved and whether the agreement relates to the licensingof a single motion picture or several motion pictures pursuant to an‘‘output’’ or multi-picture arrangement.Generally, our distributors are entitled to royalties based on anegotiated percentage of the revenues derived from the exploitation ofour motion pictures and to recoup advances that they may have providedto us for production. A list of our principal distributors andindividual distribution terms are summarizedbelow:

|                    |  |                              |  |                                                                                         |  |                                                      |  |                                         |  |  |  |  |  |  |  |  |  |  |
|--------------------|--|------------------------------|--|-----------------------------------------------------------------------------------------|--|------------------------------------------------------|--|-----------------------------------------|--|--|--|--|--|--|--|--|--|--|
| Movie              |  | Distributor                  |  | Territories                                                                             |  | RightsMedia                                          |  | Term ofAgreement                        |
| CastleRock         |  | UAV Corporation (1)          |  | North America – EnglishSpeaking                                                   |  | DVD/Home Video                                       |  | 7 years with 6 month sell-offperiod     |
|               |  | First Look Media(2)          |  | International, excluding Canada                                                         |  | Cinematic,Television and Video                       |  | 8 years from date of delivery ofpicture |
| Dumb Luck          |  | First Look Media(2)          |  | International, excluding Canada                                                         |  | Cinematic,Television and Video                       |  | 8 years from date of delivery ofpicture |
|               |  | UAV Corporation (1)          |  | NorthAmerica – English Speaking                                                   |  | DVD/Home Video                                       |  | 7years                                  |
| No Place Like Home |  | First Look Media(2)          |  | International, excluding Canada                                                         |  | Cinematic,Television and Video                       |  | 8 years from date of delivery ofpicture |
|               |  | Sandstar FamilyEntertainment |  | US and territories in English, Spanish, andFrench languages and English speaking Canada |  | Direct Response– DVD and Video Cassettes sales |  | 10years                                 |
|               |  | UAV Corporation (1)          |  | NorthAmerica – English Speaking                                                   |  | DVD/Home Video                                       |  | 7years                                  |
|                    |

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|--------------------|--|-----------------------------------------------------|--|-----------------------------------------------------------------------------------------|--|----------------------------------------------------------|--|-----------------------------------------|--|--|--|--|--|--|--|--|--|--|
| Movie              |  | Distributor                                         |  | Territories                                                                             |  | RightsMedia                                              |  | Term ofAgreement                        |
| The Retrievers     |  | DiscoveryChannel / Animal Planet                    |  | US and Caribbean                                                                        |  | Exhibit,market, sub-license, distribute film on Cable TV |  | 5years                                  |
|               |  | SandstarFamily Entertainment                        |  | US and territories in English, Spanish,and French languages and English speaking Canada |  | DirectResponse– DVD and Video Cassettes sales      |  | 10years                                 |
|               |  | UAV Corporation (1)                                 |  | NorthAmerica – English Speaking                                                   |  | DVD/Home Video                                           |  | 7years                                  |
|               |  | First Look Media(2)                                 |  | International, excluding Canada                                                         |  | Cinematic,Television and Video                           |  | 8 years from date of delivery ofpicture |
|               |  | Feature Films for Families, f/k/aRekab Sudskany LLC |  | US and English speaking Canada                                                          |  | DVDand Videocassettes                                    |  | 7years                                  |
| Hansel &Gretel |  | Warner Brothers Home  Video (3)                     |  | USand Canada and their territories                                                      |  | Television, Home Video andOnline                         |  | 10 years                                |
|               |  | HelkonInternational                                 |  | International                                                                           |  |                                                     |  | 15years                                 |
| Miracle Dogs       |  | Sandstar FamilyEntertainment                        |  | US and territories in English, Spanish, andFrench languages and English speaking Canada |  | Direct Response– DVD and Video Cassettes sales     |  | 10years                                 |
|               |  | UAV Corporation (1)                                 |  | NorthAmerica – English Speaking                                                   |  | DVD/Home Video                                           |  | 7years                                  |
|               |  | Myriad Pictures,Inc.                                |  | International, excluding Canada                                                         |  | Cinematic,Television and Video                           |  | 15 years                                |
|               |  | StarzEntertainment Group (4)                        |  | UUS and territories and theBahamas                                                      |  | Pay Television                                           |  | 24months                                |
|               |  | Showtime Networks (5)                               |  | US and territories and the Bahamas, Bermudaand the Caribbean Basin                      |  | Pay Television                                           |  | 24months                                |
| The Santa Trap     |  | PAXEntertainment                                    |  | US and Territories                                                                      |  | Television                                               |  | Perpetuity                              |
|               |  | UAVCorporation (1)                                  |  | North America – EnglishSpeaking                                                   |  | DVD/Home Video                                           |  | 7years                                  |
|               |  | SoloEntertainment                                   |  | International, excludingCanada                                                          |  | Cinematic, Television and Video                          |  | 10years                                 |
|                    |

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|-----------------|--|----------------------------------------|--|----------------------------------------|--|----------------------------------------------------------------|--|--------------------------------------------------------------------|--|--|--|--|--|--|--|--|--|--|
| Movie           |  | Distributor                            |  | Territories                            |  | RightsMedia                                                    |  | Term ofAgreement                                                   |
| Red Riding Hood |  | 20thCentury Fox Home Entertainment (6) |  | US andCanada                           |  | Theatrical (Test Release) and DVD / Home Video                 |  | 7years                                                             |
|            |  | SoloEntertainment                      |  | International                          |  | All rights.                                                    |  | 20years                                                            |
| Moto X Kids     |  | 20thCentury Fox Home Entertainment (6) |  | US andCanada                           |  | DVD / Home Video                                               |  | 7years                                                             |
|            |  | Loews Cineplex                         |  | US andCanada                           |  | Limited Theatrical                                             |  | 3years                                                             |
|            |  | Warner Bros. DomesticCable             |  | US and Canada                          |  | TV rights for pay, free andbasic                               |  | 20 years                                                           |
| Pop Star        |  | Warner Bros.Domestic Cable             |  | US and Canada                          |  | TV rights for pay, freeand basic                               |  | 20 years                                                           |
|            |  | New Line HomeEntertainment             |  | US and Canada                          |  | All media and format rights(except the Warner Bros. TV Rights) |  | 15 – 20 depending onmedia format                             |
|            |  | 7 ArtsInternational                    |  | International, excludingCanada         |  | Cinematic, Television and Video                                |  | 10 years withoption to extend                                      |
| Supercross      |  | 20thCentury Fox                        |  | U.S. and Canada                        |  | All media andformats                                           |  | 20 years                                                           |
|            |  | 7 ArtsInternational                    |  | International, excludingCanada         |  | Theatrical, Television and Video                               |  | 15 years withoption to extend                                      |
| Shergar         |  | UAV Corporation(2)                     |  | North America – English Speaking |  | DVD/HomeVideo                                                  |  | 7 years                                                            |
| Hemdale Titles  |  | UAVCorporation (7)                     |  | North America – EnglishSpeaking  |  | DVD/Home Video                                                 |  | 7 years                                                            |
| WildStallion    |  | Myriad Pictures (8)                    |  | International                          |  | Allmedia and exhibition formats                                |  | 10 years and upon meeting certainconditions an additional 5 years. |
| Miracle Dogs2   |  | UAV Corporation (9)                    |  | US and Canada                          |  | DVD / HomeVideo                                                |  | 7 years                                                            |
|            |  | Myriad Pictures(9)                     |  | International                          |  | All media and exhibitionformats                                |  | 10 years and upon meeting certain conditions anadditional 5years.  |
|                 |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                            |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | UAVCorporation obtained the right to manufacture, distribute, promote,advertise and sell video devices for the following films: Miracle Dogs,The Retrievers, The Santa Trap, No Place Like Home, Castle Rock andDumb Luck. |

|     |                                                                                                                                                                                                                                                |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | First Look Media has theexclusive right to distribute, exhibit, sell, lease, license andotherwise exploit in foreign markets, excluding the U.S. and Canada thefollowing movies: The Retrievers, Dumb Luck, No Place Like Home andCastle Rock. |

|     |                                                                                          |
|-----|------------------------------------------------------------------------------------------|
| (3) | Time Warner Home Video wasgranted home video, television and online rights for thisfilm. |

|     |                                                                                                 |
|-----|-------------------------------------------------------------------------------------------------|
| (4) | License agreement between All ChannelFilms, as agent for TAG USA, and Starz EntertainmentGroup. |

|     |                                                                                         |
|-----|-----------------------------------------------------------------------------------------|
| (5) | License agreement between All ChannelFilms, as agent for TAG USA, and ShowtimeNetworks. |

|     |                                                                                                                              |
|-----|------------------------------------------------------------------------------------------------------------------------------|
| (6) | 20th Century Fox HomeEntertainment, Inc., has all rights to home video distribution and homevideo exhibition of the picture. |

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|     |                                                                                                                                                                                                                                           |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (7) | UAV obtained the right tomanufacture, distribute, promote, advertise, sell and otherwise exploitvideo devices showing a catalog of four movie titles. See table underthe caption ‘‘Feature Film RightsAcquired.’’ |

|     |                                                                                                                                      |
|-----|--------------------------------------------------------------------------------------------------------------------------------------|
| (8) | Distributionagreement between TAG USA and Animal Film Productions LP.Sub-distribution agreement between TAG and Myriad Pictures,Inc. |

|     |                                                                                                 |
|-----|-------------------------------------------------------------------------------------------------|
| (9) | Sub-distribution agreements between TAGUSA and each of UAV Corporation and Myriad Pictures,Inc. |

Theatrical Exhibition Market

The theatricaldistribution of a motion picture, whether in the U.S. orinternationally, involves the licensing and booking of the motionpicture to theatrical exhibitors (movie theaters), the promotion of themotion picture through advertising and publicity campaigns and themanufacture of release prints from the motion picture negative.Expenditures on these activities, particularly on promotion andadvertising, are often substantial and may have a significant impact onthe ultimate success of the motion picture’s theatricalrelease.

In addition, such expenditures can vary significantlydepending upon the markets and regions where the motion picture isdistributed, the media used to promote the motion picture (newspaper,television and radio), the number of screens on which the motionpicture is to be exhibited and the ability to exhibit motion picturesduring peak exhibition seasons.

With a release by a major studio,the vast majority of these costs (primarily advertising costs) areincurred prior to the first weekend of the motion picture’s U.S.theatrical release, so there is not necessarily an ability to correlatethese costs and the motion picture’s ultimate box officeperformance. In addition, the ability to distribute a picture duringpeak exhibition seasons, including the summer months and theThanksgiving and Christmas holidays, and in the most popular theatersmay affect the theatrical success of a motion picture.

Whilearrangements for the exhibition of a motion picture vary greatly, thereare certain financial relationships generally applicable to theatricaldistribution. Theater owners retain a portion of the admissions paid atthe box office, generally referred to as ‘‘gross boxoffice receipts.’’ The share of the gross box officereceipts retained by them generally includes a fixed amount per week(in part to cover overhead), plus a percentage of receipts thatgenerally escalates over time. The balance, generally referred to as‘‘gross film rentals,’’ is remitted to thedistributor.

As indicated in the table appearing under thecaption ‘‘Our Distribution Agreements,’’ weentered into distribution arrangements for the theatrical exhibition ofthe following films in the United States: Red Riding Hood (on atest basis), Moto X Kids (on a limited basis), Popstarand Supercross. In 2005, Supercross was exhibitedtheatrically on a nationwide basis.

We have also entered intodistribution arrangements for the theatrical exhibition of thefollowing films internationally: Castle Rock, Dumb Luck, No PlaceLike Home, The Retrievers, Miracle Dogs, The Santa Trap, Red RidingHood, Popstar, Supercross, Wild Stallion and Miracle Dogs2.

DVD and Video Markets

Home video distributionconsists of the promotion and sale of DVDs and videocassettes to local,regional and national video retailers that rent or sell DVDs andvideocassettes to consumers primarily for home viewing. Most motionpictures are initially made available at wholesale prices primarily toDVD and video rental stores that rent or sell the DVDs or the cassettesto consumers.

It is now common practice in the U.S. domesticmarket for major releases with broad appeal to be initially offered toretail chains at a price designed for sell-through rather than rental.This occurs only when it is believed that the ownership demand byconsumers will result in a sufficient level of sales to justify thereduced margin on each home video device sold. In the past, owners ofmotion pictures did not share in rental income. However, distributorshave recently begun to enter into revenue sharing arrangements withcertain retail stores. Under such arrangements, videocassettes or DVDsare sold at a reduced price to retail stores (usually $6 to $10 perdevice) and a percentage of the rental revenue is then shared with theowners (or licensors) of the motion pictures. Home video arrangementsin international territories are generally similar to those in the U.S.except that the wholesale prices may differ.

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As indicated in the table appearing underthe caption ‘‘Our DistributionAgreements,’’ we have entered into home videodistribution arrangements for all of our titles.

TelevisionMarket

Television rights for motion pictures initially releasedtheatrically are, if such motion pictures have broad appeal, generallylicensed first to pay-per-view television for an exhibition periodfollowing initial video release, then to pay television, thereafter incertain cases to network television for an exhibition period, and then,in certain cases, to pay television again. These motion pictures arethen syndicated to either independent stations or basic cableoutlets.

Pay-per-view allows subscribers to pay for individualprograms. Pay television allows cable television subscribers to viewsuch services as HBO, Showtime, Starz/Encore, Canal+, BSkyB, Premiere,Telepiu, JSB or others offered by their cable system operators for amonthly subscription fee. Pay-per-view and pay television is nowdelivered not only by cable, but also by satellite transmission, andmotion pictures are generally licensed in both such media.

Motionpictures are often packaged and licensed as a group for exhibition ontelevision over a period of time and, therefore, revenues from thesetelevision licensing ‘‘packages’’ may bereceived over a period that extends beyond five years from the initialU.S. theatrical release of a particular motion picture. Motion picturesare also licensed and ‘‘packaged’’ byproducers and distributors for television broadcast in internationalmarkets by government owned or privately owned televisionnetworks.

As indicated in the table appearing under the caption‘‘Our Distribution Agreements,’’ we haveentered into television distribution arrangements (either domestic orinternationally) for all of our titles other than Red Riding Hood,Shergar and the titles we acquired from Hemdale.

TheInternet

The continuing and improving capability to transmitlarge files through the internet via fast broadband connections eitherthrough cable, satellite or DSL connections will permit both the salessolicitation and eventually the actual delivery of motion pictures tolicensees around the world. This model of efficiency expressed both interms of the time required to effectuate sales presentations and thedelivery of the physical elements comprising entertainment properties,their packaging as well as related publicity, advertising, promotionand marketing materials, will optimize the ability of movie companiesto effectuate foreign sales on a basis that it not only cost efficientbut one which enables them to eliminate the traditional intermediarieswho otherwise may receive as much as thirty five percent (35%)to forty percent (40%) of the gross revenues after a deductionof traditional distribution costs. A digital means of delivery is by nomeans universally embraced and this methodology may not be ubiquitousfor an undetermined period yet to come. However, it is clearly a formof delivery that motion picture companies would seek to embrace (dueits efficiency and cost effectiveness) and utilize in the future bothto enhance revenues and to decrease dependence on third party serviceproviders. To date, we have only engaged in distribution arrangementsfor the exploitation of Hansel & Gretel over theinternet.

Non-Theatrical and Other Rights

Motion picturesmay be licensed for use by airlines, schools, public libraries,community groups, the armed services, correctional facilities, shipsand others. Music contained in a motion picture may be licensed forsound recording, public performance and sheet music publication. Rightsin motion pictures may be licensed to merchandisers for the manufactureof products such as toys, T-shirts, posters and other merchandise.Rights may also be licensed to create novels from a screenplay and togenerate other related book publications, as well as interactive gameson such platforms as CD-ROM, CD-I or other proprietary platforms. Todate, we have not derived substantial revenue from arrangementsdescribed in this paragraph.

Intellectual Property

We arecurrently using the trademark ‘‘TAGEntertainment’’ in connection with films that we produceand distribute or license, both domestically and internationally. Weregard our trademark as 

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valuable assets and believe that ourtrademark is an important factor in marketing our products. We own thecopyright and all motion pictures that we produce and license thenecessary rights from the rights-holder in connection with ourdistribution of films produced by third parties. In order to protectour intellectual property rights we rely on a combination of copyrightand trademark laws, contract law, and other methods, such as thecareful management of our licensing and distribution arrangements withthird parties.

Government Regulation

Distribution rightsto motion pictures are granted legal protection under the copyrightlaws of the United States and most foreign countries. These lawsprovide substantial civil and criminal sanctions for unauthorizedduplication and exhibition of motion pictures. Motion pictures, musicalworks, sound recordings, art work, still photography and motion pictureproperties are separate works subject to copyright under most copyrightlaws, including the United States Copyright Act of 1976, as amended. Weare aware of reports of extensive unauthorized misappropriation ofvideocassette rights to motion pictures which may include motionpictures distributed by us. Motion picture piracy is an industry-wideproblem. The Motion Picture Association of America, an industry tradeassociation, operates a piracy hotline and investigates all reports ofsuch piracy. Depending upon the results of investigations, appropriatelegal action may be brought by the owner of the rights. Depending uponthe extent of the piracy, the Federal Bureau of Investigation mayassist in these investigations and related criminalprosecutions.

Motion picture piracy is also an internationalproblem. Motion picture piracy is extensive in many parts of the world,including South America, Asia including Korea, China and Taiwan, thecountries of the former Soviet Union and other former Eastern bloccountries. In addition to the Motion Picture Association, the MotionPicture Export Association, the American Film Marketing Association andthe American Film Export Association monitor the progress and effortsmade by various countries to limit or prevent piracy. In the past,these various trade associations have enacted voluntary embargoes ofmotion picture exports to certain countries in order to pressure thegovernments of those countries to become more aggressive in preventingmotion picture piracy. In addition, the United States government haspublicly considered trade sanctions against specific countries that donot prevent copyright infringement of United States produced motionpictures. We cannot assure you that voluntary industry embargoes orUnited States government trade sanctions will be enacted. If enacted,these actions could impact the amount of revenue that we realize fromthe international exploitation of motion pictures depending upon thecountries subject to and the duration of such action. If not enacted orif other measures are not taken, the motion picture industry as awhole, and our business in particular, may continue to lose anindeterminate amount of revenues as a result of motion picturepiracy.

The Code and Ratings Administration of the Motion PictureAssociation assigns ratings indicating age-group suitability fortheatrical distribution of motion pictures. We plan to submit ourmotion pictures for these ratings. In certain circumstances, motionpictures that we plan to submit for rating might receive restrictiveratings, including, in some circumstances, the most restrictive ratingwhich prohibits theatrical attendance by persons below the age ofseventeen. Unrated motion pictures, or motion pictures receiving themost restrictive rating, may not be exhibited in certain movie theatersor in certain locales, thereby potentially reducing the total revenuesgenerated by these films. United States television stations andnetworks, as well as foreign governments, impose additionalrestrictions on the content of motion pictures which may restrict inwhole or in part theatrical or television exhibition in particularterritories. In 1997, the major broadcast networks and the majortelevision production companies implemented a system to rate televisionprograms. This television rating system has not had a material adverseeffect on the motion pictures distributed by us. However, thepossibility exists that the sale of theatrical motion pictures forbroadcast on domestic free television may become more difficult becauseof potential advertiser unwillingness to purchase advertising time ontelevision programs that are rated for limited audiences. We cannotassure you that current and future restrictions on the content ofmotion pictures may not limit or adversely affect our ability toexploit certain motion pictures in particular territories andmedia.

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United States television stations andnetworks as well as foreign governments impose content restrictions onmotion pictures that may restrict in whole or in part exhibition ontelevision or theaters in a particular territory. There can be noassurance that such restrictions will not limit or alter our ability toexhibit certain motion pictures in such media or markets or that thecost to edit a particular motion picture would be prohibitive, therebyeliminating a possible revenue source for the motionpicture.

Industry Compensation Arrangements

Most of thecreative and production personnel that work on a movie are short-termemployees or ‘‘for hire’’ contractors whoare compensated for their services at a predetermined rate. It is alsocustomary in the motion picture industry to pay contingent compensationover and above these fees to certain key employees and contractors.Customary contingent compensation arrangements in the industryinclude:

|  |              |                 |
|--|--------------|-----------------|
|  | •  | fixeddeferrals; |

|  |              |                       |
|--|--------------|-----------------------|
|  | •  | residual payments;and |

|  |              |                                    |
|--|--------------|------------------------------------|
|  | •  | gross or net profitparticipations. |

Fixed Deferrals. Key creativepersonnel, including the director, producer, writer and actors, oftennegotiate fixed deferral payments of flat fees tied to a film’sfinancial returns. We have not granted any fixed deferrals and have noplans to do so.

Residual Payments. The principalcollective bargaining organizations for personnel within the movieindustry are: the Directors Guild of America, or DGA; theWriter’s Guild of America, or WGA; the Screen Actors Guild, orSAG; the American Federation of Musicians, or AFM; and theInternational Alliance of Theatrical Stage Employees, or IATSE. When amovie producer involves members of these organizations in a film, theyare required to comply with certain residual payment obligations. Theseobligations are set forth in agreements between these organizations andthe Alliance of Motion Picture and Television Producers(‘‘AMPTP’’) (which represents the majorstudios) and provide that a percentage of a film’s grossrevenues in certain markets must be paid to these organizations for thebenefit of their members. As an example, SAG currently requires paymentof between 4.5% and 5.4% of the gross revenueattributable to videocassette exploitation and 3.6% oftelevision exploitation, with no residuals due for theatricalexploitation.

We may be required to accrue and pay standardresidual payments based on the collective bargaining agreementsassociated with our creative team. These residual payments are basedupon gross revenues in certain markets and may therefore, dependingupon our distribution arrangements, reduce our revenues in variousmarkets and release windows. It is difficult to predict the specificimpact on our overall returns as we have no way of predicting whichrelease windows and which markets will achieve what relative levels ofrevenues, nor can we predict whether our arrangements with distributorsmight provide for flat fees or advance payments which would reduce oreliminate the impact of these residual obligations.

ProfitParticipations. The last form of contingent compensation isa ‘‘profit participation,’’ which entitlesthe recipient to additional compensation based on the financialperformance of a particular motion picture. Granting profitparticipation to certain key creative personnel is common for bothlarger studio films as well as smaller independent films. Forindependent movies, this form of contingent compensation is critical toattract quality creative personnel who work for less upfrontcompensation than they otherwise might receive on a larger, more costlymovie. By paying this contingent compensation, producers are able toattract these high quality creative personnel while simultaneouslyreducing the upfront costs.

Profit participations are typically‘‘gross’’ or‘‘net.’’ Gross profit participation,granted in extremely rare cases where the importance of the actor ordirector is critical, is calculated based on gross revenues before anycosts (such as, distribution fees, financing costs and other corporatecosts) are deducted. Net profit participation is far more common, andis the arrangement we will be using to pay 

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contingent compensation. Net profitparticipation is calculated based on net revenues after deductingcertain costs of a film, including distribution fees, financing costsand general corporate expenses. Thus, a gross profit participationreceives a percentage of the first dollar received by a film before anycosts are deducted, while a net profit participation receives apercentage of revenue remaining after certain costs arededucted.

Employees

As of December  31,  2005we had five full-time employees. As is typical in motion pictureproduction, we use short-term employees and independent contractors toproduce our films. We plan to retain most of these short-term employeesand independent contractors after we begin production, and most of ouragreements with these employees and contractors will end by the timeproduction is completed. We intend on hiring on a full-time basis anumber of individuals to provide accounting, operational and othermanagement services, including a full-time Chief FinancialOfficer.

Most of the unions and guilds within the movie industrythat represent creative talent and necessary production personnel areparties to collective bargaining agreements with the AMPTP, whichrepresents the major studios. Although we are not a member of theAMPTP, and therefore are not a party to any of the AMPTP’scollective bargaining agreements, these agreements serve as a referencepoint during our negotiations with unions, guilds and members of theproduction staff for any particularfilm.

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RISKFACTORS

An investment in shares of our common stockinvolves a high degree of risk. You should carefully consider thefollowing information which summarizes all material risks, togetherwith the other information contained in this Annual Report, before youdecide to buy our common stock. If any of the following risks actuallyoccur, our business would likely suffer. In these circumstances, themarket price of our common stock could decline, and you may lose all orpart of your investment.

Risks Related To Our BusinessAnd Industry

We have limited working capital andwill need to raise additional capital in the future and our independentauditors have included a ‘‘going concern’’opinion in their report.

At December  31,  2005,our cash and cash equivalents were minimal and we are in immediate needof additional capital. Although we raised $5.0  million in 2005through the issuance of preferred stock, we will need additional fundsto satisfy our expected cash needs for working capital and capitalexpenditures. Management believes that approximately $2.0million will be required to cover our operating expenses and workingcapital requirements, including, but not limited to, marketing, sales,film productions, and operations, during the next twelvemonths.

Accordingly, we need substantial additional debt orequity financing and we intend to either undertake private placementsof our securities, either as a self-offering or with the assistance ofregistered broker-dealers, or negotiate a private sale of oursecurities to one or more institutional investors. However, wecurrently have no firm agreements with any third-parties for suchtransactions and no assurances can be given that we will be successfulin raising sufficient capital from any of these proposed financings.Further, we cannot assure you that any additional financing will beavailable or, even if it is available that it will be on termsacceptable to us. If additional funds are raised though the issuance ofequity or debt securities, such additional securities may have powers,designations, preferences or rights senior to our currently outstandingsecurities and, in the case of additional equity securities, theownership of our existing shareholders will be diluted. Any inabilityto obtain required financing on sufficiently favorable terms could havea material adverse effect on our business, results of operations andfinancial condition. If we are unsuccessful in raising additionalcapital and increasing revenues from operations, we will need to reducecosts and operations substantially. Further, if expenditures requiredto achieve our plans are greater than projected or if revenues are lessthan, or are generated more slowly than, projected, we will need toraise a greater amount of funds than currently expected. Ourindependent auditors have included a ‘‘goingconcern’’ explanatory paragraph in their report to ourfinancial statements for the year ended December  31,2005, citing recurring losses and negative cash flows from operations.Our capital needs in the future will depend upon factors such as marketacceptance of our films and any other new films we release, the successof our independent distributors and our production, marketing and salescosts. None of these factors can be predicted with certainty.

Weface substantial capital requirements since our business requires asubstantial investment of capital.

The production, acquisitionand distribution of motion pictures require a significant amount ofcapital. A significant amount of time may elapse between ourexpenditure of funds and the receipt of commercial revenues from orother contributions to our motion pictures. This time lapse requires usto fund a significant portion of our capital requirements from variousfinancing sources. Although we intend to continue to reduce the risksof our production exposure through financial contributions fromdistributors and industry programs and other studios, we cannot assureyou that we will continue to successfully implement these arrangementsor that we will not be subject to substantial financial risks relatingto the production, acquisition, completion and release of future motionpictures. If we increase (through internal growth or acquisition) ourproduction slate or our production budgets, we may be required toincrease overhead and/or make larger up-front payments to talent andconsequently bear greater financial risks. Any of the foregoing couldhave a material adverse effect on our business, results of operationsand financial condition.

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We have incurred losses in thepast, which may continue. Failure to increase our revenue and keep ourexpenses consistent with revenues could prevent us from achieving andmaintaining profitability.

We incurred losses of $1,845,000and $3,871,000 for the fiscal years ended December  31,2005 and 2004, respectively and there can be no assurance that we willbe profitable in the future. We have expended, and will continue to berequired to expend, substantial funds to pursue our business plan ofproducing and distributing feature-length motion pictures and otherprogramming and enhancing marketing and sales efforts for these titles.In addition, we expect our general and administrative expenses inoperating our business to increase in connection with our obligationsas a reporting company under the Securities Exchange Act of 1934. Inorder to fund capital needs, we have issued our securities in privateplacements pursuant to applicable exemptions from registration underthe Securities Act of 1933. Therefore, we will need to generate higherrevenue from our motion pictures and other programming to achieve andmaintain profitability and cannot assure you that we will be profitablein any future period. We have generated limited revenues since ourinception, and do not expect to generate significant revenues withinthe next fiscal year. For the fiscal years ended December31,  2005 and 2004, we had total revenue of approximately$3,879,000 and $2,059,000, respectively. Our prospects should beconsidered in light of the difficulties frequently encountered inoperating as a independent producer and distributor in the motionpicture industry and the substantial costs that are required for anycompany to successfully compete in this industry. Accordingly, therecan be no assurance that we will be able to achieve profitableoperations in future operating periods. If we need additional capitalin the future and we are unsuccessful in finding financing, we may berequired to severely curtail our operations, which would have amaterial adverse affect on our business.

Our Preferred Stockfinancing arrangement contains certain covenants that limit the way wecan conduct business.

Our Series A Preferred Stock financingarrangement includes various covenants limiting our ability to incur orguarantee additional indebtedness, pay dividends and make otherdistributions, issue securities senior or equivalent to the Series APreferred Stock and purchasing or redeeming shares of our common stock.We also granted the investors a participation right in futurefinancings, subject to certain exemptions from these restrictions.These covenants may limit us in raising additional capital, competingeffectively or taking advantage of new business opportunities. If we donot comply with these covenants, it could result in a default under thefinancing agreements, and unless we are able to negotiate an amendment,forbearance or waiver, we could be required to redeem the Series APreferred Stock in full, which could have a material adverse effect onour business, results of operations and financial condition. Further,the Series A Preferred Stock matures and must be repaid in full threeyears from the issue date, unless it is converted prior to such time.We may not be able to generate sufficient cash flow to repay thisamount, if required, and we may not be able to obtain additionalfinancing or to refinance this obligation on terms acceptable to us, ifat all. Any such failure could have a material adverse effect on ourbusiness, results of operations and financial condition.

Budgetoverruns and inherent risks in our business may adversely affect ourfinancial condition.

We need to be efficient in the productionof our motion pictures and television programming. Actual motionpicture and television production costs often exceed their budgets,sometimes significantly. The production, completion and distribution ofmotion pictures and other programming are subject to a number ofuncertainties, including delays and increased expenditures due tocreative differences among key cast members and other key creativepersonnel or other disruptions or events beyond our control. Risks suchas death or disability of star performers, technical complications withspecial effects or other aspects of production, shortages of necessaryequipment, damage to film negatives, master tapes and recordings oradverse weather conditions may cause cost overruns and delay orfrustrate completion of a production. If a motion picture or televisionprogram incurs substantial budget overruns, we may have to seekadditional financing from outside sources to complete production. Wecannot make assurances regarding the availability of such financing onterms 

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acceptable to us, and the lack of suchfinancing could have a material adverse effect on our business, resultsof operations and financial condition.

In addition, if a motionpicture or television program incurs substantial budget overruns, wecannot assure you that we will recoup these costs, which could have amaterial adverse effect on our business, results of operations andfinancial condition. Increased costs incurred with respect to aparticular film may result in any such film not being ready for releaseat the intended time and the postponement to a potentially lessfavorable time, all of which could cause a decline in box officeperformance, and thus the overall financial success of such film.Budget overruns could also prevent a picture or program from beingcompleted or released. Any of the foregoing could have a materialadverse effect on our business, results of operations and financialcondition. Production costs and marketing costs are rising at a fasterrate than increases in either domestic admissions to movie theatres oradmission ticket prices, leaving us more dependent on other media, suchas home video, television and foreign markets, and new media. If wecannot successfully exploit these other media, it could have a materialadverse effect on our business, results of operations and financialcondition.

Revenues and results of operations are difficult topredict and depend on a variety of factors.

The economic successof any motion picture or television program that we produce is, and ourrevenues and results of operations are, uncertain since the revenuesderived from the distribution of a motion picture or television program(which do not necessarily cover production or distribution costsincurred) depend primarily upon its acceptance by the public. There canbe no assurance that we will continually or consistently producecommercially successful motion pictures. Accordingly, our revenues andresults of operations may fluctuate significantly from period toperiod, and the results of any one period may not be indicative of theresults for any future periods. Any inability to achieve suchcommercial success could have a material adverse effect on ourbusiness, results of operations and financial condition. Commercialsuccess of a motion picture or television program is dependent on avariety of factors, including critical reviews and public tastes, whichwe cannot anticipate with certainty. In addition, our revenues andresults of operations depend significantly upon the timing of ourreleases, which we do not control and which are subject to a number ofuncertainties. We can give no assurance that its production and releasegoals will be met in any period or that completion will occur inaccordance with the anticipated schedule or budget. Therefore, it isdifficult to predict the quarters in which motion pictures or otherprograms will be completed, and in turn, are available for release by aparticular distributor. Depending on the ultimate timing and manner ofrelease of motion pictures and television programs produced orco-financed by us, future revenues and results of operations mayfluctuate significantly from period to period.

Ourrevenues and results of operations vary from quarter to quarter. If wefail to project accurately and experience significant revenueshortfalls, we could be forced to discontinue a portion or all of ouroperations.

Our revenues and results of operations depend toa significant degree upon the timing and receipt of revenue fromlicensing, production fees and distribution of motion pictures. Whilesome of our licensing fees are paid immediately upon entering into thelicense agreements, much of these fees are deferred until thelicensor’s production costs are recouped, which couldsignificantly delay our receipt of these funds. Production fees are notearned until the production is begun and expenses related to theproduction are incurred. Furthermore, motion pictures often have longproduction cycles, making it difficult to predict when they will becompleted and released for distribution. All of these factors make itdifficult to predict with certainty when revenues might be received.Results in any particular quarter may not be indicative of results insubsequent periods. If, because of the variance in our quarterlyoperating results, we fail to plan or project accurately, we could besubject to unexpected revenue shortfalls. If we were unable to findfinancing to cover the revenue shortfalls, we could have to discontinuea portion or all of our operations for some period of time or evenindefinitely.

Accounting practices used in our industry mayaccentuate fluctuations in operating results.

In addition to thecyclical nature of the entertainment industry, our accounting practices(which are standard for the industry) may accentuate fluctuations inour operating results. In accordance with 

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U.S. generally accepted accounting principlesand industry practice, we amortize film costs using the‘‘individual-film-forecast’’ method. Underthis accounting method, we amortize film costs for each film based onthe following ratio: Revenue earned by title in the currentperiod/Estimated total revenues by title. We must review, and revisewhen necessary, our total revenue estimates on a title-by-title basis.This review may result in a change in the rate of amortization and/or awrite-down of the motion picture asset to its estimated fair value.Results of operations in future years depend upon our amortization ofour motion picture costs. Periodic adjustments in amortization ratesmay significantly affect these results. In addition, we are required toexpense film advertising costs as incurred, but are also required torecognize the revenue from any motion picture over the entire revenuestream expected to be generated by the individual picture or televisionprogram. As a result, in the event our initial total revenue estimatesfor a title were too high, under the industry’s accountingmethod, we would immediately recognize the entire loss in instanceswhere we expect that a motion picture will not recover our investment.Comparatively, the profit of a successful motion picture must bedeferred and recognized over the entire revenue stream generated by theindividual picture. Accordingly, our revenues and results of operationsmay fluctuate significantly from period to period, and the results ofany one period may not be indicative of the results for any futureperiod.

We face substantial competition in all aspects of ourbusiness.

We are smaller and less diversified than many ofour competitors. As an independent distributor and producer,we constantly compete with major U.S. and international studios. Mostof the major U.S. studios are part of large diversified corporategroups with a variety of other operations, including televisionnetworks and cable channels, that can provide both the means ofdistributing their products and stable sources of earnings that mayallow them better to offset fluctuations in the financial performanceof their motion picture and television operations. In addition, themajor studios have more resources with which to compete for ideas,storylines and scripts created by third parties as well as for actors,directors and other personnel required for production. The resources ofthe major studios may also give them an advantage in acquiring otherbusinesses or assets, including film and television content libraries,that we might also be interested in acquiring. Our inability to competesuccessfully could have a material adverse effect on our business,results of operations and financial condition.

These competitorsinclude Universal Pictures, Warner Bros. (which includes New LineCinema and Castle Rock Entertainment), Twentieth Century Fox, SonyPictures Entertainment (which includes Columbia Pictures and TriStarPictures), Paramount Pictures, the Walt Disney Company (which includesBuena Vista Pictures Distribution, Touchstone Hollywood Pictures andMiramax) and MGM (which includes Metro Goldwyn Mayer Pictures andUnited Artist Pictures). We also compete with independent producers anddistributors, including, among others, Lions Gate Entertainment, NewRegency, Imagine Entertainment, Village Roadshow, Icon Productions,Jersey Films and Mandalay Pictures. Many of these companies have avariety of operations in addition to the production of motion picturesincluding television network libraries and cable channels which canprovide a means of distributing their products and providing a stablesource of revenues to offset fluctuations in the financial performanceof their motion picture operations. We rely almost exclusively on ourmotion picture operations for our revenues.

The risks ofcompetition exist in all stages of motion picture production anddistribution. Motion picture and television programacquisition, production and distribution are highly competitivebusinesses, and we cannot assure you that we will continue to competeeffectively in these businesses. If we are unable to competeeffectively, it will have an adverse effect on our business as a whole.In the production phase, competition will affect our ability to obtainthe services of preferred performers and other creative personnel,including script writers and designers. We also compete with others forfinancing of production efforts. We will be competing with theproducers of other films and programs in arranging for distribution inthe domestic theatrical marketplace and in other markets and media andobtaining advertising space and time. In the distribution phase,competition will limit the availability of release dates and theatersrequired for the successful distribution of a film. A potential film ortelevision series will be competing directly with other motion picturesand television series and 

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indirectly with other forms of publicentertainment. We will compete with numerous larger motion picture andtelevision program production companies and distribution companies thathave substantially greater resources, larger and more experiencedproduction and distribution staff and established histories ofsuccessful production and distribution of motion pictures andtelevision programs.

The motion picture industry is highlycompetitive and at times may create an oversupply of motion pictures inthe market. The number of motion pictures released by ourcompetitors, particularly the major U.S. studios, may create anoversupply of product in the market, reduce our share of box officereceipts and make it more difficult for our films to succeedcommercially. Oversupply may become most pronounced during peak releasetimes, such as school holidays and national holidays, when theatreattendance is expected to be highest. If we release our films duringpeak release times, our potential revenues for a particular release maybe reduced and we cannot guarantee that we can release our films duringmore advantageous times. In addition to production or other delays thatmight cause us to alter our release schedule, a change in the scheduleof a major studio may force us to alter the release date of a filmbecause we cannot always compete with a major studio’s largerpromotion campaign. Any such change could adversely impact afilm’s financial performance. In addition, if we cannot changeour schedule after such a change by a major studio because we are tooclose to the release date, the major studio’s release and itstypically larger promotion budget may adversely impact the financialperformance of our film. The foregoing could have a material adverseeffect on our business, results of operations and financialcondition.

The limited supply of motion picture screens compoundsthis product oversupply problem. Currently, a substantial majority ofthe motion picture screens in the U.S. typically are committed at anyone time to only 10 to 15 films distributed nationally by major studiodistributors. In addition, as a result of changes in the theatricalexhibition industry, including reorganizations and consolidations andthe fact that major studio releases occupy more screens, the number ofscreens available to us when we want to release a picture may decrease.If the number of motion picture screens decreases, box office receipts,and the correlating future revenue streams, such as from home video andpay and free television, of our motion pictures may also decrease,which could have a material adverse effect on our business, results ofoperations and financial condition.

Technological advances mayreduce our ability to exploit our motion pictures and televisionseries. The entertainment industry in general and the motionpicture industry in particular continue to undergo significanttechnological developments, including video-on-demand. This rapidgrowth of technology combined with shifting consumer tastes couldchange how consumers view our motion pictures and television series.For example, an increase in video-on-demand could decrease home videorentals. Other larger entertainment distribution companies will havelarger budgets to exploit these growing trends. We cannot predict howwe will financially participate in the exploitation of our motionpictures and other programming through these emerging technologies orwhether we have the right to do so for certain of our library titles.If we cannot successfully exploit these and other emergingtechnologies, it could have a material adverse effect on our business,results of operations and financial condition.

Protecting anddefending against intellectual property claims may have a materialadverse effect on our business.

Our intellectual property rightsare critically important to our business. We rely on a combination ofcopyright, trademark and trade secret laws, contract law, and othermethods to protect our content, license rights, proprietary technologyand information but there can be no assurance that such laws willprovide sufficient protection to us. Our ability to compete depends, inpart, upon successful protection of our intellectual property. We donot have the financial resources to protect our rights to the sameextent as major studios and our efforts to protect our intellectualproperty may not be adequate. We also attempt to protect proprietaryand intellectual property rights to our productions by licensing anddistribution arrangements with reputable international companies inspecific territories and media for limited durations. Despite theseprecautions, existing copyright and trademark laws afford only limitedpractical protection in certain countries. We may also distribute

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our products in other countries in whichthere is only limited copyright or trademark protection. As a result,it may be possible for unauthorized third parties to copy anddistribute our productions or certain portions or applications of ourintended productions, which could have a material adverse effect on ourbusiness, results of operations and financial condition.

Therealso can be no assurance that third parties will not copy or otherwiseobtain and use our content or other intellectual property rightswithout our authorization or that we will be able to continue tomaintain rights to our intellectual property. The failure to protectour intellectual property rights may have a material adverse effect onour business, results of operations, and financial condition.Litigation may also be necessary in the future to enforce ourintellectual property rights, to protect our trade secrets, or todetermine the validity and scope of the proprietary rights of others orto defend against claims of infringement or invalidity. Any suchlitigation, regardless of the validity or the success of the claims,could result in substantial costs and the diversion of resources andcould have a material adverse effect on our business, results ofoperations and financial condition. We cannot assure you thatinfringement or invalidity claims will not materially adversely affectour business, results of operations and financial condition. Finally,there can be no assurance that such actions will result in thesuccessful protection of our rights.

Piracy of motionpictures, including digital and internet piracy, may reduce the grossreceipts from the exploitation of our films.

Motion picturepiracy is extensive in many parts of the world, including SouthAmerica, Asia, the countries of the former Soviet Union and otherformer Eastern bloc countries. Additionally, as motion pictures beginto be digitally distributed using emerging technologies such as theinternet and online services, piracy could become more prevalent,including in the U.S., because digital formats are easier to copy. As aresult, users can download and distribute unauthorized copies ofcopyrighted motion pictures over the internet. In addition, there couldbe increased use of devices capable of making unauthorized copies ofmotion pictures. As long as pirated content is available to downloaddigitally, many consumers may choose to download such pirated motionpictures rather than pay to view motion pictures. Piracy of our filmsmay adversely impact the gross receipts received from the exploitationof these films, which could have a material adverse effect on ourbusiness, results of operations and financial condition. See also thediscussion above under the caption ‘‘GovernmentRegulation.’’

We rely upon key vendors andsuppliers.

We currently have only a limited number of employeesand we outsource many of our requirements such as production,post-production and distribution services to unaffiliated thirdparties. Therefore, we are reliant upon these third parties’successful execution of these critical services. To the extent thatthese providers fail to perform or are unable to meet unexpectedrequirements (such as rapid growth), substantial damage to our brand,reputation and future business prospects could result.

We have alimited operating history and unproven business model.

Due tothe relatively early stage of our operations, it is difficult toevaluate the business and our prospects. Our revenue potential isunproven and the business model is evolving. TAG USA has only been inbusiness since 1999 and has a limited operating history. Further, thescope of the business proposed by TAG is more extensive than ourhistorical operations, including operating as a public company, andtherefore encompass a great degree of execution risk. Accordingly,investors have only limited operating and financial informationrelating to our business to evaluate our performance and futureprospects.

Our success depends on external factors in ourindustries.

Our success depends on the commercial success ofmotion pictures and television series, which isunpredictable. Operating in the motion picture andtelevision industries involves a substantial degree of risk. Eachmotion picture or television program is an individual artistic work,and inherently 

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unpredictable audience reactions primarilydetermine commercial success. Generally, the popularity of our motionpictures and programs depends on many factors, including the criticalacclaim they receive, the format of their initial release, for example,theatrical or direct-to-video, the actors and other key talent, theirgenre and their specific subject matter. The commercial success of ourmotion pictures also depends upon the quality and acceptance of motionpictures that our competitors release into the marketplace at or nearthe same time, critical reviews, the availability of alternative formsof entertainment and leisure activities, general economic conditionsand other tangible and intangible factors, many of which we do notcontrol and all of which may change. We cannot predict the futureeffects of these factors with certainty, any of which factors couldhave a material adverse effect on our business, results of operationsand financial condition.

In addition, because a motionpicture’s performance in ancillary markets, such as home videoand pay and free television, is often directly related to its boxoffice performance, poor box office results or poor television ratingsmay negatively affect future revenue streams. Our success will dependon the experience and judgment of our management to select and developnew investment and production opportunities. We cannot make assurancesthat our motion pictures will obtain favorable reviews or ratings, thatour motion pictures will perform well at the box office or in ancillarymarkets. The failure to achieve any of the foregoing could have amaterial adverse effect on our business, results of operations andfinancial condition.

Our distributors’ failure topromote our films and programs may adversely affect ourbusiness. The profitable distribution of a motion picture ortelevision program depends in large part on the availability of one ormore capable distributors who are able to arrange for appropriateadvertising and promotion, proper release dates and bookings infirst-run and other theaters. The decisions of our distributorsregarding the timing of release and promotional support of our motionpictures and programs are important in determining their success. We donot control the timing and manner in which our licensed distributorsdistribute our motion pictures or programs. Any decision by thosedistributors not to distribute or promote one of our motion pictures orto promote our competitors’ motion pictures, to a greater extentthan they promote ours could have a material adverse effect on ourbusiness, results of operations and financial condition. Moreover, wecannot assure that profitable distribution arrangements will beobtained for our films or programs or that they can or will bedistributed profitably. If we attempt to self-distribute our films(arrange for our own theater bookings and other releases), there is noassurance that theaters or other venues will be available to exhibit orsell the motion picture or that the agreements reached with suchtheaters would meet our pre-agreement expectations.

We couldbe adversely affected by strikes or other union jobactions. We are directly or indirectly dependent upon highlyspecialized union members who are essential to the production of motionpictures and television programs. A strike by, or a lockout of, one ormore of the unions that provide personnel essential to the productionof motion pictures and television programs could delay or halt ourongoing production activities. Such a halt or delay, depending on thelength of time, could cause a delay or interruption in our release ofnew motion pictures or programs which could have a material adverseeffect on our business, results of operations and financialcondition.

If the carrying value of our intangible assets is notrecoverable, an impairment loss must be recognized which wouldnegatively affect our financial results.

We will continue toevaluate our intangible assets, including goodwill, acquired productrights, and other intangible assets, whenever events or circumstancesoccur which indicate that these assets might be impaired. We haveacquired limited partnership interests in five limited partnershipsfrom the holders of such interests in consideration for shares of ourcommon stock. We have issued 675,219 shares of our common stock in suchtransactions and acquired limited partnership interests valued at$688,000. We hold a 14.2% position in Animal Partners, L.P.,which was valued at $425,000 and a 5.9% position in Family FilmPartners VII, LP valued at $200,000. We will recognize an impairmentcharge based on the amounts of these investments if we determine, inaccordance with generally accepted accounting principles, that thecarrying value of these assets exceeds the undiscounted future cashflows expected from such assets as well as upon the eventualdisposition of such assets. If an asset is 

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considered to be impaired, the impairment tobe recognized is measured by the amount by which the carrying amount ofthe asset exceeds the fair value of the asset.

We will need tomanage our growth.

We have a limited operating history and willto need expand our operations rapidly to implement our business plans.This growth has and will continue to place significant strain on ourmanagerial, operational, financial, and other resources. To the extentthat available resources are unable to meet demand, we may be requiredto make additional material investments in our operations and personnelto do so.

Failure to achieve and maintain effectiveinternal controls in accordance with Section 404 of the Sarbanes-Oxleyact could have a material adverse effect on our ability to report ourfinancial results timely and accurately.

Section 404 of theSarbanes-Oxley Act requires management’s ongoing review andevaluation of our internal controls, and will require management toreport on our internal controls and our independent auditors to attestto the effectiveness of our internal controls. In connection with themerger of Power Marketing and TAG USA in November  2004, we haveadopted certain measures in connection with our ongoing efforts toimprove our control processes and corporate governance and intend toadopt and implement additional measures that may be required. Thesechanges are required to effect the transition of our company from aprivately-held corporation to a public company that files periodreports under the Securities Exchange Act of 1934. As a privatecompany, TAG USA was not required to adopt the types of internalcontrol procedures that a public company must adopt and maintain.Accordingly, since the merger, we have begun implementing variousmeasures to enhance existing policies, or implement new ones, so as tohave an effective system of internal controls over financial reporting.We are incurring, and will continue to incur, substantial additionalexpense and diversion of management’s time as a result ofperforming the internal control systems evaluation, testing andremediation required in order to comply with the requirements ofSection 404 of the Sarbanes-Oxley Act.

We are undertaking acomprehensive effort to comply fully with these requirements. Thiseffort includes documenting, evaluating the design of and testing theeffectiveness of our internal controls over financial reporting. Duringthis process, we may identify deficiencies in our system of internalcontrols over financial reporting that may require remediation. Asdescribed in Item 8 of this Annual Report on Form 10-KSB, our formerindependent auditing firm, Grobstein, Horwath & Co, LLP, in itsresignation letter to us, made statements indicating the existence ofweaknesses in our internal control over financial reporting. Due to theongoing improvement, evaluation and testing of our internal controls,there can be no assurance that any deficiencies identified may not bematerial weaknesses that we would be required to report. Readers shouldreview this risk factor within the context of the discussion regardingour change of independent accountants and auditors in Item 8 of thisAnnual Report on Form 10-KSB.

If we are unable to conclude thatour internal controls over financial reporting are effective, ourability to obtain additional financing on favorable terms and ouraccess to capital markets could be materially and adversely affected,which could materially and adversely affect our business and financialcondition. In addition, if we are unable to conclude our internalcontrols or disclosure controls are effective, current and potentialstockholders could lose confidence in our financial reporting and ourstock price could be negatively impacted.

We are dependent uponthe continued employment of our founder.

For the foreseeablefuture, we will be largely dependent upon the personal efforts andabilities of our Chief Executive Officer, Steve Austin, to coordinate,implement and manage our business plans and programs. Our loss orunavailability of his services would likely have a material adverseaffect on our business, operations and prospects. Although we arecurrently negotiating the terms of an employment agreement withMr. Austin, we do not currently have an employment agreementwith 

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him and no assurances can be given that wewill enter into an employment agreement with him. Therefore,Mr. Austin may terminate his relationship with us at any timewith or without cause or prior notice. In the eventMr. Austin’s employment with us ends, we may need tocease operation.

Mr.  Austin has extensive control overus.

At the present time, our Chief Executive Officer, SteveAustin, owns more than 50% of our outstanding common stock.Mr. Austin is also currently our only executive officer and isthe Chairman of the board of directors. This position givesMr. Austin extensive control over the company and the right todetermine who will serve as our officers and directors in the future.Although we have established a board of directors with independentdirectors and intend to hire other persons to serve in an executivecapacity, readers should consider Mr. Austin’s equityownership in us and position of control in determining whether toinvest in us. These factors should be considered in the context of ournegotiation of an employment agreement with Mr. Austin. See‘‘EmploymentAgreements.’’

Mr.  Austin owns and controlscertain limited partnerships which we mayacquire.

Mr. Austin controls the entity which is thegeneral partner of certain limited partnerships that we have proposedto acquire. Mr. Austin receives compensation from the limitedpartnerships for services he renders to each of them and may benefitfrom our consummation of the proposed acquisitions of the limitedpartnerships. This concentration of control in Mr. Austin mustbe considered in determining whether to invest in us. The limitedpartners have not currently agreed to be acquired by us and the termsof the acquisition are still being considered. There can be noassurance any acquisition will be completed. In such an event, we willhave a continuing obligation to these limitedpartnerships.

Failure to attract and retain qualified personnelmay adversely affect our business.

We believe that ourperformance and future success will depend in large part upon ourability to attract and retain additional highly skilled creative,technical, sales, marketing and financial personnel, especially thosewith experience in the motion picture industry. If we do not succeed inattracting skilled personnel or in retaining our current personnel, ourbusiness could be adversely affected. Competition for such individuals,especially creative and technical talent, is intense. We have in thepast experienced, and expect to continue to experience, difficulty inhiring highly skilled employees with appropriatequalifications.

The investors in the limited partnerships areentitled to recoup their investment before we receive meaningfulearnings.

The feature films that we have produced to date, withone exception, were financed through the creation of limitedpartnerships with unaffiliated investors. Generally, these investorsare entitled to be repaid the entire principal amount of theirinvestments before we share in any profits derived from each of thefilms, other than distribution fee and production fee that TAG USA maybe entitled to before remitting the balance of the proceeds to thelimited partnership entity. After the limited partners recoup theirinvestment, profits, if any, are typically divided between TAG USA(where it acts as the general partner to the limited partnership) andthe limited partners on a 60:40 ratio. The ratio may, however, varydepending on the limited partnership entity. Earnings, therefore, maybe insufficient to allow us to receive any distributions, and if we doreceive a distribution, it may be delayed for a significant period oftime. We intend to finance future feature films through a combinationof bank, equity or debt financing.

We have limited the liabilityof our directors.

Our certificate of incorporation includesprovisions eliminating the personal liability of our directors, exceptfor breach of a director’s duty of loyalty to us or ourshareholders, acts or omissions not in good faith or which involveintentional misconduct or a knowing violation of the law, and in

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respect of any transaction in which adirector receives an improper personal benefit. These provisionspertain only to breaches of duty by directors as such, and not in anyother corporate capacity, e.g., as an officer. As a result of theinclusion of such provisions, neither we nor our shareholders may beable to recover monetary damages against directors for actions taken bythem which are ultimately found to have constituted negligence or grossnegligence in the carrying out of their fiduciary duties, although itmay be possible to obtain injunctive or other equitable relief withrespect to such actions. If equitable remedies are found not to beavailable to shareholders in any particular case, shareholders may nothave an effective remedy against the challenged conduct. We believethat, based upon recent developments in the market fordirectors’ and officers’ liability insurance, suchprovisions are necessary to attract and retain qualified individuals toserve as directors. In addition, such provisions will allow directorsto perform their duties in good faith without concern for theapplication of monetary liability on a retroactive basis in the eventthat a court determines their conduct to have been negligent or grosslynegligent. On the other hand, such provisions significantly limit thepotential remedies available to us or a shareholder, and it is possiblethat the protection afforded by such provisions may reduce the level ofdiligence or care demonstrated by such directors.

RisksRelated To Our Stock

Our common stock may besubject to the ‘‘Penny Stock’’ rules of theSEC and the trading market in our securities is limited, which makestransactions in our stock cumbersome and may reduce the value of aninvestment in our stock.

Shares of our common stock may beconsidered to be ‘‘penny stocks’’ asdefined in the Exchange Act, which are stocks that are traded in theover-the-counter market on the OTC Bulletin Board and have a price lessthan $5.00 per share, subject to certain exemptions. As a result, aninvestor may find it more difficult to dispose of or obtain accuratequotations as to the price of the shares of our common stock. Inaddition, the ‘‘penny stock’’ rules adoptedby the Commission under the Exchange Act subject the sale of the sharesof common tock to certain regulations which impose sales practicerequirements on broker-dealers. For example, broker-dealers sellingsuch securities must, prior to effecting the transaction, provide theircustomers with a document that discloses the risks of investing in suchsecurities. Included in this document are the bid and offer pricequotes for the penny stock and the number of shares to which the quotedprices apply; the brokerage firm’s compensation for the tradeand the compensation received by the individual salesperson for thetrade. If the person purchasing the securities is someone other than anaccredited investor or an established customer of the broker-dealer,the broker-dealer must also approve the potential customer’saccount by obtaining information concerning the customer’sfinancial situation, investment experience and investment objectives.The broker-dealer must also make a determination whether thetransaction is suitable for the customer and whether the customer hassufficient knowledge and experience in financial matters to bereasonably expected to be capable of evaluating the risk oftransactions in such securities. Accordingly, the Commission’srules may limit the number of potential purchasers of shares of ourcommon stock. In addition, certain state securities laws imposerestrictions on transferring ‘‘pennystocks’’ and as a result, the ability of investors tosell their shares of common stock may be impaired.

We have notpaid dividends on our common stock and investors may not receive areturn on an investment in our stock.

We anticipate that for theforeseeable future, earnings will be retained for the development ofour business. Accordingly, we do not anticipate paying dividends on ourcommon stock in the foreseeable future. The payment of future dividendswill be at the sole discretion of our Board of Directors and willdepend on our general business condition.

There are outstandinga significant number of shares available for future sales under rule144.

As of December  31,  2005, there are 21,189,948issued and outstanding shares of our common stock. Of this amount,approximately 12.9  million shares may be deemed to be‘‘restricted shares’’ and, in the future,may be sold in compliance with Rule 144 under the securities Act of1933, as 

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amended. Rule 144 provides that a personholding restricted securities for a period of one year may sell inbrokerage transactions an amount equal to 1% of our outstandingcommon stock every three months. A person who is a‘‘non-affiliate’’ of TAG and who has heldrestricted securities for over two years is not subject to theaforesaid volume limitations. Possible or actual sales of our commonstock by certain of our present shareholders under Rule 144 may, in thefuture, have a depressive effect on the price of our common stock inany market which may develop for such shares.

There area significant number of outstanding options and warrants, the exerciseof which may have a dilutive effect on the price of our commonstock.

As of December  31,  2005, there wereoutstanding and immediately exercisable options to purchase 2,142,526shares of common stock, at an average exercise price of $2.00 per shareand warrants to purchase 5,220,781 shares of common stock exercisableat average price of approximately $1.41 per share. The exercise ofthese securities will cause dilution to our shareholders and the saleof the underlying common stock (or even the potential of such exerciseor sale) may have a depressive effect on the market price of oursecurities. Moreover, the terms upon which we will be able to obtainadditional equity capital may be adversely affected, since the holdersof the outstanding options and warrants can be expected to exercisethem at a time when we would, in all likelihood, be able to obtain anyneeded capital on terms more favorable to it than the exercise termsprovided by the outstanding options and warrants.

OurSeries A Preferred Stock financing may result in dilution to our commonstockholders.

Dilution of the per share value of our commonshares could result from the conversion of most or all of the 6%Series A Redeemable Preferred Stock we issued to the sellingstockholders. There are currently outstanding 5,000 shares of ourSeries A Preferred Stock, which were initially convertable into a totalof 2,000,000 shares of common stock. Although these securities wereissued at the initial conversion rate of $2.50, the decline in themarket price of our common stock has resulted in an adjustment of theconversion price to the floor amount of $1.00. Accordingly, the holdersof our outstanding shares of Series A Preferred Stock are able toconvert these shares into an aggregate of 5,000,000 shares of ourcommon stock. Holders of our common stock will experience substantialdilution from the conversion of the Series A Preferred Stock. In theevent the conversion price is lower than the actual trading price onthe day of conversion, the holder could immediately sell all of itsconverted common shares, which would have a dilutive effect on thevalue of the outstanding common shares. Furthermore, the significantdownward pressure on the trading price of our common stock as Series APreferred Stock holders converted these securities and sell the commonshares received on conversion could encourage short sales by theholders of Series A Preferred Stock or other shareholders. This wouldplace further downward pressure on the trading price of our commonstock. Even the mere perception of eventual sales of common sharesissued on the conversion of the Series A Preferred Stock could lead toa decline in the trading price of our common stock.

Ourcommon stock has low trading volume and any sale of a significantnumber of shares is likely to depress the market price.

Ourcommon stock is traded on the OTC Bulletin Board and the trading volumeof our common stock has been limited. Because of this limited tradingvolume, shareholders may not be able to quickly sell any significantnumber of their shares even after an exemption becomes available, andany attempted sale of a large number of our shares will likely have anadverse impact on the price of our common stock. Because of the limitednumber of shares being traded, the per share price is subject tovolatility and may continue to be subject to rapid price swings in thefuture.

The price of our common stock may bevolatile, and a shareholder’s investment in our common stockcould suffer a decline in value.

There has been significantvolatility in the market price of our common stock, and this volatilitymay continue in the future. In addition, there is a greater chance formarket volatility for securities that trade on the OTC Bulletin Boardas opposed to a national exchange or on the Nasdaq Stock Market. Thisvolatility may be caused by a variety of factors, including generallylower trading 

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volume. In addition to events andcircumstances beyond our control, the price of our common stock islikely to be subject to wide fluctuations in response to certainfactors, including, but not limited to, thefollowing:

|              |                                                       |
|--------------|-------------------------------------------------------|
| •  | quarter to quartervariations in results ofoperations; |

|              |                                      |
|--------------|--------------------------------------|
| •  | announcements of newmotion pictures; |

|              |                                                        |
|--------------|--------------------------------------------------------|
| •  | competitors’announcements of new motionpictures; |

|              |                                                  |
|--------------|--------------------------------------------------|
| •  | general conditions in theentertainment industry; |

|              |                            |
|--------------|----------------------------|
| •  | litigationinvolving us; or |

|              |                                                                                                                                                         |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | investor andcustomer perceptions and expectations regarding our motion pictures,plans and strategic position and those of our competitors andcustomers. |

Additionally, the public stock markets experienceextreme price and trading volume volatility. This volatility hassignificantly affected the market prices of securities of manycompanies for reasons often unrelated to the operating performance ofthe specific companies. These broad market fluctuations may adverselyaffect the market price of our common stock.

Ourexecutive officers and certain stockholders own a significantpercentage of our stock, and as a result, the trading price for ourshares may be depressed and these stockholders can take actions thatmay be adverse to your interests.

Our executive officers anddirectors, beneficially own, in the aggregate, approximately64.4% of our common stock, assuming the conversion and exerciseof all convertible securities held by such persons. In addition, theholders of our Series A Preferred Stock are the beneficial owners of asignificant amount of convertible securities. This concentration ofshare ownership may adversely affect the trading price for our commonstock because investors often perceive disadvantages in owning stock incompanies with controlling stockholders. Although the Series APreferred Stockholders contractually agreed to not convert or exercisethe securities held by them if such event would cause their percentageownership of our common stock to exceed 4.99%, these securityholders, acting together, will have the ability to exert substantialinfluence over all matters requiring approval by our stockholders,including the election and removal of directors and any proposedmerger, consolidation or sale of all or substantially all of ourassets. In addition, these stockholders could dictate the management ofour business and affairs. This concentration of ownership could havethe effect of delaying, deferring or preventing a change in control, orimpeding a merger or consolidation, takeover or other businesscombination that could be favorable to you.

We have authorizedshares of undesignated preferred stock.

Our certificate ofincorporation authorizes the issuance of up to 500,000 shares of‘‘blank check’’ preferred stock, with suchdesignation rights and preferences as may be determined from time totime by the Board of Directors. We issued 5,000 shares of Series APreferred Stock in a private sale which we consummated on May4,  2005, which shares have rights and preferences senior to ourcommon stock. These rights and preferences are described in detailelsewhere in this Annual Report on Form 10-KSB. Subject to the rightsof the holders of the Series A Preferred Stock, our Board of Directorsis empowered, without shareholder approval, to issue additional sharesof preferred stock with dividend, liquidation, conversion, voting orother rights which could adversely affect the voting power or otherrights of the holders of our common stock. In the event of suchissuances, the preferred stock could be utilized, under certaincircumstances, as a method of discouraging, delaying or preventing achange in control of TAG.

Item 2.  Description ofProperty.

We do not own any real property. Our primary officesare at 1333 Second Avenue, Suite 240, Santa Monica, CA where we enteredinto a sublease for approximately 2,000 square feet of office spacebeginning in February  2006. The base rent is $4,000 per monthand the sublease expires 

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April  30, 2007. In January2006, we terminated our previous lease in Beverly Hills, CA as anaccommodation to the new landlord in connection with the sale of thebuilding. The remaining lease commitment on the Beverly Hills location,terminating in September  2007, was $276,000 at December31,  2005. Management does not expect any material obligation toarise in connection with the early termination of the lease.

Weleased an industrial condominium of approximately 10,000 square feetfor use as a production studio in Chatsworth, California under a threeyear lease which commenced in December  2004. Our rent obligationunder this lease was $8,000 per month. In May  2005, an entityaffiliated with our Chief Executive Officer purchased the premises fromthe landlord and in August  2005, the lease with TAG wasterminated effective in May  2005 with no further obligation tous in connection with the lease.

Item 3.  LegalProceedings.

We are not currently a party to any lawsuit orproceeding which, in the opinion of management, is likely to have amaterial adverse effect on TAG, except as set forth below.

We arenamed in an administrative proceedings with the securities regulatoryagency in the state of Texas regarding a private placement of limitedpartnership interests of Supercross the Movie, L.P. made to investorsin that state by Supercross the Movie, L.P. In February  2005,the Texas Securities Bureau and counsel for TAG and Supercross agreedthat Supercross the Movie, L.P. would undertake a rescission offer forthe limited partnership interests of Supercross sold in Texas and tomake all the required filings in that state. The estimated amount ofpartnership interests that would be subject to the rescission offer isapproximately $660,000.

The Maryland Securities Bureau isinvestigating the role of TAG Entertainment Corp. in certain privateofferings made by certain limited partnerships (collectively, the‘‘LPs’’) for which we produced motionpictures in light of the relationships between TAG and the LPs. Thestate has alleged that the sale of limited partnership interests toinvestors in Maryland by these limited partnerships may not have beenmade in compliance with the ‘‘blue sky’’laws of Maryland. In September  2005, the Maryland SecuritiesBureau demanded that these LPs conduct a rescission offer with respectto the limited partnership interests sold to Maryland residents andalso indicated its intention to seek a civil penalty of $5,000 againsteach LP for these alleged violations. TAG and the LPs are currentlyattempting to reach a mutually agreeable settlement of theseallegations and anticipate that each LP will offer rescission to theinvestors residing in Maryland. The total amount of interests sold inMaryland by these LPs was $419,000.

On September21,  2005 a complaint entitled Grobstein, Horwath & Co.,LLP (‘‘Grobstein’’) vs. TAG EntertainmentCorp., Steve Austin, et al. was filed in the Superior Court of TheState of California, County of Los Angeles, Northwest Division. Theplaintiff, our former auditing firm, alleged that we owe the sum ofapproximately $152,000 arising out of an agreement related toGrobstein’s decision to resign as our auditing firm. The partiesstipulated to a settlement of this claim whereby defendants have agreedto pay Grobstein the sum of $110,000 in six equal installmentscommencing March  1,  2006.

Certain limited partnersin the entity Funny Money the Movie, L.P. have demanded that thislimited partnership agree to rescind their purchase of limitedpartnership interests, in the aggregate amount of $275,000, plusinterest. The limited partnership reached an agreement in principlewith these limited partners and expects to finalize, execute andexchange the settlement documents among the relevant parties. Further,these limited partners have claimed that TAG, due to its contractualrelationship with the limited partnership, has responsibility for theactions of the limited partnership. We have denied any responsibilityfor the actions taken in the name of the limited partnership andbelieve we would have meritorious defenses to any claim assertedagainst us. Accordingly, we do not believe that the resolution of thisclaim will have a materially adverse effect on our financial condition.However, no assurances can be given that such belief will ultimatelyprove to be accurate or that other facts adverse to our positioncurrently not known to management will not be uncovered, in which casethe ultimate resolution of this claim could potentially have a materialadverse effect on our financial condition.

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On January  17,  2006, acomplaint was filed against TAG Entertainment, Inc. and Steve Austin byPark Avenue Entertainment, LLC claiming that we materially breached anagreement between the two companies to produce a motion picture. Thecomplaint was filed in the Superior Court of the State of California,County of Los Angeles, Central District, with the caption ParkAvenue Entertainment LLC et al. vs. TAG Entertainment, Inc.; SteveAustin et al. We have been advised that plaintiffs are seeking adefault judgment against the defendants; however, the defendants arecurrently contesting any such action on the grounds of defectiveservice. The claimants are seeking damages in the amount of $2,135,000based on production fees and participation rights that they areallegedly entitled to under the production contract. We have previouslydisputed plaintiffs’ allegations and notified them that we mayassert claims against them concerning their failure to properly performunder the agreement. We are currently reviewing the allegations made inthe complaint and the claims being asserted and we intend to defendthis action vigorously. Management is unable to determine at this timewhether this claim will have a material adverse impact on our financialcondition, results of operations or cash flow.

TAG and its ChiefExecutive Officer are involved in a dispute with Mr.  JeffFranklin and F.W.E., Inc. regarding the production of two motionpictures and business dealings between Mr.  Austin, our ChiefExecutive Officer, and Mr.  Franklin.  The disputes concernthe production and distribution relationship regarding the filmsFunny Money and American Black Beauty. In each case,Mr.  Franklin has alleged that TAG has not properly performed itsobligations in connection with the production of these motion pictures.We have disputed the allegations of Mr.  Franklin, have notifiedhim of our potential claims against him and F.W.E. and have beenengaged in protracted negotiations with him and F.W.E. in order toachieve a global settlement of the disagreements between the parties.Messrs. Franklin and Austin continue to negotiate and discuss theirrespective positions and we are currently unable to determine at thistime whether this claim will have a material adverse impact on ourfinancial condition, results of operations or cash flow.

We havereceived a collection notice in the amount of $183,593 from Mr.R.  Michael Webb on behalf of Webb Development Pension Trust onFebruary  17,  2006. The collection notice seeks repaymentof a $250,000 loan made by the creditor to Supercross the Movie, LLC,which loan was guaranteed by TAG Entertainment, Inc. as well as thepersonal assets of Steve Austin. The loan was initially made inJuly  2004.

We are a defendant in an action titledFillmore et al. v. TAG Entertainment et al., which is pending inState Court in Utah. The action concerns an allegation of non-paymentin connection with the production of the film Wild Stallion.Payment was to be by Wild Stallion Productions, LLC to certain serviceproviders; the parties however are in dispute over the sums now due.Plaintiff has claimed he is entitled to approximately $250,000, whichclaims TAG and the co-defendants have refuted. The parties havestipulated to set aside a default judgment entered against theco-defendants and are engaged in discussions to settle the matterwithout further resort to litigation. We are currently unable todetermine at this time whether this claim will have a material adverseimpact on our financial condition, results of operations or cashflow.

We are the respondent in a proceeding commenced inCalifornia state court under the caption Barrus et al. v. StevenAustin, et al. Plaintiff is the holder of an aggregate of 50,000shares of common stock of TAG Entertainment USA, Inc. and has electedto its exercise dissenters’ rights under the CaliforniaCorporations Code. We have been negotiating with the claimant toresolve this matter and we are currently unable to determine at thistime whether this claim will have a material adverse impact on ourfinancial condition, results of operations or cash flow.

We areinvolved in various claims and other legal proceedings that arise fromtime to time in the ordinary course of business, including claimsasserted by guilds and unions representing creative talent. Based onthe facts of which we are currently aware, management does not believethat any of these matters will have a material adverse effect on ourfinancial position or results of operations. Litigation is inherentlyunpredictable and excessive verdicts do occur. Although we believe wehave valid defenses in these matters, we may incur judgments or enterinto settlements of claims that could have a material adverse effect onour financial position or results of operations in any particular

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period. No assurances can be given thatmanagement’s assessment of these claims will ultimately prove tobe accurate or that other facts adverse to our position currently notknown to management will not be uncovered, in which case the ultimateresolution of some or all of these claims could potentially have amaterial adverse effect on our financial condition. Further, theoccurrence of intervening events may also result in managementreconsidering their assessment of the impact of these matters.

Weand TAG USA have been involved in various claims made or threatenedagainst certain limited partnerships. Although these claims concern theactions of the specific limited partnerships, we have been involved inthese proceedings due to the interests arising out of our productionand distribution activities on behalf of these limited partnershipsand, in certain situations, where an affiliate of our Chief ExecutiveOfficer serves as general partner of the limited partnership entity. Incertain situations, these arrangements have led to limited partnersasserting claims against and seeking redress from us. Regardless of theultimate liability to any of these claimants, these disputes may imposefinancial and administrative challenges that may require theapplication of our resources and the time and attention of ourmanagement. Further, based on our production relationship with certainlimited partnerships, cash resources were used to satisfy obligationsof the limited partnerships and although we expect reimbursement fromthe limited partnerships, this cannot be assured. These situations havenegatively impacted our cash position and distracted management fromfocusing on our business. With respect to claims, adverse decisions orsettlements may occur in one or more of these matters and it is notpossible to estimate the possible loss or losses, if any. Based on thefacts of which we are currently aware, management believes that theresolution of these claims will not have a materially adverse effect onour condition. However, no assurances can be given that such beliefwill ultimately prove to be accurate or that other facts adverse to ourposition currently not known to management will not be uncovered, inwhich case the ultimate resolution of some or all of these claims couldpotentially have a material adverse effect on our financialcondition.

Item 4.    Submission of Matters to a Vote ofSecurity Holders.

None.

PART II

Item5.    Market for Common Equity and Related StockholderMatters.

Our common stock trades on the Over-the CounterBulletin Board, also called the OTCBB, under the trading symbol‘‘TAGE.OB’’. On March  31,2006, our common stock had bid and offer prices of $0.60 and $0.78,respectively. At December  31,  2005 our common stock had aclosing price of $1.90 per share. Our certificate of incorporationauthorizes 50,000,000 shares of common stock, par value $.001 per shareand 500,000 shares of preferred stock, par value $.001 per share. As ofDecember  31,  2005, we had 21,189,948 shares of commonstock issued and outstanding and 5,000 shares of preferred stock issuedand outstanding, all of which shares of preferred stock are designatedas Series A Convertible Preferred Stock.

The following table setforth the quarterly high and low bid prices per share for our commonstock. The bid prices reflect inter-dealer prices, without retailmarkup, markdown, or commission and may not represent actualtransactions.

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|                    |  |         |        |        |  |        |        |        |  |  |
|--------------------|--|---------|--------|--------|--|--------|--------|--------|--|--|
|               |  | HighBid |        | LowBid |
| Fiscal2006         |  |    |   |   |  |   |   |   |
| March  31,2006     |  | $       | 1.60   |   |  | $      | 0.25   |   |
| Fiscal2005         |  |    |   |   |  |   |   |   |
| March  31,2005     |  | $       | 5.40   |   |  | $      | 1.60   |   |
| June30,2005        |  | $       | 5.40   |   |  | $      | 2.10   |   |
| September30,  2005 |  | $       | 4.00   |   |  | $      | 1.30   |   |
| December  31,2005  |  | $       | 2.50   |   |  | $      | 1.01   |   |
| Fiscal2004         |  |    |   |   |  |   |   |   |
| March  31,2004*    |  | $       | 3.75   |   |  | $      | 1.55   |   |
| June  30,2004*     |  | $       | 4.20   |   |  | $      | 2.00   |   |
| September30, 2004* |  | $       | 5.05   |   |  | $      | 2.75   |   |
| December  31,2004  |  | $       | 6.40   |   |  | $      | 3.00   |   |
|                    |

|  |
|--|
|  |  |
|  |

|  |   |                                                                                                   |
|--|---|---------------------------------------------------------------------------------------------------|
|  | * | Pricesquoted are those of Power Marketing, Inc., the predecessor to TAG. SeeBusiness Description. |

Number of RecordHolders

The approximate number of record holders of ourcommon stock as of March 28, 2006 was 293. Such number of recordholders was determined from our stockholder records, and does notinclude beneficial owners of our common stock whose shares are held inthe names of various security holders, dealers and clearingagencies.

Dividend Policy

We have not paid anydividends upon our common stock since our inception, and do not expectto pay any dividends upon our common stock in the foreseeable futureand plan to retain earnings, if any, to finance the development andexpansion of our business. We are obligated to pay dividends to theholders of our outstanding shares of Series A Preferred Stock in anamount equal to 6% per annum. Accrued dividends on the shares ofSeries A Preferred Stock are payable quarterly in arrears on eachJanuary  1, April  1, July  1, and October  1of each calendar year and on the maturity date. We will pay thesedividends in cash unless we satisfy the conditions for paying dividendsin shares of our common stock, which provide that if on the applicabledividend payment dateand on each of the twenty trading days immediatelypreceding such date, all of the following conditions are satisfied infull:

|                    |                                                                                                                                                                                                           |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •   | the payment to be madein common stock shall not cause the number of shares of common stockbeneficially owned by the holder to exceed 4.99% of the totalnumber of shares of common stock then outstanding; |

|                    |                                                                                                                                                                                                                                                                 |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •   | this registration statementshall have been declared effective and not be the subject of any stoporder, shall be available to each holder for the resale of the sharesof common stock so issuable or such shares are eligible for resalepursuant to Rule 144(k); |

|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •   | (a)our common stock shall be listed on the Nasdaq National Market, theNasdaq SmallCap Market or the New York Stock Exchange and trading inthe common stock on such market or exchange shall not then besuspended, (b) we shall be in compliance with each of the listingstandards of the market or exchange upon which our common stock istraded, and (c) we shall not have received any notice of noncompliancefrom such market or exchange; |

|                    |                                                                                                                                                                                                                          |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •   | the trading volume of shares ofcommon stock shall have exceeded $500,000 per day for any fifteenconsecutive trading days after the effective date of the registrationstatement of which this prospectus forms a part;and |

|                    |                                                                                                                                                                                                                             |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •   | there shall not haveoccurred and be continuing (x) a breach by us of our obligations underthe agreements pursuant to which we issued the Series A PreferredStock; (y) a change of control event; or (z) a liquidationevent. |

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Recent Sales of UnregisteredSecurities

In connection with the merger of TAG USA withPower Marketing, Inc., TAG USA common stockholders and warrant holderswere issued an aggregate of 21,450,000 shares of common stock andwarrants of Power Marketing in exchange for the shares of TAG USAcommon stock (and warrants) that they owned. In addition, an aggregateof 2,035,000 options of TAG USA were exchanged for options to purchaseshares of our common stock at the exchange rate of 1.1101. The issuanceof these securities was exempt from the registration requirements ofthe Securities Act of 1933, as amended, pursuant to Section 4(2),and/or Regulation D. The security holders receiving our securities wereall existing security holders of TAG USA.

In connection with themerger, we issued an aggregate of 300,000 shares of our common stock toRaymond J. Skiptunis pursuant to a consulting agreement between us forprofessional services rendered in connection with the consummation ofthe merger. This issuance was made pursuant to the exemption providedby Section 4(2) of the Securities Act of 1933, as amended.

InJanuary  2005, we commenced a private placement offering ofshares of common stock under Section 4(2) of the Securities Act of1933, as amended, and Rule 506, promulgated thereunder. This offeringexpired during the fiscal quarter ended June  30,  2005. Anaggregate amount of 29,480 shares of common stock were issued at a pershare price of $3.00. We received a total of $88,000 from these saleswhich has been used for working capital and general corporate purposes.We relied on Section 4(2) of the Securities Act of 1933 and Rule 506promulgated thereunder to issue the securities, inasmuch as the shareswere offered and sold only to accredited investors without any form ofgeneral solicitation.

On March  30,  2005, weentered into a Securities Purchase Agreement with Satellite StrategicFinance Associates, LLC and Satellite Strategic Finance Partners, Ltd.under which we issued $1.0  million in aggregate principal amountof Senior Secured Notes and Warrants to purchase 500,000 shares ofcommon stock. We received gross proceeds of $1,000,000, which was usedfor the production and distribution of films, including acquisition ofadditional product and/or distribution assets and for general workingcapital. The issuance of these securities was exempt from registrationpursuant to Rule 506 promulgated under Section 4(2) of the SecuritiesAct of 1933, as amended, and may not be offered or sold in the UnitedStates absent registration or an applicable exemption from suchregistration requirement.  

On May  4,  2005,we completed a private placement with Satellite Strategic FinanceAssociates, LLC and Satellite Strategic Finance Partners, Ltd. of 5,000shares of our Series A Convertible Preferred Stock, par value $.001 pershare, and warrants to purchase 2,000,000 shares of common stock. Theplacement was made pursuant to a Securities Purchase Agreement, datedMay  3,  2005 and the gross proceeds of this transactionwere $5,000,000. We repaid out of the gross proceeds the secured notesthat we issued to the investors in the bridge financing completedMarch  30,  2005 and described above. After payment of thenotes and offering expenses in the amount of approximately $370,000, wereceived net proceeds of approximately $3,480,000 from this financing.We have used the net proceeds for the production, acquisition anddistribution of feature films and general working capital. ThePreferred Stock is convertible at the option of the holder into aninitial aggregate amount of 2,000,000 shares of common stock, par value$.001 per share, at an initial conversion price of $2.50 per share.However, the decline in the market price of our common stock hasresulted in an adjustment of the conversion price to the floor amountof $1.00. Accordingly, the holders of our outstanding shares of SeriesA Preferred Stock are able to convert these shares into an aggregate of5,000,000 shares of our common stock. In addition, we are required toredeem the Preferred Stock (a) on its maturity date; (b) upon a changeof control; or (c) if we commit a default under the transactionagreements. The warrants have an initial exercise price of $2.50 pershare, subject to adjustment based on the anti-dilution provisions ofthe warrants, are immediately exercisable and expire in seven years.The sale of the Preferred Stock and warrants to the Investors wasexempt from the registration provisions of the Securities Act of 1933pursuant to Section 4(2) of the Securities Act and/or Regulation D.Accordingly, these securities may not be offered or sold in the UnitedStates absent registration or an applicable exemption from suchregistration requirement.

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In August  2005, we issued 9,500shares to a warrant holder upon its exercise of common stock purchasewarrants previously issued to him. The warrant was exercised on acashless basis and we did not receive any proceeds from thistransaction. The issuance of these securities was exempt fromregistration under the Securities Act of 1933, as amended, underSection 4(2) thereof inasmuch as the securities were issued without anyform of general solicitation or general advertising and the acquirerwas provided with access to material information concerning thecompany.

In July  2005, we issued 35,000 shares of commonstock to a consultant for services rendered. The issuance of thesesecurities was exempt from registration under the Securities Act of1933, as amended, under Section 4(2) thereof inasmuch as the securitieswere issued without any form of general solicitation or generaladvertising and the acquirer was provided with access to materialinformation concerning the company.

StockRepurchases

During 2005, we did not repurchase any shares ofour common stock.

Transfer Agent

The transferagent for our common stock is InterWest Transfer Agency, Salt LakeCity, UT.

Item6.   Management’s Discussion and Analysisor Plan ofOperation.

Overview

Thismanagement’s discussion and analysis of financial condition andresults of operations contains forward-looking statements that involverisks and uncertainties. Please see ‘‘Item1—Business— Forward-Looking Statements’’for a discussion of the uncertainties, risks and assumptions associatedwith these statements. You should read the following discussion inconjunction with our audited consolidated financial statements and thenotes to our audited consolidated financial statements includedelsewhere in this report. Our actual results may differ materially fromthose discussed in the forward-looking statements as a result ofvarious factors, including but not limited to those listed under‘‘Item 1—Business—RiskFactors’’ and included in other portions of thisreport.

Nature of Operations

TAG Entertainment Corp.is a Delaware corporation headquartered in Santa Monica, California. Weare engaged in the development, production and distribution of motionpictures and the management of studio facilities. We also acquire thecopyrights and/or distribution rights to already completed films formedia exhibition. In order to finance film production, we have raisedfunds through the establishment of single purpose limited partnershipsand through the sale of equity or debt securities. TAG EntertainmentUSA, Inc. (‘‘TAG USA’’), our wholly-ownedsubsidiary, serves as the sole general partner of the following fourlimited partnerships: Majestic Film Partners, LP, Majestic FilmPartners II, LP, Majestic Film Partners III, LP and Majestic FilmPartners IV, LP (the ‘‘Majestic LimitedPartnerships’’). TAG USA is also the distributor of filmsproduced by numerous other limited partnerships as well as assists infacilitating the production and distribution of films produced bylimited partnerships for which it receives an overhead and/orproduction fee. Five of these other limited partnerships have as theirgeneral partner an entity owned and controlled by Steve Austin, ourChief Executive Officer.

Our revenues are derived from motionpicture production and distribution fees, which includes theatrical,home entertainment, television and international distribution.Theatrical revenues are derived from the domestic theatrical release ofmotion pictures in North America. Home entertainment revenues arederived from the sale of video and DVD releases of our own productionsand acquired films, including theatrical releases and direct-to-videoreleases. Television revenues are primarily derived from the licensingof our productions and acquired films to the domestic cable, free andpay television markets. International revenues are derived from thelicensing of our productions and acquired films to internationalmarkets on a territory-by-territory basis.

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Our primary operating expenses includethe following: direct operating expenses, which include amortization ofproduction or acquisition costs, participation and residual expenses,distribution and marketing expenses; which primarily include the costsof theatrical ‘‘prints and advertising’’and of video and DVD duplication and marketing; and general andadministration expenses, which include salaries and other overhead.

Merger

On November  22,  2004, TAG USA wasacquired by Power Marketing, Inc., a Delaware corporation. In thetransaction, TAG USA merged with a subsidiary of Power Marketing, Inc.and became a wholly-owned subsidiary of Power Marketing, Inc., nowoperating as a separate entity. As a result of this transaction, thestockholders and other security holders of TAG USA became the owners ofapproximately 90% of our outstanding shares of common stock. Inconnection with the merger, Power Marketing changed its corporate nameto TAG Entertainment Corp., obtained the new trading symbol TAGE.OB andall of the officers and directors of Power Marketing resigned andMr.  Austin, who was the majority shareholder, Chief ExecutiveOfficer and sole director of TAG USA became our Chief ExecutiveOfficer, Chief Financial Officer and sole director. We appointed fiveadditional directors to our board during 2005; however, as ofMarch  20,  2006, two of our independent directorsresigned. The transaction was treated as a reverse merger and arecapitalization of the company for reporting purposes. The holders ofapproximately 1,122,000 shares of common stock of TAG USA that did notconsent in writing to our acquisition of TAG USA were entitled toexercise appraisal rights under the California Corporations Code. Asdescribed under the caption ‘‘LegalProceedings,’’ we are the respondent in a proceedingcommenced by the holder of an aggregate of 50,000 shares of commonstock of TAG USA that has elected to its exercise dissenters’rights under the California Corporations Code. We continue to negotiatewith the claimant to resolve this matter.

Going Concern andManagement Plans

Our financial statements have been presented onthe basis that we are a going concern, which contemplates therealization of assets and the satisfaction of liabilities in the normalcourse of business. We have experienced recurring losses and negativecash flows from operations and have a working capital deficit, whichraises substantial doubt about our ability to continue as a goingconcern and our independent auditors have included a‘‘going concern’’ explanatory paragraph intheir report on our financial statements for the year endedDecember  31,  2005. We are currently devoting efforts toraising additional capital and achieving profitable operations. Ourability to continue as a going concern is dependent upon its ability todevelop additional sources of capital. The accompanying financialstatements do not include any adjustments that might result from theoutcome of these uncertainties. We closed on a bridge financing in theamount of $1,000,000 on March  30,  2005. On May  4,2005,we completed a $5,000,000 preferred stock financing and retiredthe bridge loan.

On March  30,  2005, we entered intoa Letter of Intent to acquire a privately held company, MyriadPictures, Inc., which is engaged in the film production anddistribution business. The letter of intent provided for a purchaseprice of approximately $4,000,000, including an earnout payment of upto $2,000,000. In connection with the execution of the letter ofintent, we provided Myriad with a short term loan of $250,000, bearinginterest at the rate of 3% per annum, which Myriad was to usefor working capital and to pay for its acquisition costs pending theclosing (the ‘‘Myriad Loan’’). The MyriadLoan is secured by a lien on the assets of Myriad. As ofFebruary  23,  2006, we notified Myriad that we wereterminating negotiations and the letter of intent, effectiveimmediately. Pursuant to its terms, the Myriad Loan (less certainexpenses) is repayable by March  30,  2006 and we have notreceived repayment as of the date hereof.

In order to satisfyfuture cash requirements, management is actively pursuing and hasentered into discussions regarding additional financing to support theproposed acquisition, related expansion plans, and ongoing operations.We currently have no firm agreements with any third parties for anyfuture transactions and future financings.

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Critical AccountingPolicies

Accounting Principles, Estimates andReclassifications

The accompanying consolidated financialstatements for the years ended December  31,  2005 and 2004have been prepared in accordance with accounting principles generallyaccepted in the United States (‘‘GAAP’’).The preparation of the financial statements in accordance with GAAPrequires management to make estimates and assumptions that affectreported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period.Actual results could differ from those and other estimates. Inpreparing the financial statements for comparative purposes, prior yearfinancial information has been reclassified to conform withclassifications of the current year.

Principles ofConsolidation

The accompanying consolidated financial statementsinclude the accounts of TAG, TAG USA and of the Majestic LimitedPartnerships, of which TAG USA is the sole general partner. The GeneralPartner has the full and exclusive control of the management andoperation of the business of each partnership. In its capacity asGeneral Partner, TAG USA participates in 1% of the losses of thelimited partnerships but shares in 60% of any profits. Allsignificant inter-company balances and transactions have beeneliminated in consolidation.

Minority Interests

Weconsolidate the Majestic Limited Partnerships, of which TAG USA is thesole general partner. The amount of minority interest represents theaggregate net limited partnership capital of each partnership offset by99% of accumulated Majestic Limited Partnershiplosses.

Revenue Recognition

Revenue from the sale orlicensing of films and television programs is recognized upon meetingall recognition requirements of SOP 00-2. Revenue from the theatricalrelease of feature films is recognized at the time of exhibition basedon our participation in box office receipts. Revenue from the sale ofvideocassettes and digital video disks(‘‘DVDs’’) in the retail market isrecognized on the ‘‘street date’’ when itis available for sale to the customer. Revenues from televisionslicensing are recognized when the feature film or television program isavailable to the licensee for telecast. Revenues from sales tointernational territories are recognized when the feature film ortelevision program is available to the distributor for exploitation andno conditions for delivery exist.

Production fees are earned onfilms where we have been engaged as producer by limited partnershipsformed to finance the movie. In certain cases, such fees are fixed inamount and are earned and billed during the production process. Inother cases, we earn a fee based on the revenues of the film andtherefore recognizes our fee when revenues are determined and reportedby the distributors of the film.

On certain films, we earnmanagement fees in connection with our role as production manager forthe limited partnerships where our Chief Executive Officer has assignedto TAG his management fee rights during the production period.

We bill overhead fees to limited partnerships for reasonable, directand allocable costs arising during the management of film theprojects.

Rental revenue from short-term operating leases ofstudio facilities is recognized over the term of the lease.

Cashpayments received which may include minimum guarantees may be recordedas deferred revenue until all conditions of revenue recognition havebeen met.

Cash Equivalents

For purposes of reporting cashflows, we consider all short-term, interest bearing deposits withoriginal maturities of three months or less to be cashequivalents.

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Capitalized FilmCosts

Capitalized film costs consist of investments in filmswhich include the unamortized costs of completed films which we haveproduced or for which we have acquired distribution rights or filmlibraries.

For films we produced, capitalized costs include alldirect production and financing costs, and production overhead. Foracquired films, these capitalized costs consist of minimum guaranteepayments to acquire the distribution rights.

Costs of acquiringand producing films and of acquired libraries are amortized using theindividual-film-forecast method, whereby these costs are amortized andparticipation and residual costs are accrued in the proportion that thecurrent year’s revenue bears to management’s estimate ofultimate revenue at the beginning of the current year expected to berecognized from the exploitation, exhibition or sale of thefilms.

Ultimate revenue includes estimates over a period not toexceed ten years following the date of initial release. For titlesincluded in acquired libraries, ultimate revenue includes estimatesover a period not to exceed ten years following the date ofacquisition.

Capitalized film costs are stated at the lower ofamortized cost or estimated fair value on an individual film basis. Thevaluation of investment in films is reviewed on a title-by-title basis,when an event or changes in circumstances indicated that the fair valueof a film is less than its unamortized cost. The fair value of the filmis determined using management’s future revenue and costestimates. Additional amortization is recorded in the amount by whichthe unamortized costs exceed the estimated fair value of the film.Estimates of future revenue involve measurement uncertainty and it istherefore possible that reductions in the carrying value of investmentin films may be required as a consequence of changes inmanagement’s future revenue estimates.

Films in progressinclude the accumulated costs of production which have not yet beencompleted.

Films in development include costs of acquiring filmrights to original screenplays and costs to adapt such projects. Suchcosts are capitalized and, upon commencement of production, aretransferred to production costs. Projects in development are writtenoff at the earlier of the date determined not to be recoverable or whenabandoned, or three years from the date of the initialinvestment.

Equipment

Equipment is carried at cost and isdepreciated on the straight-line basis over their estimated usefullives of three to eight years. Repairs and maintenance are expensed asincurred. When assets are retired or otherwise disposed of, theproperty accounts are relieved of costs and accumulated depreciationand any existing gain or loss is credited or charged to operations.Depreciation expense was $49,000 and $48,000 in 2005 and 2004,respectively.

Stock-Based Compensation

We account forstock-based compensation in accordance with Statement of FinancialAccounting Standards No. 123, ‘‘Accounting forStock-Based Compensation’’ (‘‘SFAS123’’). This standard requires us to adopt the‘‘fair value’’ method with respect tostock-based compensation of consultants and other non-employees. We didnot change our method of accounting with respect to employee stockoptions; we continue to account for these under the‘‘intrinsic value’’ method and to furnishthe pro-forma disclosures required by SFAS 123.

Valuation of theOur Common Stock

Unless otherwise disclosed, all stock-basedtransactions entered into by us have been valued at the market value ofour common stock on the date the transaction was entered into or havebeen valued using the Black-Scholes to estimate the fair marketvalue.

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Concentrations of Risk

Ourfinancial instruments that are exposed to concentrations of credit riskconsist of cash and receivables. We invest our cash in banks with highcredit ratings; however, certain account balances have been maintainedat levels in excess of federally insured limits. We have notexperienced a loss in such accounts.

We extend credit based on anevaluation of the customer’s financial condition, generallywithout collateral. Exposure to losses on receivables is principallydependent on each customer’s financial condition. We monitor ourexposure for credit losses and maintain allowances for anticipatedlosses, as required. We sub-distribute titles in both the domestic andinternational markets. We are typically paid an advance or minimumguarantee for these rights. Any overages (revenue in excess of theminimum guarantee) are reported to us 45 to 90 days after the reportingperiod. Because of the minimum guarantees and the details of ourdistribution relationships, our outstanding balances may extend togreater than 90 days.

At December  31,  2005, ourreceivables included $1.6  million to be collected from aninternational film distributor for sub-distribution rights on a filmcompleted and delivered during the year. In addition, we issued a notefor production funding provided to the investor partnership that ownsthe underlying rights to this film. The note receivable balance was$1.2  million at December  31,  2005. The receivablefrom distributor represents a minimum guarantee under a distributioncontract with us to be collected from receipts in various foreignmarkets. The note receivable, which originally matured during thefourth quarter of 2005 was extended until the fourth quarter of 2006.The amount due bears interest at 12% per annum and will becollected from the partnership after payment of distribution andproduction fees and expenses related to the film. While estimates ofgross receipts, including video and DVD sales, support the statedvalues of these amounts, the collection of these balances is subject toinherent risks associated with the worldwide performance of the filmand general conditions in the various foreign markets.

IncomeTaxes

Deferred income taxes are recorded to reflect the taxconsequences in future years of temporary differences between the taxbasis of the assets and liabilities and their financial statementamounts at the end of each reporting period. Valuation allowances areestablished when necessary to reduce deferred tax assets to the amountexpected to be realized. Income tax expense is the tax payable for thecurrent period and the change during the period in deferred tax assetsand liabilities. The deferred tax assets and liabilities have beennetted to reflect the tax impact of temporary differences. A fullvaluation allowance has been established for net deferred tax assets asmanagement believes that it is more likely than not that a tax benefitwill not be realized.

Earnings per Common Share

Wecompute earnings per common share in accordance with Statement ofFinancial Accounting Standards No. 128, ‘‘Earnings perShare’’ (SFAS No. 128). The Statement requires dualpresentation of basic and diluted EPS on the face of the incomestatement for all entities with complex capital structures and requiresa reconciliation of the numerator and denominator of the basic EPScomputation to the numerator and denominator of the diluted EPScomputation. Basic EPS is computed by dividing income or loss availableto common shareholders by the weighted average number of common sharesoutstanding. The computation of diluted EPS is similar to the basic EPScomputation except the denominator is increased to include the numberof additional shares that would have been outstanding if the dilutivepotential common shares had been issued. In addition, the numerator isadjusted for any changes in income or loss that would result from theassumed conversions of those potential shares. However, suchpresentation is not required if the effect is anti-dilutive. Thediluted EPS amounts for the years ended December  31,  2005and 2004 do not reflect the impact of common share equivalents arisingfrom warrants and options totaling 7,363,000 and 4,990,000 atDecember  31,  2005 and 2004, respectively, as the effectswould be anti-dilutive in those periods.

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Results of Operations: Fiscal Year2005 Compared to Fiscal Year2004

Revenue

Gross revenues for theyear ended December  31,  2005 and 2004 were $3,879,000 and$2,059,000, respectively, an increase of $1,820,000 or 88%. Theincrease in revenues was principally attributable to the increase inproduction and distribution fees arising from film projects where TAGwas engaged to manage filming and related production activities onbehalf of certain investor partnerships. Production, management andoverhead fees for the year ended December  31,  2005increased by $1,606,000 from $675,000 in 2004 to $2,281,000 for 2005.This increase was due to increased production and administrativesupport activity during the year on film projects.

In addition,film revenues increased as a result of distribution fees arising onfilm projects that were delivered for international distribution.Distribution fees for the year ended December  31,  2005increased by $503,000 from $1,095,000 in 2004 to $1,598,000 for2005.

There was no studio rental income in 2005, compared to$289,000 in 2004, as we elected to not pursue studio rental activitiesin 2005. During 2005 our lease was terminated subsequent to the sale ofthe building.

Expenses

Operating expensesfor the year ended December  31,  2005 were $4,452,000compared to $6,391,000 for the year ended December  31,2004, a decrease of $1,939,000. The decrease in expenses is primarilyattributed to decreased amortization of film costs ($690,000), legalsettlements ($590,000), studio rent ($133,000), and selling, generaland administrative expenses ($1,135,000) offset by failed acquisitioncosts ($609,000). Film and amortization costs for the year endedDecember  31,  2005 were $575,000 compared to $1,265,000for the year ended December  31,  2004. The decrease infilm amortization is directly related to decreased revenues on filmseither TAG or consolidated limited partnerships previously financed andproduced. Legal settlements for the year ended December31,  2005 were $0 as compared to $590,000 for the year endedDecember  31,  2004. In 2004, legal settlements were paidwith regard to our lease of certain studio facilities in 2004 and aninvestor claim.

Studio rent expenses for the year endedDecember  31,  2005 were $43,000 as compared to $176,000for the year ended December  31,  2004. The decrease instudio rent expense was the result of the company not pursing studiorental activities in 2005 and our termination of this lease during thefiscal year.

Decreased consulting and legal expenses in 2005contributed to the overall decrease in expenses as we completed ourtransition as a public company in connection with the merger in 2004.Failed acquisition costs increased in the year ended December31,  2005 by $609,000 as the result of the write off ofaccounting, legal, and other expenses related to the termination of theLetter of Intent with Myriad Pictures. There were no failed acquisitioncosts in the prior year.

Interest expense was $1,561,000 in 2005and included discount amortization associated with the bridge financingretired in May  2005 ($788,000), amortization of the convertiblepreferred stock discount associated with related warrants ($573,000),and interest on our convertible preferred stock. There was no interestexpense in the prior year.

MinorityInterest

The loss attributable to minority interest for theyear ended December  31,  2005 and 2004 was $255,000 and$451,000, respectively, a decrease of $196,000. The decrease isprimarily attributed to the partial write-down of films costs in threeof the limited partnerships in 2004 that we consolidate in ourfinancial statements. There were no corresponding write-downs in the2005.

Financial Condition, Liquidity, and CapitalResources: For the Year Ended December  31,2005

Since inception, we have financed our operationsprimarily through the sale of equity securities and issuance of debtinstruments.

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As of December  31,  2004, wehad minimal cash and cash equivalents and we were in the process ofcompleting various financing arrangements. In March  2005, wecompleted a secured debt financing transaction which provided us withcash of $1,000,000. We have used the funds for the production anddistribution of films, including acquisition of additional productand/or distribution assets and for general working capital. We alsogranted the investor warrants to purchase a total of 500,000 shares ofour common stock, exercisable at $1.00 per share, subject to adjustmentupon certain events, including as a result of our sale of equitysecurities at a price below the exercise price. The warrants areexercisable at any time on or before March  30,2010.

On May  4,  2005, we consummated a subsequentfinancing transaction with the holders of the secured notes, pursuantto which the secured notes were repaid in full and we fulfilled ourobligations under the Security Agreement and Guaranty we entered inconnection with our secured note financing. In this financingtransaction, we completed a private placement of shares of TAG’sSeries A Convertible Preferred Stock, par value $.001 per share, andwarrants to purchase shares of TAG’s common stock. The placementwas made pursuant to a Securities Purchase Agreement, dated May3,  2005 and the gross proceeds of this transaction were$5,000,000. We repaid out of the gross proceeds the secured note weissued to the investor in the bridge financing completed March30,  2005. After payment of the note and offering expenses in theamount of approximately $370,000, we received net proceeds ofapproximately $3,480,000 from this financing. We are using the netproceeds for the production, acquisition and distribution of featurefilms and general working capital.

In this financing, we issued5,000 shares of Series A Preferred Stock, convertible at the option ofthe holder into an initial aggregate amount of 2,000,000 shares ofcommon stock, par value $.001 per share, at an initial conversion priceof $2.50 per share, and warrants to purchase an initial aggregateamount of 2,000,000 shares of common stock at an initial exercise priceof $2.50 per share, which are immediately exercisable and expire inseven years. Due to the decline in the market price of our commonstock, the conversion rate of the shares of Series A Preferred Stockwas adjusted to $1.00 and such shares are presently convertible into anaggregate of 5,000,000 shares of common stock. Each share of PreferredStock, which has a stated value of $1,000 per share, earns cumulativedividends at a rate of 6% per annum and matures three years fromthe date of issuance. The dividend and liquidation rights of thePreferred Stock are senior to those of its common stock. The PreferredStock does not carry voting rights.

Net cash used for operatingactivities for 2005 was $2,176,000 which primarily resulted from ouroperating losses, as well as amounts advanced to certain partnershipsto fund completion of films where we are engaged as producer anddistributor. Net cash used for operating activities for the year endedDecember  31,  2004 was $888,000 which primarily consistedof our operating loss along with film investments of $1,006,000, offsetby increases in accrued salaries of $420,000 and amounts payable toaffiliated partnerships of $1,238,000.

Net cash used in investingactivities for 2005 was $2,223,000 compared to $167,000 in the prioryear. In 2005, we loaned $250,000 to Myriad Pictures, Inc., inconnection with a proposed acquisition and issued a note for theprovision of production completion funds on a film that was releasedduring the third quarter. In addition, we incurred $338,000 in costsrelated to a proposed acquisition and invested $200,000 in filmpartnerships. In 2004, equipment purchases totaled $153,000. As ofFebruary  23,  2006, we notified Myriad that we wereterminating negotiations and the letter of intent, effectiveimmediately and have requested repayment of our loan, which was due(less certain expenses) by March  30,  2006. We have notyet received repayment of this loan.

Net cash provided byfinancing activities for 2005 was $4,434,000 which primarily consistedof proceeds from debt financings offset by financing costs. Net cashprovided by financing activities in 2004 was $393,000 which primarilyincluded proceeds from the issuance of common stock and privateplacement proceeds payable to our chief executive officer.

In2005, we invested $260,000 in a limited liability company created toproduce a film with the working title of Pool Hall Prophets. InMarch  2005, the limited liability company agreed to pay us aspecial distribution equal to our initial capital contribution plus10% for a total of $286,000. We retain 

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a minority interest in the company and mayreceive further disbursements from operating cash in the future subjectto the limited liability company’s prior obligations and theresults of its operations.

Our subsidiary, TAG USA, entered intoproduction and distribution agreements with Wild Stallion ProductionsLP, an unaffiliated third party that holds the rights to the motionpicture Wild Stallion. These arrangements provide TAG USA withthe rights to produce and distribute the motion picture. In July2005, TAG USA agreed to guarantee a loan in the amount of $250,000 madeby an individual lender to Wild Stallion Productions in order to inducethe lender to make this loan. The loan proceeds have been used by WildStallion for the production of the motion picture. This loan, whichbears interest at the rate of 10% per annum, was due onAugust  15,  2005 and has not been repaid by the limitedpartnership. The lender, however, has neither demanded repayment fromthe limited partnership nor notified TAG USA of its intention tocollect under the guarantee.

At December  31,  2005,our receivables included $1.6  million to be collected from aninternational film distributor for sub-distribution rights on the filmSupercross, which was film completed and delivered during theyear. In addition, we issued a note for production funding provided tothe investor partnership that owns the underlying rights to this film.The note receivable balance was $1.2  million at December31,  2005. The receivable represents a minimum guarantee under adistribution contract with us to be collected from receipts in variousforeign markets. The note receivable, which originally matured duringthe fourth quarter of 2005 was extended until the fourth quarter of2006. The amount due bears interest at 12% per annum and will becollected from the partnership after payment of distribution andproduction fees and expenses related to the film.

We willcontinue to evaluate our intangible assets, including goodwill,acquired product rights, and other intangible assets, whenever eventsor circumstances occur which indicate that these assets might beimpaired. We have acquired limited partnership interests in fivelimited partnerships from the holders of such interests inconsideration for shares of our common stock. We have issued 675,000shares of our common stock in such transactions and acquired limitedpartnership interests valued at $688,000. We hold a 14.2%position in Animal Partners, L.P., which was valued at $425,000 and a5.9% position in Family Film Partners VII, LP valued at$200,000. We will recognize an impairment charge based on the amountsof these investments if we determine, in accordance with generallyaccepted accounting principles, that the carrying value of these assetsexceeds the undiscounted future cash flows expected from such assets aswell as upon the eventual disposition of such assets. If an asset isconsidered to be impaired, the impairment to be recognized is measuredby the amount by which the carrying amount of the asset exceeds thefair value of the asset. We review these assets on a quarterly basis todetermine whether an impairment charge is appropriate.

We havereceived a collection notice in the amount of $183,593 from Mr.R.  Michael Webb on behalf of Webb Development Pension Trust onFebruary  17,  2006. The collection notice seeks repaymentof a $250,000 loan made by the creditor to Supercross the Movie, LLC,which loan was guaranteed by TAG Entertainment, Inc. as well as thepersonal assets of Steve Austin. The loan was initially made inJuly  2004.

As described above in Item 3.‘‘Legal Proceedings,’’ we are party tovarious other claims, including claims made or threatened againstcertain limited partnerships. As described therein, although we believewe have valid defenses in these matters, we may incur judgments orenter into settlements of claims that could have a material adverseeffect on our financial position or results of operations in anyparticular period. No assurances can be given that management’sassessment of these claims will ultimately prove to be accurate or thatother facts adverse to our position currently not known to managementwill not be uncovered, in which case the ultimate resolution of some orall of these claims could potentially have a material adverse effect onour financial condition. Further, the occurrence of intervening eventsmay also result in management reconsidering their assessment of theimpact of these matters. Regardless of the ultimate liability to any ofthese claimants, these disputes may impose financial and administrativechallenges that may require the application of our resources and thetime and attention of our management.

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Cash Requirements and Need forAdditional Funds

As of December  31,  2005 ourcash balance was approximately $58,000 and we have an immediate needfor cash to fund our working capital requirements and business modelobjectives. With the completion of the $5  million preferredstock financing in 2005, we received net proceeds of approximately$3.5  million after retirement of the $1  million bridgeloan and payment of closing costs. We used these proceeds to fund ournear term working capital requirements and business model objectives.In connection with the execution of our business strategy and relatedexpansion plans, we intend to either undertake private placements ofour securities, either as a self-offering or with the assistance ofregistered broker-dealers, or negotiate a private sale of itssecurities to one or more institutional investors. However, wecurrently have no firm agreements with any third-parties for suchtransactions and no assurances can be given that we will be successfulin raising sufficient capital from any of these proposed financings.Further, we cannot assure you that any additional financing will beavailable or, even if it is available that it will be on termsacceptable to us. Any inability to obtain required financing onsufficiently favorable terms could have a material adverse effect onour business, results of operations and financial condition. If we areunsuccessful in raising additional capital and increasing revenues fromoperations, we will need to reduce costs and operations substantially.Further, if expenditures required to achieve our plans are greater thanprojected or if revenues are less than, or are generated more slowlythan projected, we will need to raise a greater amount of funds thancurrently expected.

Off-Balance Sheet Arrangements

Wehave not created, and are not party to, any special-purpose oroff-balance sheet entities for the purpose of raising capital,incurring debt or operating parts of our business that are notconsolidated into our financial statements, except as described herein.Except as described herein, we do not have any arrangements orrelationships with entities that are not consolidated into ourfinancial statements that are reasonably likely to materially affectour liquidity or the availability of our capital resources.

Wehave incurred debt to unconsolidated partnerships in the aggregateamount of $1,509,000 as of December  31,  2005, which werequired during the course of managing our operations and facilitatingthe activities of the partnerships. In addition, cash transfers wererequired between affiliated partnerships to meet cash flow needs andother obligations. Cash transfers were made between and among us andboth consolidated and unconsolidated partnerships.

Thereceivable and payable balances among affiliated entities onDecember  31,  2005 and the amounts due (to) or fromaffiliated partnerships are as follows:

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|                                 |  |        |            |         |  |  |
|---------------------------------|--|--------|------------|---------|--|--|
| SantaTrap, LLC                  |  | $      | (19,000    | )  |
| Animal Partners,LP              |  |   | (616,000   | )  |
| Family Film Partners VII,LP     |  |   | 83,000     |    |
| Cinderella,LP                   |  |   | 153,000    |    |
| Fairy Tale Partners III,LP      |  |   | (1,450,000 | )  |
| Family Film Partners, VIII,LP   |  |   | (3,000     | )  |
| Tag Studios No. 1,LP            |  |   | 3,696,000  |    |
| Ghost Town,LP                   |  |   | (643,000   | )  |
| American Black Beauty,LP        |  |   | (133,000   | )  |
| Black Beauty,LLC                |  |   | 292,000    |    |
| Red Riding Hood,LLC             |  |   | 1,250,000  |    |
| Motocross Kids,LP               |  |   | (1,233,000 | )  |
| Funny Money the Movie,LP        |  |   | (522,000   | )  |
| Down Town the Movie,LP          |  |   | 957,000    |    |
| Supercross the Movie,LP         |  |   | (2,842,000 | )  |
| Austin Family Entertainment,LLC |  |   | (7,000     | )  |
| Steve Austin Productions,LLC    |  |   | (472,000   | )  |
| Total                           |  | $      | (1,509,000 | )  |
|                                 |

TAGUSA, in its capacity as general partner and distributor of variousfilms produced by the limited partnerships is allowed to charge monthlyoverhead and production fees which get recorded to and against relatedparty transactions. We also plan on making a formal purchase offer tothe various partnerships in return for shares of our stock, which ifconsummated, would eliminate any current and future outstandingbalances owed to the partnerships. We have recorded interest on amountsborrowed from related entities at the prime leading rate and hasincluded accrued interest in the amounts due to and from the relatedentities.

We have entered into various agreements by which we maybe obligated to indemnify the other party with respect to certainmatters. Generally, these indemnification provisions are included incontracts arising in the normal course of business under which wecustomarily agree to hold the indemnified party harmless against lossesarising from a breach of representations related to such matters asintellectual property rights. Payments by us under such indemnificationclauses are generally conditioned on the other party making a claim.Such claims are generally subject to challenge by us and to disputeresolution procedures specified in the particular contract. Further,our obligations under these arrangements may be limited in terms oftime and/or amount and, in some instances, we may have recourse againstthird parties for certain payments made by us. It is not possible topredict the maximum potential amount of future payments under theseindemnification agreements due to the conditional nature of ourobligations and the unique facts of each particular agreement.Historically, we have not made any payments under these agreements thathave been material individually or in the aggregate. As ofDecember  31,  2005, we were not aware of any obligationsunder such indemnification agreements that would require materialpayments.

Item 7.    Financial Statements.

Our auditedfinancial statements for the fiscal years ended December31,  2005 and December  31,  2004 follow Item 14 ofthis Annual Report on Form 10-KSB, beginning at page F-1.

Item8.    Changes In and Disagreements With Accountants on Accounting andFinancial Disclosure.

Engagement of Grobstein Horwath &Co., LLP

(i) On January  17,  2005, we dismissedPritchett, Siler & Hardy, P.C. as our independent publicaccountants. The reports of Pritchett, Siler & Hardy on ourfinancial statements for each of the past two fiscal years, the fiscalyears ended December  31,  2003 and 2002, contained noadverse opinion or 

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disclaimer of opinion and were not qualifiedor modified as to uncertainty, audit scope or accounting principles,except that the reports of Pritchett, Siler & Hardy on ourfinancial statements for each of the fiscal years ended December31,  2003 and 2002 contained an explanatory paragraph as to ourability to continue as a going concern. The decision to dismissPritchett, Siler & Hardy was made and approved on January17,  2005 by Steve Austin, our sole director at that time.

(ii) During our two most recent fiscal years and through the date ofour Report on Form 8-K announcing the dismissal of Pritchett, Siler& Hardy, we had no disagreements with Pritchett, Siler & Hardyon any matter of accounting principles or practices, financialstatement disclosure, or auditing scope or procedure, whichdisagreements if not resolved to the satisfaction of Pritchett, Siler& Hardy would have caused it to make reference to the subjectmatter of the disagreement in its report on our financial statementsfor such years. During our two most recent fiscal years and through thedate of our Report on Form 8-K, we had no reportable events as definedin Item 304(a) (1)(iv) of Regulation S-B. Pritchett, Siler & Hardyprovided us with a letter addressed to the Commission stating itsagreement with the above statements.

(iii) EffectiveJanuary  17,  2005, we engaged Grobstein, Horwath &Company LLP as our new independent public accountants to audit ourfinancial statements for the fiscal year ended December31,  2004. Grobstein was engaged by TAG USA with respect to itsconsolidated financial statements for the fiscal year endedDecember  31,  2003. TAG USA was a private company that weacquired in a merger consummated on November  22,  2004,and is deemed to be the accounting acquirer for financial statementreporting purposes. Prior to the engagement of Grobstein, we had notconsulted with Grobstein during our two most recent fiscal years andthrough the date of our Report on Form 8-K in any matter regarding: (A)either the application of accounting principles to a specifiedtransaction, either completed or proposed, or the type of audit opinionthat might be rendered on our financial statements, and neither was awritten report provided to us nor was oral advice provided thatGrobstein concluded was an important factor that we considered inreaching a decision as to the accounting, auditing or financialreporting issue, or (B) the subject of either a disagreement or areportable event defined in Item 304(a)(1)(iv) of RegulationS-B.

Resignation of Grobstein, Horwath & Co.,LLP

(i) We filed a Form 8-K with the Securities and ExchangeCommission on February  16,  2005 disclosing that onFebruary  9,  2005, we received a letter from ourindependent public accountants, Grobstein, Horwath & Company, LLPadvising us that they resigned, effective immediately, as ourindependent accountants and auditors and that it would not provideaudit services to us in connection with the audit of our 2004 fiscalyear.

(ii) Grobstein did not report on our consolidated financialstatements for any fiscal year. We initially engaged Grobstein onJanuary  17,  2005. However, on March  20,2003, TAG USA retained Grobstein to perform specific accounting and taxservices. The nature and scope of the services included: (1) review andanalysis of the condition of their existing accounting records andfinancial data including previously filed tax returns, financialrecords, and legal agreements, (2) assistance in summarizing andrecording transactions as well as review its policies and proceduresfor recording transactions and producing financial statements; and (3)assisting their management in producing a complete set of accountingbooks and records which will reflect its history from inception.Further, on June  21,  2004, TAG USA expanded the natureand scope of the services that Grobstein provided to include auditservices.

(iii) Grobstein’s resignation was an independentdecision and our Board neither recommended nor approved suchevent.

(iv)(A) During the period of Grobstein’sengagement, there were no disagreements with Grobstein on any matter ofaccounting principle or practices, financial statement disclosure, orauditing scope or procedure which, if not resolved toGrobstein’s satisfaction, would have caused them to makereference to the subject matter in connection with their report on ourconsolidated financial statements.

(iv)(B) As discussed below, ina letter dated January  28,  2005, Grobstein advised usthat the scope of the audit that it had been conducting during theperiod of its engagement would need to be 

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expanded significantly in order to determineif Grobstein would be able to render an opinion on the consolidatedfinancial statements of TAG USA for the periods through December31,  2003. Grobstein’s January  28,  2005letter was sent after its receipt of certain documents (includingminutes of a meeting of TAG USA’s board from September26,  2001) that were delivered to Grobstein on or aboutJanuary  20,  2005 by a consultant to us that was retainedto provide financial and accounting services equivalent to the servicescustomarily provided by a company’s chief financial officer. Theminutes described the allegations set forth in paragraph (iv)(C) below.The Board’s consideration of these allegations and thesubsequent temporary resignation of TAG USA’s Chief ExecutiveOfficer were not previously communicated to Grobstein by management orthe consultant, contrary to representations that all minutes had beenproduced. In its letter dated February  9,  2005 to us,Grobstein stated that it reached the conclusion that it was unwillingto rely on management’s representations.

(iv)(C) Thesubject matter of Grobstein’s statements identified in Paragraph(iv)(B) above are described herein. As stated above, under cover of aletter dated January  28,  2005, Grobstein advised us thaton January  20,  2005, it received copies of minutes of ameeting of the Board of Directors of TAG USA dated September26,  2001, after having been previously advised that all minuteswere previously produced. Grobstein expressed its concern that theminutes were not previously disclosed in light of the subject matter ofsuch minutes. The minutes from September  26,  2001discussed allegations concerning TAG USA’s lack of corporateformalities between the corporation and certain affiliated limitedpartnerships; inadequate financial controls; irregularities by itsChief Executive Officer in the disposition of corporate and partnershipassets and financial resources by making undocumented expensereimbursements; failure of the Chief Executive Officer to properlydisclose insider and related party transactions and other matters; andthe disregard of directions of the Board concerning its operations.These events led to the temporary resignation of TAG USA’s ChiefExecutive Officer from the Board of Directors and such office.Subsequently, the Board approved an action plan by the Chief ExecutiveOfficer that resulted in the reinstatement of the Chief ExecutiveOfficer. The original members of the Board resigned after the approvalof the action plan. Subsequently, TAG USA engaged additional accountingprofessionals, including Grobstein and other firms, to remediate theinadequate financial controls and documentation. In addition, upon theadvice of Grobstein, the Chief Executive Officer agreed to takeresponsibility for and treat the undocumented expense reimbursements asloans made to him by the company and/or its affiliated limitedpartnerships and to repay those amounts by surrendering shares ofcommon stock of TAG that he owned to those entities.

Grobsteinalso expressed concern that the failure to document expenditures andthe transfer of funds between the corporation and its affiliatedlimited partnerships continued during the 2003 audit period. It statedthat such events has caused it to believe that it needed to expand thescope of its audit and perform additional procedures to determine if itis able to render an opinion on the consolidated financial statementsof TAG USA for periods through December  31,  2003, and tocontinue its engagement with us. Grobstein stated that this latedisclosure of the minutes from September  2001 also raised thequestion of whether it can rely on the representations of ourmanagement. Grobstein concluded its January  28,  2005letter by identifying a series of actions it requested that we take inorder for Grobstein to continue with its audit procedures and to issuea report on our financial statements.

Upon our receipt ofGrobstein’s January  28,  2005 letter, we advisedGrobstein that we believed that our financial consultant had suppliedGrobstein with all necessary documents and information, delivered adetailed written response dated February  1,  2005 toGrobstein in response to the issues raised in Grobstein’sJanuary  28,  2005 letter and held a meeting onFebruary  3,  2005 to discuss the matters raised therein inorder to reach an agreement on an action plan. On February4,  2005, we provided Grobstein with a detailed action plan inresponse to the meeting and provided supplemental information onFebruary  7,  2005. Notwithstanding our discussion andcorrespondence subsequent to January  28,  2005, in aletter dated February  9,  2005, Grobstein advised us ofits decision to resign as our accountants and auditors. Grobstein basedits decision to resign on its belief that it was unable to rely onmanagement’s representations due to the matters discussedabove.

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We have established, and will continue toestablish, new policies and procedures designed to improve thereliability and reporting of operational and financial information. Inrecent months, prior to the January  28,  2005 letter fromGrobstein, we had hired additional accounting staff and workeddiligently with its counsel to improve our internal financial controlsand adherence to corporate formalities. We are committed to improvingour internal controls, and are reevaluating systems and personnel witha view toward implementation of all appropriate correctiveaction.

(iv)(D) Upon our receipt of Grobstein’sJanuary  28,  2005 letter, we arranged a meeting betweenGrobstein and our Chief Executive Officer/Chairman of the Board (andsole director at that time) to discuss the matters raised therein.However, our Chief Executive Officer and Chairman did not meet withGrobstein to discuss the matters raised in its February9,  2005 letter.

(iv)(E) We authorized Grobstein to respondfully to the inquiries of the TAG’s successor accountant.

On February  24,  2005 we filed an Amendment to ourCurrent Report on Form 8-K of February  16,  2005 toinclude the letter we requested from Grobstein in accordance with Item304(a)(3) of Regulation S-B and to respond to certain of the statementsmade by Grobstein in their letter.

Engagement of AJ. RobbinsPC

(i) Effective February  24,  2005, we engagedAJ. Robbins, PC (‘‘AJRPC’’) as our newindependent public accountants to audit our financial statements forthe fiscal year ending December  31,  2004.

(ii)Prior to the engagement of AJRPC, we had not consulted with AJRPCduring our two most recent fiscal years and through the date of thisreport in any matter regarding: (A) either the application ofaccounting principles to a specified transaction, either completed orproposed, or the type of audit opinion that might be rendered on ourfinancial statements, and neither was a written report provided to usnor was oral advice provided that AJRPC concluded was an importantfactor considered by us in reaching a decision as to the accounting,auditing or financial reporting issue, or (B) the subject of either adisagreement or a reportable event defined in Item 304(a)(1)(iv) ofRegulation S-B.

Although we did not consult with AJRPC on thereportable events and/or disagreements described in the Report on Form8-K disclosing the resignation of Grobstein, in connection with ourpotential engagement of AJRPC, we did discuss the nature of thosematters with them.

Item 8A.    Controls andProcedures.

Disclosure Controls

As of the end ofthe period covered by this report, we carried out an evaluation, underthe supervision and with the participation of our management, includingthe chief executive officer (who also currently serves as our chieffinancial officer), of the effectiveness of our disclosure controls andprocedures as defined in Exchange Act Rule 13a-15(e). The evaluationincluded certain internal control areas in which we have made and arecontinuing to make changes to improve and enhance controls, asdescribed in greater detail below. In designing and evaluating thedisclosure controls and procedures, management recognized that anycontrols and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired controlobjectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls andprocedures.

Based on that evaluation, our chief executiveofficer and chief financial officer concluded that our disclosurecontrols and procedures were effective as of the end of the year toprovide reasonable assurance that information we are required todisclose in reports that we file or submit under the SecuritiesExchange Act of 1934, as amended, is accurately recorded, processed,summarized and reported within the time periods specified in Securitiesand Exchange Commission rules and forms, and that such information isaccumulated and communicated to our management, including our chiefexecutive officer and chief financial officer, as appropriate, to allowtimely decisions regarding required disclosure.

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In our quarterly report on Form 10-QSBfor the quarter ended September  30,  2005, we reportedthat during our evaluation of disclosure controls and procedures forsuch period and in connection with our ongoing efforts to improve ourinternal control over financial reporting, certain deficiencies in ourdisclosure controls and procedures came to management’sattention. These deficiencies, which include a need to improve thetimeliness of the dissemination of information received from one of ourthird party service providers and ascertaining expense and relatedliabilities incurred by certain limited partnerships with which we haveproduction and distribution relationships are being addressed throughimplementing greater controls in our relationships with these limitedpartnerships. Although management did not uncover additionaldeficiencies in its evaluation for this Annual Report, we arecontinuing our efforts to improve both our disclosure controls andprocedures and our internal control over financialreporting.

Internal Controls

In connection withthe merger of Power Marketing and TAG USA in November  2004, weadopted and implemented numerous measures in connection with itsongoing efforts to improve control processes and corporate governance.These changes are required to effect our transition from aprivately-held corporation to a public company that files periodicreports under the Securities Exchange Act of 1934, as amended. As aprivate company, TAG USA was not required to adopt the types ofinternal control procedures that a public company must adopt andmaintain. Accordingly, since the merger, we have taken numerous stepsto enhance existing policies, or implement new ones, so as to have aneffective system of internal controls over financial reporting.Measures we have taken during the 2005 fiscal year which either havematerially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting, include thefollowing:

|  |              |                                                                                                                                                                                                                                                                                                                    |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Increasing themembership of the board of directors to consist of six persons, four ofwhom are independent, as such term is defined in the Marketplace Rulesof the Nasdaq Stock Market. However, as previously reported, we areseeking to fill the vacancies created by the recent resignation of twoboard members. |

|  |              |                                                                                           |
|--|--------------|-------------------------------------------------------------------------------------------|
|  | •  | Determining tohire an individual to serve as Chief Financial Officer on a full-timebasis. |

|  |              |                                                                                                                                                                                                                                                                          |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Adopting a Code ofEthics and Business Conduct. The Code of Ethics is designed to promoteethical conduct and full, fair and accurate disclosure in its periodicreports. We have re-emphasized to our finance and accounting personnelthe importance of theserequirements. |

|  |              |                                                                                                                                                                                                                                                                       |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Recruiting newpersonnel to the finance function who have expertise in financialcontrols and reporting, including a corporate controller, and madeother changes in finance personnel to improve the overall quality andlevel of experience of the financeorganization. |

|  |              |                                                                                                |
|--|--------------|------------------------------------------------------------------------------------------------|
|  | •  | Reorganizingour finance and general and administrative functions to improvefinancialoversight. |

|  |              |                                                                                                                                                                                                                                                                                                  |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Implementingchanges in our organizational structure to provide a clearersegregation of responsibilities in connection with accountreconciliations, manual journal entries, and the preparation and reviewof documentation to support the preparation of quarterly and annualfinancialstatements. |

|  |              |                                                                                                                                                                                                                                                           |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Adopting andimplementing standard financial policies and procedures on acomprehensive basis. These policies provide finance and accountingguidance and include process documentation designed to ensureconsistent application of policies and procedures. |

We continue toimplement additional measures in response to specific accounting andreporting weaknesses, including personnel and organizational changes toimprove supervision and increased training for finance and accountingpersonnel. We will continue to develop new policies and procedures andeducate and train employees on existing policies and procedures in aneffort to continuously improve internal controls and the controlenvironment.

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The changes noted above occurredthroughout the 2005 fiscal year; however, there were no specificchanges in our internal control over financial reporting during thequarter ended December  31,  2005 that have materiallyaffected, or are reasonably likely to materially affect, internalcontrols over financial reporting.

We do not expect thatdisclosure controls or internal controls over financial reporting willprevent all errors or all instances of fraud. A control system, nomatter how well designed and operated, can provide only reasonable, notabsolute, assurance that the control system’s objectives will bemet. Further, the design of a control system must reflect the fact thatthere are resource constraints, and the benefits of controls must beconsidered relative to their costs. Because of the inherent limitationsin all control systems, no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any,within its company have been detected. These inherent limitationsinclude the realities that judgments in decision-making can be faulty,and that breakdowns can occur because of simple error or mistake.Controls can also be circumvented by the individual acts of somepersons, by collusion of two or more people, or by management overrideof the controls. The design of any system of controls is based in partupon certain assumptions about the likelihood of future events, and anydesign may not succeed in achieving its stated goals under allpotential future conditions. Over time, controls may become inadequatebecause of changes in conditions or deterioration in the degree ofcompliance with policies or procedures. Because of the inherentlimitation of a cost-effective control system, misstatements due toerror or fraud may occur and not be detected.

Item8B.    Other Information.

We entered into a sublease for ourprimary offices at 1333 Second Avenue, Santa Monica, CA, which iseffective as of January  26,  2006 and expires on April 30,2006. We received confirmation from the landlord that it approved thesublease on March  20,  2006. See detailed informationregarding this lease under Item 2. ‘‘Description ofProperty’’ above.

In March  2006, we agreedto issue warrants to purchase 100,000 shares to a service provider inconnection with a co-production arrangement we entered into with it.The warrants are exercisable at $1.00 per share for a period of sevenyears. The issuance of these securities was exempt from registrationunder the Securities Act of 1933, as amended, under Section 4(2)thereof inasmuch as the securities were issued without any form ofgeneral solicitation or general advertising and the acquirer wasprovided with access to material information concerning thecompany.

In March  2006, we issued 125,000 shares of ourcommon stock to a limited partner in a limited partnership for which anentity affiliated with our Chief Executive Officer serves as generalpartner. The shares were issued pursuant to Section 3(a)(9) of theSecurities Act of 1933, as amended, as the limited partner waspreviously granted the right to convert his interests in the limitedpartnership into shares of our common stock. The acquirer is anaccredited investor and the securities were issued without any form ofgeneral solicitation or generaladvertising.

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PARTIII

|                    |                                                                                                                |
|--------------------|----------------------------------------------------------------------------------------------------------------|
| Item 9.  | Directors,Executive Officers, Promoters and Control Persons; Compliance WithSection 16(a) of the Exchange Act. |

The following tablesummarizes the name, age and title of each of our current directors andexecutive officers. Directors are elected annually by our stockholdersand hold office until their successors are elected and qualified, oruntil their earlier resignation or removal. In May  2005, weappointed the four following persons to serve as independent members ofour Board of Directors: John T. Botti, James Schneider, H. Carl McCalland Marvin Rosen. However, as of March  20,  2006, Messrs.McCall and Rosen resigned from our Board. Accordingly, our Board ofDirectors currently consists of four members, two of whom areindependent, as defined in the Marketplace Rules of The Nasdaq StockMarket. We will seek to replace the vacancies created by theresignations of Messrs. McCall and Rosen as soon a practicable. Thereare no family relationships among our executive officers and directors.Officers are elected by and serve at the discretion of the Board ofDirectors. Board members hold office until their successors are chosenand qualified, or until they resign or have been removed from office.Our current directors and officers are asfollows:

|                      |  |        |    |              |  |                                                             |  |  |  |  |
|----------------------|--|--------|----|--------------|--|-------------------------------------------------------------|--|--|--|--|
| Name                 |  | Age    |    | PositionHeld |
| SteveAustin          |  |   | 48 |         |  | Chairman,Chief Executive Officer and Chief FinancialOfficer |
| Raymond J. Skiptunis |  |   | 63 |         |  | Director, Management Consultant                             |
| John T.Botti         |  |   | 42 |         |  | Director                                                    |
| James L.Schneider    |  |   | 58 |         |  | Director                                                    |
|                      |

None of ourdirectors or executive officers has, during the past five years,

|              |                                                                                                                                                                                                         |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | had any bankruptcy petition filed by oragainst any business of which such person was a general partner orexecutive officer, either at the time of the bankruptcy or within twoyears prior to that time, |

|              |                                                                                                                                    |
|--------------|------------------------------------------------------------------------------------------------------------------------------------|
| •  | beenconvicted in a criminal proceeding and none of our directors orexecutive officers is subject to a pending criminal proceeding, |

|              |                                                                                                                                                                                                                                                                                                                         |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | been subject to any order, judgment, ordecree, not subsequently reversed, suspended or vacated, of any courtof competent jurisdiction, permanently or temporarily enjoining,barring, suspending or otherwise limiting his involvement in any typeof business, securities, futures, commodities or banking activities,or |

|              |                                                                                                                                                                                                                                                                                       |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | been found by a court ofcompetent jurisdiction (in a civil action), the Securities and ExchangeCommission or the Commodity Futures Trading Commission to have violateda federal or state securities or commodities law, and the judgment hasnot been reversed, suspended, or vacated. |

BusinessExperience

Steve Austin has been our Chairman, ChiefExecutive Officer and Chief Financial Officer since our inception.Mr. Austin has over 25 years of experience in the entertainmentindustry. Mr. Austin has an extensive and distinguished careerin all aspects of the film and television industry including experienceas an actor, personal manager, director, producer and companyexecutive. He starred in the best-selling video series‘‘Daddy and Me’’ distributed by ArtisanEntertainment. He managed his daughter Alana Austin’s career forover ten years and negotiated deals for her that included staring rolesin: A Simple Twist of Fate for Disney starring Steve Martin,North for Castle Rock directed by Rob Reiner, a recurring rolein the television series Ink with Tony Danza and SisterSister for Warner Bros. Mr. Austin directed the feature filmRoute 66, and has produced and independently financed thefollowing films: Dumb Luck, No Place Like Home, Castle Rock, TheRetrievers, The Santa Trap and Red Riding Hood.Mr. Austin founded TAG Entertainment, Inc. in 1999 as a companyfocused on developing, creating, distributing and marketing familyentertainment.

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John T. Botti joined our board inMay  2005. Mr.  Botti is the President of Titan CapitalSystems, Inc., a technology development and consulting company hefounded in 2005. From 1985 to 2004, Mr.  Botti was the President,Chief Executive Officer and Chairman of AuthentiDate Holding Corp., aprovider of software-based content authentication technology, which heco-founded in 1985. Mr.  Botti graduated from RensselaerPolytechnic Institute with a B.S. degree in electrical engineering in1994 and in 1996 earned a Master of Business Administration degree fromRPI.

James L. Schneider joined our board in May2005. Mr.  Schneider has been the Chief Executive Officer of DeerHill Associates, a business consulting firm specializing in enhancingthe operational efficiency of firms in the IT Services industry andproviding government consulting since 2002. From 1988 to 2002,Mr.  Schneider was the Chief Executive Officer and owner ofProfessional Consulting Network, a firm that provides IT consulting toprivate sector and government clients. From 1977 to 1988, Mr.Schneider was President of Sanderson Associates, a staffing andplacement firm specializing in the IT sector. Mr.  Schneiderreceived a B.S. in Applied Systems and Business from the University ofCalifornia, Berkeley and an M.B.A. from California State University.Mr.  Schneider also serves on the board of directors of theGenomics Education Institute, a non-profitorganization.

Raymond J. Skiptunis joined our board inMay  2005 and is currently providing management services to TAGon a consulting basis. From 2002 to 2004, Mr.  Skiptunis servedas a consultant and the interim Chief Financial Officer and ChiefExecutive Office of Power Efficiency Corporation. Prior to that,Mr.  Skiptunis worked at SR Capital Partners, a businessconsulting firm, from 1996 to 2002. Mr.  Skiptunis also served asthe Chief Executive Officer and Vice Chairman of TeamStaff, Inc. from1990 to 1996 a publicly held professional employer organization; theChief Executive Officer of Venray Management Corp. from 1983 to 1990 aventure capital and financial consulting firm; the Chief FinancialOfficer, Vice President and Board member of Biosearch Medical Products,Inc. from 1978 to 1983; and was engaged in private practice as anaccountant.

Meetings of Directors

During the fiscal yearended December  31,  2005, our board of directors heldthree meetings and acted by unanimous written consent on fouroccasions. No member of the Board of Directors attended less than75% of the aggregate number of (i) the total number of meetingsof the Board of Directors or (ii) the total number of meetings held byall Committees of the Board of Directors. Our independent directorsmeet in executive sessions periodically during the course of theyear.

Committees of the Board of Directors

Upon ourappointment of four independent directors in May  2005, we alsoestablished three committees of our board: Audit, Management Resourcesand Compensation, and Nominating and Corporate Governance. However, dueto the recent resignation of two independent board members, we willneed to reconfigure these committees and intend to do so as soon as newindividuals are elected to the board. Our independent directors areJohn T. Botti and James Schneider.

AuditCommittee. The members of the Audit Committee fromJune  2005 until March  2006 year were Messrs. Botti,McCall and Schneider. Each of these individuals was appointed to serveon the Audit Committee on June  6,  2005. Mr.  Bottiserves as the Chairman of the Audit Committee. However, due toMr.  McCall’s resignation, the Audit Committee nowconsists of Messrs. Botti and Schneider. The Audit Committee acts to:(i) acquire a complete understanding of our audit functions; (ii)review with management the finances, financial condition and ourinterim financial statements; (iii) review with our independentauditors the year-end financial statements; and (iv) reviewimplementation with the independent auditors and management any actionrecommended by the independent auditors. Our Board of Directors haddetermined that Mr.  McCall was our audit committee financialexpert as defined in Item 401(e) of Regulation S-B, and was independentwithin the meaning of Item 7(d)(3)(iv) of Schedule 14A of the ExchangeAct. In light of his resignation, the board will designate a new auditcommittee financial expert. The Audit Committee did not meet during thefiscal year ended December  31,  2005.

ManagementResources and Compensation Committee. From May  2005until March  2006, our Management Resources and CompensationCommittee was comprised of Messrs. Schneider, McCall 

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and Rosen. Mr.  Schneider was appointedas Chairman of this committee. Each of these individuals was appointedto this committee on May  2,  2005. However, as Messrs.McCall and Rosen have resigned, we intend to appoint new individuals toserve on this committee. The functions of this committee includeadministration of our 2004 Employee Stock Option Plan and thenegotiation and review of all employment agreements of our executiveofficers. During the fiscal year ended December  31,  2005,the Management Resources and Compensation Committee held onemeeting.

Nominating and Corporate GovernanceCommittee. From June  2005 until March  2006,this committee was comprised of Messrs. Botti, McCall and Rosen, withMr.  McCall as Chairman. These individuals were appointed to thiscommittee on June  6,  2005. However, as Messrs. McCall andRosen have resigned, we intend to appoint new individuals to serve onthis committee. The Nominating and Corporate GovernanceCommittee’s tasks include reviewing and recommending to theBoard issues relating to the Board’s composition and structure;establishing criteria for membership and evaluating corporate policiesrelating to the recruitment of Board members; implementing andmonitoring policies regarding principles of corporate governance inorder to ensure the Board’s compliance with its fiduciary dutiesto the company and its shareholders; and making recommendationsregarding proposals submitted by shareholders. During the fiscal yearended December  31,  2005, the Nominating and CorporateGovernance Committee did not meet.

The board did not adopt anymodifications to the procedures by which security holders may recommendnominees to our board of directors.

Compliance with Section16(a) of the Securities Exchange Act

As we are registered underSection 15(d) of the Exchange Act, we are not subject to the reportingobligations of Section 16(a).

Code of Ethics

We adopted aCode of Ethics for our employees and management, including our ChiefFinancial Officer and Chief Executive Officer as of April4,  2005. Our Code of Ethics is filed as Exhibit 14 to our Reporton Form 10-KSB for the fiscal year ended December  31,2004.

|                |                        |
|----------------|------------------------|
| Item 10.  | ExecutiveCompensation. |

Summary of Cash and Certain OtherCompensation

The following table provides certain informationconcerning all Plan and Non-Plan (as defined in Item 402 (a)(ii) ofRegulation S-B) compensation awarded to, earned by, paid or accrued byus during the years ended December  31,  2005, 2004 and2003 to each of our named executiveofficers.

|                                                                                       |  |            |      |         |  |        |         |                          |  |                             |   |                                       |  |        |        |           |  |        |   |        |  |        |           |           |  |  |
|---------------------------------------------------------------------------------------|--|------------|------|---------|--|--------|---------|--------------------------|--|-----------------------------|---|---------------------------------------|--|--------|--------|-----------|--|--------|---|--------|--|--------|-----------|-----------|--|--|
|                                                                                  |  |       |      |    |  |   |         |                     |  | LongTerm CompensationAwards |
| Name andPrincipal Position                                                            |  | FiscalYear |      | Salary  |  | Bonus  |         | Other AnnualCompensation |  | Restricted StockAward(s)    |   | No.ofSecuritiesUnderlyingOptions/SARs |
| SteveAustin,                                                                          |  |       | 2005 |    |  | $      | 300,000 |                     |  | $                           | 0 |                                  |  |   | 0      |      |  |   | 0 |   |  |   | 0         |      |
|     Chief Executive Officer and Chairman of the Board ofDirectors |  |       | 2004 | *  |  | $      | 500,000 |                     |  | $                           | 0 |                                  |  |   | 95,000 | (1)  |  |   | 0 |   |  |   | 1,665,176 | (2)  |
|                                                                                       |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                         |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Mr. Austinalso received a total of $95,000 as a fee for services rendered to anunconsolidated limited partnership during the fiscal year endedDecember  31,  2004. |

|     |                                                                                                                                                                                                  |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Originalgrant of 1,500,000 options were exchanged for 1,665,176 options inconnection with our acquisition of TAG USA in accordance with theexchange ratio agreed to in the acquisitionagreement. |

|   |                                                                                                                                                                                       |
|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| * | TAG USA was acquired by PowerMarketing on November  22,  2004. Accordingly, the firstperiod during which Mr. Austin was employed by us is for theyear ended December  31,  2004. |

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OPTION/SAR GRANTS IN LAST FISCALYEAR

The following table contains information with respect tothe named executive officers concerning options granted during the yearended December  31,  2005. No Stock Appreciation Rightswere granted to any of the named executive officers during the lastfiscalyear.

|         |  |                                                            |  |                                                                        |  |                                 |  |                    |  |  |  |  |  |  |  |  |  |  |
|---------|--|------------------------------------------------------------|--|------------------------------------------------------------------------|--|---------------------------------|--|--------------------|--|--|--|--|--|--|--|--|--|--|
| Name(a) |  | Number of Securities UnderlyingOption/SARs Granted (#) (b) |  | Percent of TotalOption/SARs Granted To Employees In Fiscal Year (c)(1) |  | Exercise of BasePrice (S/Sh)(d) |  | Expiration Date(c) |
|         |

None

AGGREGATEDOPTION/SAR EXERCISES IN LAST FISCAL YEARAND FY-END OPTION/SARVALUES

The following table sets forth information related to thestock options held by Mr. Austin and information related to thefiscal year-end value of unexercised stock options held by our namedexecutive officers. We have not issued any stock appreciationrights.

|             |  |                            |   |                |  |                                                                              |     |                                                                                          |  |                |  |    |  |  |  |  |  |  |
|-------------|--|----------------------------|---|----------------|--|------------------------------------------------------------------------------|-----|------------------------------------------------------------------------------------------|--|----------------|--|----|--|--|--|--|--|--|
| Name        |  | SharesAcquired on Exercise |   | Value Realized |  | Numberof Unexercised Options as of December 31,2005Exercisable/Unexercisable |     | Value ofUnexercisedIn-the-Money Options at December 31, 2005(2)Exercisable/Unexercisable |
| SteveAustin |  |                       | 0 |           |  |                                                                         | N/A |                                                                                     |  | 1,665,176/0(1) |  | $0 |
|             |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                  |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Originalgrant of 1,500,000 options were exchanged for 1,665,176 options inconnection with our acquisition of TAG USA in accordance with theexchange ratio agreed to in the acquisitionagreement. |

|     |                                                                                                                                                                           |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Based upon the closing price($1.90 per share) of our common stock on December  31,2005, less the exercise price for the aggregate number of sharessubject to the options. |

Compensation ofDirectors

Employees and consultants that serve on our board ofdirectors do not receive any additional compensation for their serviceon our board. However, we compensate the independent members of ourboard and reimburse them for related expenses. Independent members ofour board are paid $18,000 annually and such members who also act aschairmen of a committee are paid an additional $2,000. In addition,independent members of the board also receive $1,000 per board orcommittee meeting whether in-person or by conference call. Further, wealso intend to adopt an option plan which will provide for thenon-discretionary grant of stock options or restricted stock toindependent members of our board of directors. It is expected that theplan will provide for an initial grant of 25,000 options to suchpersons upon joining our board and for annual grants of up to 10,000options for each year of service on our board.

Employment,Severance and Change of Control Agreements

We currently do nothave an employment or other similar agreement with Steve Austin, who iscurrently our sole executive officer. We had been negotiating the termsof an employment agreement with Mr.  Austin; however, this matteris being deferred until the election of new board members. As describedbelow under the caption ‘‘Certain Relationships andRelated Transactions,’’ Mr.  Austin receives feesfrom certain limited partnerships which he controls by virtue of theproduction and/or distribution relationships established between us andsuch limited partnerships.

Incentive Stock Option Plan

InNovember  2004, we adopted the 2004 Employee Stock Option Plan,which provides for the grant of options to purchase up to 3,000,000shares of our common stock by our employees, registered 

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representatives and consultants. Under theterms of the Incentive Plan, options granted thereunder may bedesignated as options which qualify for incentive stock optiontreatment under Section 422 of the Internal Revenue Code, or optionswhich do not so qualify.

The Plan is administered by our Board ofDirectors which has the discretion to determine the eligible employeesto whom, and the times and the price at which, options will be granted;whether such options shall be Incentive Stock Options or Non-IncentiveStock Options; the periods during which each option will beexercisable; and the number of shares subject to each option. The Boardhas full authority to interpret the Incentive Plan and to establish andamend rules and regulations relating thereto.

Under the IncentivePlan, the exercise price of an option designated as an Incentive StockOption shall not be less than the fair market value of the common stockon the date the option is granted. However, in the event an optiondesignated as an Incentive Stock Option is granted to a ten percentstockholder such exercise price shall be at least 110% of suchfair market value. Exercise prices of Non-Incentive Stock Options maybe less than such fair market value. The aggregate fair market value ofshares subject to options granted to a participant which are designatedas Incentive Stock Options which become exercisable in any calendaryear may not exceed $100,000. Unless sooner terminated, the 2004 Planwill expire in 2014.

Effective as of the date of this AnnualReport, since the adoption of the 2004 Plan, we have issued 2,259,088options, of which 116,562 have been cancelled.

Item11.  Security Ownership

The following table setsforth the beneficial ownership of our common stock as of March31,  2006, by (i) each director and each executive officer, (ii)and all directors and executive officers as a group, and (iii) persons(including any ‘‘group’’ as that term isused in Section 13(d)(3) of the Securities Exchange Act of l934), knownby us to be the beneficial owner of more than five percent of ourcommon stock. Shares of common stock subject to options exercisablewithin 60 days from the date of this table are deemed to be outstandingand beneficially owned for purposes of computing the percentageownership of such person but are not treated as outstanding forpurposes of computing the percentage ownership of others. Accordingly,due the contractual restrictions against acquiring greater than4.9% of our shares of common stock agreed to by the holders ofour shares of Series A Preferred Stock, such persons are not includedin this table. Unless otherwise stated, the address of each person inthe table is 1333 Second Street, Suite 240, Santa Monica, CA90401.

|              |  |                                                              |  |                                         |            |                        |  |        |      |          |  |  |  |  |
|--------------|--|--------------------------------------------------------------|--|-----------------------------------------|------------|------------------------|--|--------|------|----------|--|--|--|--|
| Typeof Class |  | Name and Address of BeneficialHolder                         |  | Amount and Nature ofBeneficialOwnership |            | Percentage of Class(#) |
| Common       |  | SteveAustin                                                  |  |                                    | 13,885,111 | (1)               |  |   | 60.7 | %   |
| Common       |  | RaymondJ. Skiptunis                                          |  |                                    | 799,522    | (2)               |  |   | 3.7  | %   |
| Common       |  | JamesL.Schneider                                             |  |                                    | 55,710     |                   |  |   |      | **  |
| Common       |  | JohnT.Botti                                                  |  |                                    | 0          |                   |  |   | 0    |     |
| Common       |  | Alldirectors and executiveofficers as a group (4 persons)(1) |  |                                    | 14,740,373 |                   |  |   | 64.4 | %   |
|              |

 ____________

|   |                                                                                            |
|---|--------------------------------------------------------------------------------------------|
| # | Percentagesare based on 21,189,948 shares issued and outstanding as ofDecember  31,  2005. |

|    |                            |
|----|----------------------------|
| ** | Percentageis less than 1%. |

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.  | Aftergiving effect to the surrender of 863,106 shares of our common stock byMr. Austin to us in connection with a transaction to cancelcertain indebtedness. Includes vested options to purchase 1,665,176shares of common stock, which were issued in exchange for cancellationof 1,500,000 options in connection with our acquisition of TAG USA inaccordance with the exchange ratio agreed to in the acquisitionagreement. |

|          |                                                                                                                                                                                                                       |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.  | Includes warrants topurchase 222,023 shares of our common stock and options to purchase277,529 shares of common stock of which fifty percent vested on thedate of grant and the balance vested six months thereafter. |

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Equity Compensation PlanInformation

The following table provides information about ourcommon stock that may be issued upon the exercise of options and rightsunder all of our existing equity compensation plans as ofDecember  31,  2005, which consists of our 2004Plan.

|                                                      |  |                                                                                 |           |                                                         |  |                                                                                                                                           |      |        |  |        |         |        |  |  |
|------------------------------------------------------|--|---------------------------------------------------------------------------------|-----------|---------------------------------------------------------|--|-------------------------------------------------------------------------------------------------------------------------------------------|------|--------|--|--------|---------|--------|--|--|
| PlanCategory                                         |  | Number ofSecurities tobeIssued UponExercise ofOutstanding Options andRights (a) |           | Weighted Average Exercise PriceofOutstanding Options(b) |  | Number of SecuritiesRemaining Available for Future Issuance Under EquityCompensation Plans Excluding Securities Reflected inColumn(a) (c) |
| Equity Compensation PlansApproved byStockholders     |  |                                                                            | 2,142,526 |                                                    |  | $                                                                                                                                         | 2.00 |   |  |   | 857,474 |   |
| EquityCompensation Plans Not Approved byStockholders |  |                                                                            | N/A       |                                                    |  |                                                                                                                                      | N/A  |   |  |   | N/A     |   |
| Total                                                |  |                                                                            | 2,142,526 |                                                    |  | $                                                                                                                                         | 2.00 |   |  |   | 857,474 |   |
|                                                      |

Item12.  Certain Relationships and RelatedTransactions.

For information concerning employment agreementswith, and compensation of, our executive officers and directors, seethe disclosure in the section of this Annual Report on Form 10-KSBcaptioned ‘‘ExecutiveCompensation.’’

In connection with the mergertransaction between TAG USA and Power Marketing, debt owed byMr. Austin in the amount of approximately $3.1  million(including accrued interest to the date of repayment) to TAG USA wasrepaid by Mr. Austin through the surrender of 863,106 shares ofour common stock back to us. This debt was incurred prior to theacquisition while TAG USA was privately held. We intend to retire aportion of the shares and to distribute some of the shares to otherentities affiliated with Mr. Austin which are owed money by TAGUSA.

In addition and not in lieu of Mr. Austin’ssalary from us, he is entitled to receive compensation in the form offees resulting from both his production of motion pictures and otherentertainment products created for us and also fees arising by reasonof Mr. Austin (or entities controlled and wholly owned byMr. Austin, such as Austin Family Entertainment, Inc.(‘‘AFE’’) or Steve Austin Productions, Inc.(‘‘SAP’’) serving as the general partner ofentities which have an interest in motion pictures previously producedby or in association with us). Production fees will vary from pictureto picture, but shall not exceed 10% of the production budget ofany film. Mr. Austin will entitled to a share (to be determinedon a picture by picture basis) of such fees, along with others actingin a similar capacity.

Steve Austin, SAP and AFE collectivelyhave assigned to TAG USA their right to receive from certain limitedpartnerships payments due to them for the period commencingJanuary  1,  2001 and terminating December31,  2004. Either SAP or AFE serves as the general partner of therelevant limited partnership. The payments assigned byMr. Austin and his affiliated entities consist of producer fees,overhead and staffing reimbursement and salary payments. The paymentswere due from the limited partnerships in connection with thedevelopment of feature films by SAP and AFE on behalf of the limitedpartnerships.

We are authorized to and expect that we will enterinto production service agreements with Mr. Austin, AFE or SAPon a ‘‘loan-out’’ basis in connection withthe motion pictures that we produce. Similar agreements may be enteredinto with other producers who may or may not be employed by us.Management fees are as set in the financings of the various motionpictures previously produced by us. We intend that similar arrangementswill obtain in regard to all further pictures we produce.

Mr. Raymond Skiptunis presently provides services to uspursuant to a consulting agreement pursuant to which he is paid amonthly consulting fee of $20,000, was issued warrants to purchase222,023 shares of our common stock exercisable at $0.20 per share andwas issued options to purchase 

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277,529 shares of common stock exercisable at$2.00 per share, of which fifty percent vested on the date of grant andthe balance vested six months thereafter. In addition,Mr. Skiptunis received an aggregate of 300,000 shares of ourcommon stock in connection with our merger with TAG USA.

|               |          |
|---------------|----------|
| Item13.  | Exhibits |

The exhibits designated withan asterisk (*) are filed herewith. All other exhibits have beenpreviously filed with the Commission and, pursuant to 17 C.F.R. Section230.411, are incorporated by reference to the document referenced inbrackets following the descriptions of such exhibits.

|               |  |                                                                                                                                                                                                                                                                     |  |  |  |  |
|---------------|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNumber |  | DescriptionofDocument                                                                                                                                                                                                                                               |
| 2.1           |  | Agreementand Plan of Reorganization among Power Marketing, Inc., PMKT SubsidiaryCorp. and TAG Entertainment, Inc., dated October 14, 2004 (Previouslyfiled as Exhibit 2 to Current Report on Form 8-K dated October 18,2004).                                       |
| 2.2           |  | Amendment No. 1 To Agreement andPlan of Reorganization dated October 29, 2004 (Previously filed asExhibit 10.1 to Current Report on Form 8-K dated November 29,2004).                                                                                               |
| 3.1           |  | Articles of Incorporation(Previously filed as Exhibit 3.1 to Registration Statement on FormSB-2, dated February 4, 2000).                                                                                                                                           |
| 3.2           |  | Amendmentto Certificate of Incorporation (Previously filed as Exhibit 3.1 toCurrent Report on Form 8-K dated November 29,2004).                                                                                                                                     |
| 3.3           |  | By-laws (Previously filed asExhibit 3.2 to Registration Statement on Form SB-2, dated February 4,2000).                                                                                                                                                             |
| 3.4           |  | Certificate of Designations,Rights and Preferences of Series A Preferred Stock (Previously filed asexhibit 3.1 to Current Report on Form 8-K filed May 5,2005).                                                                                                     |
| 4.1           |  | Form of Common Stock Certificate(Previously filed as Exhibit 4.1 to Registration Statement on FormSB-2, dated February 4, 2000).                                                                                                                                    |
| 4.2           |  | Form ofWarrant Issued by TAG Entertainment Corp., dated March 30, 2005(Previously filed as exhibit 4.2 to Current Report on Form 8-K filedApril 4, 2005).                                                                                                           |
| 4.3           |  | Form of Warrant Issuedby TAG Entertainment Corp., dated May 4, 2005 (Previously filed asexhibit 4.1 to Current Report on Form 8-K filed May 5,2005).                                                                                                                |
| 10.1          |  | Form of Securities PurchaseAgreement between TAG Entertainment Corp., and Investors, dated March30, 2005 (Previously filed as exhibit 10.1 to Current Report on Form8-K filed April 4, 2005)                                                                        |
| 10.2          |  | Form ofSecurity Agreement between TAG Entertainment Corp., TAG EntertainmentUSA, Inc. and Investors, dated March 30, 2005 (Previously filed asexhibit 10.2 to Current Report on Form 8-K filed April 4,2005).                                                       |
| 10.3          |  | Form of Registration RightsAgreement between TAG Entertainment Corp. and Investors, dated March30, 2005 (Previously filed as exhibit 10.4 to Current Report on Form8-K filed April 4, 2005)                                                                         |
| 10.4          |  | Form ofSecured $250,000 Note Issued by Myriad Pictures, Inc., dated March 30,2005 (Previously filed as exhibit 10.1 to Current Report on Form 8-Kfiled April 5, 2005)                                                                                               |
| 10.5*         |  | SubleaseAgreement between Rubin Postaer and Assoc. and TAG Entertainment Corp.for 1333 Second Street, Santa Monica,CA.                                                                                                                                              |
| 10.6          |  | Lease Agreement between SchofieldFamily Trust and TAG Entertainment Inc., (n/k/a TAG Entertainment USA,Inc.) for 9615 Canoga Avenue, Chatsworth, Los Angeles (Previously filedas exhibit 10.7 to Annual Report on Form 10-KSB for the year endedDecember 31, 2004). |
|               |

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|               |  |                                                                                                                                                                                                                                                                      |  |  |  |  |
|---------------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNumber |  | DescriptionofDocument                                                                                                                                                                                                                                                |
| 10.7          |  | Consulting Agreementbetween TAG Entertainment, Inc. and Raymond J. Skiptunis, as amended,dated August 16, 2004 (Previously filed as exhibit 10.8 to AnnualReport on Form 10-KSB for the year ended December 31,2004).(1)                                             |
| 10.8          |  | AssignmentAgreement dated March 25, 2005, among Steve Austin, Steve AustinProductions, Inc., Austin Family Entertainment, Inc. and TAGEntertainment, Inc. (Previously filed as exhibit 10.9 to Annual Reporton Form 10-KSB for the year ended December 31, 2004).(1) |
| 10.9          |  | Guaranty Agreement betweenSteve Austin and TAG Entertainment Corp., dated March 23, 2005.(Previously filed as exhibit 10.10 to Annual Report on Form 10-KSB forthe year ended December 31, 2004).(1)                                                                 |
| 10.10         |  | Form of WorldwideDistribution Agreement (Motion Picture and Television) between TAGEntertainment, Inc. and certain limited partnerships. (Previously filedas exhibit 10.11 to Annual Report on Form 10-KSB for the year endedDecember 31, 2004).                     |
| 10.11         |  | Form of WorldwideDistribution Agreement (Home Entertainment) between TAG Entertainment,Inc. and certain limited partnerships. (Previously filed as exhibit10.12 to Annual Report on Form 10-KSB for the year ended December 31,2004).                                |
| 10.12         |  | Advisory Agreement between TAGEntertainment, Inc. and Valeo Partners, LLC, dated as of September 1,2004. (Previously filed as exhibit 10.13 to Annual Report on Form10-KSB for the year ended December 31,2004).                                                     |
| 10.13         |  | 2004 Employee Stock OptionPlan. (Previously filed as exhibit 10.14 to Annual Report on Form10-KSB for the year ended December 31, 2004).(1)                                                                                                                          |
| 10.14         |  | Form of Stock Option AwardPursuant to 2004 Employee Stock Option Plan (Previously filed asexhibit 10.15 to Annual Report on Form 10-KSB for the year endedDecember 31, 2004).(1)                                                                                     |
| 10.15         |  | Formof Securities Purchase Agreement between TAG Entertainment Corp. andInvestors, dated May 3, 2005 (Previously filed as exhibit 10.1 toCurrent Report on Form 8-K filed May 52005)                                                                                 |
| 10.16         |  | Form of Registration RightsAgreement between TAG Entertainment Corp. and Investors, dated May 3,2005 (Previously filed as exhibit 10.2 to Current Report on Form 8-Kfiled May 5 2005                                                                                 |
| 14.1          |  | Code of Ethics(Previously filed as exhibit 14.1 to Annual Report on Form 10-KSB forthe year ended December 31,2004).                                                                                                                                                 |
| 16.1          |  | Letter from Pritchett, Siler& Hardy to TAG Entertainment Corp (formerly Power Marketing, Inc.)(Previously filed as exhibit 16.1 to Current Report on Form 8-K filedJanuary 21, 2005)                                                                             |
| 16.2          |  | Letter fromPritchett, Siler & Hardy to TAG Entertainment Corp (formerly PowerMarketing, Inc.) (Previously filed as exhibit 16.1 to Current Report onForm 8-K/A filed January 28,2005)                                                                            |
| 16.3          |  | Letter from Grobstein, Horwath& Company LLP to TAG Entertainment Corp. (Previously filed asexhibit 16.1 to Current Report on Form 8-K filed February 24,2005)                                                                                                    |
| 21.1*         |  | Subsidiaries of TAGEntertainment Corp.                                                                                                                                                                                                                               |
| 31.1*         |  | Certification ofChief Executive Officer and Chief Financial Officer pursuant toExchange Act Rules 13a-14(a) and 15(d) -14(a), adopted pursuant toSection 302 of the Sarbanes-Oxley Act of2002                                                                        |
| 32.1*         |  | Certification of Chief ExecutiveOfficer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350,adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002.                                                                                             |
|               |

|  |
|--|
|  |  |
|  |

|     |                                                      |
|-----|------------------------------------------------------|
| (1) | Indicatesa management contract or compensatory plan. |

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Item 14.  PrincipalAccountant Fees and Services.

We have selected AJ. Robbins PC,as our independent accountants for the current fiscal year. The auditservices to be provided by AJ. Robbins PC consists of examination offinancial statements, services relative to filings with the Securitiesand Exchange Commission, and consultation in regard to variousaccounting matters. The financial statements included with this AnnualReport have been audited by AJ. Robbins PC. Our former accountants,Pritchett, Siler & Hardy, audited our 2003 financial statements andserved as our independent accountants during the 2004 fiscal year. InJanuary  2005, we replaced Pritchett, Siler & Hardy as ourindependent public accountants and engaged Grobstein, Horwath & Co.LLP. In February  2005, we retained AJ. Robbins PC as ourindependent public accountants to replace Grobstein, Horwath &Co.

The following table presents fees for professional auditservices rendered by AJ. Robbins PC for the fiscal year endedDecember  31,  2005 and Pritchett, Siler & Hardy forthe year ended December  31,  2004 and fees billed forother services performed for the years ended December  31,2005 and 2004 by these firms. Fees for professional services by ourindependent auditors for the fiscal years 2005 and 2004 in each of thefollowing categories are asfollows:

|                       |  |                             |         |                             |  |        |       |        |  |  |
|-----------------------|--|-----------------------------|---------|-----------------------------|--|--------|-------|--------|--|--|
|                  |  | YearEnded December 31, 2005 |         | Year Ended December 31,2004 |
| Audit Fees (1)        |  | $                           | 115,475 |                        |  | $      | 3,890 |   |
| Audit-RelatedFees (2) |  |                        | 275,000 |                        |  |   | 0     |   |
| Tax Fees(3)           |  |                        | 10,574  |                        |  |   | 150   |   |
| All OtherFees (4)     |  |                        | 0       |                        |  |   | 0     |   |
| Total.                |  | $                           | 401,049 |                        |  | $      | 4,040 |   |
|                       |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Auditservices consist of audit work performed in the preparation offinancial statements for the fiscal year and for the review offinancial statements included in Quarterly Reports on Form 10-Q duringthe fiscal year, as well as work that generally only the independentauditor can reasonably be expected to provide, including consents forregistration statement flings and responding to SEC comment letters onannual and quarterlyfilings. |

|     |                                                                                                                                                                                                                                                                  |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Audit-related servicesconsist of assurance and related services that are traditionallyperformed by the independent auditor, including due diligence relatedto mergers and acquisitions, agreed upon procedures report andaccounting and regulatoryconsultations. |

|     |                                                                                                                                                                                                                                                                  |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Tax servicesconsist of all services performed by the independent auditor’stax personnel, except those services specifically related to the auditof the financial statements, and includes fees in the areas of taxcompliance, tax planning, and taxadvice. |

|     |                                                                              |
|-----|------------------------------------------------------------------------------|
| (4) | Other services consistof those service not captured in the other categories. |

Wehave determined that the services provided by our independent auditorsand the fees paid to them for such services has not compromised theindependence of our independent auditors.

For 2005, our board ofdirectors, acting as the audit committee, was responsible forappointing, setting compensation and overseeing the work of ourindependent auditor.

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TAGENTERTAINMENT CORP. AND SUBSIDIARIESCONSOLIDATED FINANCIALSTATEMENTS

|                                                                |  |        |        |        |  |  |
|----------------------------------------------------------------|--|--------|--------|--------|--|--|
|                                                           |  | PAGES  |
| INDEXTO AUDITED CONSOLIDATED FINANCIALSTATEMENTS               |  |   |   |   |
| Report of IndependentRegistered Public Accounting Firm         |  |   | F-2    |   |
| Consolidated Balance Sheet                                     |  |   | F-3    |   |
| Consolidated Statements of Operations                          |  |   | F-4    |   |
| Consolidated Statements ofStockholders’ Equity (Deficit) |  |   | F-5    |   |
| Consolidated Statements of Cash Flows                          |  |   | F-6    |   |
| Notes to Consolidated FinancialStatements                      |  |   | F-7    |   |
|                                                                |

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AJ. ROBBINS, PCCERTIFIED PUBLICACCOUNTANTS216 16TH STREET, SUITE 600DENVER, COLORADO80202

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

To the Board of Directors and StockholdersofTAG Entertainment Corp.Santa Monica,California

We have audited the accompanying consolidatedbalance sheet of TAG Entertainment Corp. as of December31,  2005, and the related consolidated statements of operations,changes in stockholders’ equity (deficit), and cash flows foreach of the years in the two year period then ended. These consolidatedfinancial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

Weconducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are freeof material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the consolidatedfinancial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as wellas evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for ouropinion.

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects,the financial position of TAG Entertainment Corp. as of December31,  2005, and the results of its operations and its cash flowsfor each of the years in the two year period then ended, in conformitywith generally accepted accounting principles in the United States ofAmerica.

The accompanying financial statements have beenprepared assuming that the Company will continue as a going concern. Asdiscussed in Note 1 to the financial statements, the Company hasexperienced recurring losses and negative cash flows from operationsand has both a working capital and a capital deficit at December31,  2005, that raises substantial doubt about its ability tocontinue as a going concern. Management’s plans in regard tothese matters are also described in Note 1. The financial statements donot include any adjustments that might results from the outcome of thisuncertainty.

|  | /S/ AJ. ROBBINS,PC                                    CERTIFIEDPUBLIC ACCOUNTANTS |
|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

DENVER,COLORADOFebruary  10,2006

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TAGENTERTAINMENT CORP.

CONSOLIDATED BALANCE SHEETDECEMBER 31,2005

|                                                                                                                                                                                            |  |        |            |         |  |  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--------|------------|---------|--|--|
| ASSETS                                                                                                                                                                                     |
| Currentassets                                                                                                                                                                              |  |   |       |    |
| Cash                                                                                                                                                                                       |  | $      | 58,000     |    |
| Accountsreceivable, net                                                                                                                                                                    |  |   | 3,468,000  |    |
| Notesreceivable                                                                                                                                                                            |  |   | 1,205,000  |    |
| Other currentassets                                                                                                                                                                        |  |   | 220,000    |    |
| Totalcurrent assets                                                                                                                                                                        |  |   | 4,951,000  |    |
| Capitalized filmcosts, net                                                                                                                                                                 |  |   | 1,503,000  |    |
| Investments inlimitedpartnerships                                                                                                                                                          |  |   | 688,000    |    |
| Equipment,net                                                                                                                                                                              |  |   | 78,000     |    |
| Otherassets                                                                                                                                                                                |  |   | 165,000    |    |
|                                                                                                                                                                                       |  | $      | 7,385,000  |    |
| LIABILITIESAND STOCKHOLDERS’ EQUITY                                                                                                                                                  |
| Currentliabilities                                                                                                                                                                         |  |   |       |    |
| Accountspayable                                                                                                                                                                            |  | $      | 1,388,000  |    |
| Amounts payable toaffiliatedpartnerships                                                                                                                                                   |  |   | 1,509,000  |    |
| Notespayable                                                                                                                                                                               |  |   | 75,000     |    |
| Notes payable, relatedparty                                                                                                                                                                |  |   | 100,000    |    |
| Deferred productionfunding                                                                                                                                                                 |  |   | 138,000    |    |
| Accruedresiduals                                                                                                                                                                           |  |   | 67,000     |    |
| Accruedsalaries                                                                                                                                                                            |  |   | 415,000    |    |
| Accrued payrolltaxes                                                                                                                                                                       |  |   | 15,000     |    |
| Totalcurrentliabilities                                                                                                                                                                    |  |   | 3,707,000  |    |
| 6%Series A convertible preferred stock $.001 par value; 500,000shares authorized; 5,000 shares outstanding; mandatorilyredeemable, $5,000,000 redemption value; net of unamortizeddiscount |  |   | 1,111,000  |    |
| Minorityinterest                                                                                                                                                                           |  |   | 2,057,000  |    |
| Commitmentsandcontingencies                                                                                                                                                                |  |   |       |    |
| Stockholders’equity                                                                                                                                                                  |  |   |       |    |
| Commonstock, $0.001 par value: 50,000,000 shares authorized; 21,189,948shares issued andoutstanding                                                                                        |  |   | 21,000     |    |
| Additional paid-incapital                                                                                                                                                                  |  |   | 9,072,000  |    |
| Accumulated(deficit)                                                                                                                                                                       |  |   | (8,583,000 | )  |
| Totalstockholders’equity                                                                                                                                                             |  |   | 510,000    |    |
|                                                                                                                                                                                       |  | $      | 7,385,000  |    |
|                                                                                                                                                                                            |

Seeaccompanying notes to consolidated financialstatements.

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TAG ENTERTAINMENTCORP.

CONSOLIDATED STATEMENTS OF OPERATIONSFOR THE YEARSENDED DECEMBER31

|                                                 |  |        |            |         |  |        |            |         |  |  |
|-------------------------------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                            |  | 2005   |            | 2004    |
| Revenue                                         |  |   |       |    |  |   |       |    |
| Filmrevenue                                     |  | $      | 1,598,000  |    |  | $      | 1,095,000  |    |
| Productionfees                                  |  |   | 1,569,000  |    |  |   | —    |    |
| Managementfees                                  |  |   | 315,000    |    |  |   | 405,000    |    |
| Overheadfees                                    |  |   | 397,000    |    |  |   | 270,000    |    |
| Studiorentalincome                              |  |   | —    |    |  |   | 289,000    |    |
| Totalrevenue                                    |  |   | 3,879,000  |    |  |   | 2,059,000  |    |
| Operatingexpenses                               |  |   |       |    |  |   |       |    |
| Amortizationof filmcosts                        |  |   | 575,000    |    |  |   | 1,265,000  |    |
| Studiorent and otherexpenses                    |  |   | 43,000     |    |  |   | 176,000    |    |
| Legalsettlements                                |  |   | —    |    |  |   | 590,000    |    |
| Selling,general and administrativeexpenses      |  |   | 3,225,000  |    |  |   | 4,360,000  |    |
| Failedacquisitioncosts                          |  |   | 609,000    |    |  |   | —    |    |
| Totaloperatingexpenses                          |  |   | 4,452,000  |    |  |   | 6,391,000  |    |
| (Loss)fromoperations                            |  |   | (573,000   | )  |  |   | (4,332,000 | )  |
| Interestexpense                                 |  |   | (1,561,000 | )  |  |   | —    |    |
| Interestand otherincome                         |  |   | 34,000     |    |  |   | 10,000     |    |
| Net(loss) before minorityinterest               |  |   | (2,100,000 | )  |  |   | (4,322,000 | )  |
| Minorityinterest                                |  |   | 255,000    |    |  |   | 451,000    |    |
| Net(loss)                                       |  | $      | (1,845,000 | )  |  | $      | (3,871,000 | )  |
| Net(loss) per share – basic anddiluted    |  | $      | (0.09      | )  |  | $      | (0.20      | )  |
| Weightedaverage shares – basic anddiluted |  |   | 21,092,000 |    |  |   | 19,845,000 |    |
|                                                 |

Seeaccompanying notes to consolidated financialstatements

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TAG ENTERTAINMENTCORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(DEFICIT)FOR THE YEARS ENDED DECEMBER 31, 2005 AND2004

|                                                                 |  |             |            |                          |  |                    |         |        |  |        |            |         |  |        |            |         |  |        |            |         |  |  |
|-----------------------------------------------------------------|--|-------------|------------|--------------------------|--|--------------------|---------|--------|--|--------|------------|---------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                            |  | CommonStock |            | AdditionalPaid-inCapital |  | AccumulatedDeficit |         | Total  |
|                                                            |  | Shares      |            | Amount                   |
| Balance,December  31,2003                                       |  |        | 17,340,786 |                     |  | $                  | 17,000  |   |  | $      | 1,773,000  |    |  | $      | (2,303,000 | )  |  | $      | (513,000   | )  |
| Stockissued in private placements less fees of$219,000          |  |        | 730,810    |                     |  |               | 1,000   |   |  |   | 1,027,000  |    |  |   | —    |    |  |   | 1,028,000  |    |
| Purchaseof limited partnershipshares                            |  |        | 485,669    |                     |  |               | — |   |  |   | 475,000    |    |  |   | —    |    |  |   | 475,000    |    |
| Purchaseof consolidated limited partnershipshares               |  |        | 189,550    |                     |  |               | — |   |  |   | 291,000    |    |  |   | —    |    |  |   | 291,000    |    |
| Stockissued forservices                                         |  |        | 321,929    |                     |  |               | — |   |  |   | 580,000    |    |  |   | —    |    |  |   | 580,000    |    |
| Proceedsfrom warrantsexercised                                  |  |        | 156,802    |                     |  |               | — |   |  |   | 141,000    |    |  |   | —    |    |  |   | 141,000    |    |
| Stockdividend paid tostockholders                               |  |        | 5,551      |                     |  |               | — |   |  |   | 10,000     |    |  |   | (10,000    | )  |  |   | —    |    |
| Dividendspaid                                                   |  |        | —    |                     |  |               | — |   |  |   | —    |    |  |   | (18,000    | )  |  |   | (18,000    | )  |
| Stockissued in legalsettlement                                  |  |        | 277,525    |                     |  |               | — |   |  |   | 500,000    |    |  |   | —    |    |  |   | 500,000    |    |
| Surrenderof stock for return ofcapital                          |  |        | (428,025   | )                   |  |               | — |   |  |   | —    |    |  |   | —    |    |  |   | —    |    |
| Surrenderof stock for repayment of affiliatedistributions       |  |        | (435,081   | )                   |  |               | — |   |  |   | (1,567,000 | )  |  |   | —    |    |  |   | (1,567,000 | )  |
| Stockrepurchased in settlementagreement                         |  |        | (33,303    | )                   |  |               | — |   |  |   | (60,000    | )  |  |   | —    |    |  |   | (60,000    | )  |
| Effectof reversemerger                                          |  |        | 2,450,000  |                     |  |               | 3,000   |   |  |   | (3,000     | )  |  |   |       |    |  |   | —    |    |
| Netloss                                                         |  |        | —    |                     |  |               | — |   |  |   | —    |    |  |   | (3,871,000 | )  |  |   | (3,871,000 | )  |
| Balance,December  31,2004                                       |  |        | 21,062,213 |                     |  |               | 21,000  |   |  |   | 3,167,000  |    |  |   | (6,202,000 | )  |  |   | (3,014,000 | )  |
| Stockissued forservices                                         |  |        | 35,000     |                     |  |               | — |   |  |   | 143,000    |    |  |   | —    |    |  |   | 143,000    |    |
| Stockissued in private placements                               |  |        | 29,408     |                     |  |               | — |   |  |   | 88,000     |    |  |   | —    |    |  |   | 88,000     |    |
| Stockissued in for cashless exercise ofwarrant                  |  |        | 9,500      |                     |  |               | — |   |  |   | —    |    |  |   | —    |    |  |   | —    |    |
| Issuanceof warrants infinancings                                |  |        | —    |                     |  |               | — |   |  |   | 3,224,000  |    |  |   | —    |    |  |   | 3,224,000  |    |
| Beneficialconversion feature of preferredstock                  |  |        | —    |                     |  |               | — |   |  |   | 2,414,000  |    |  |   | —    |    |  |   | 2,414,000  |    |
| Amortizationof discount related to beneficial conversionfeature |  |        | —    |                     |  |               | — |   |  |   | —    |    |  |   | (536,000   | )  |  |   | (536,000   | )  |
| Effectof reversemerger                                          |  |        | 53,827     |                     |  |               | — |   |  |   | 36,000     |    |  |   | —    |    |  |   | 36,000     |    |
| Netloss                                                         |  |        | —    |                     |  |               | — |   |  |   | —    |    |  |   | (1,845,000 | )  |  |   | (1,845,000 | )  |
| Balance,December  31,2005                                       |  |        | 21,189,948 |                     |  | $                  | 21,000  |   |  | $      | 9,072,000  |    |  | $      | (8,583,000 | )  |  | $      | 510,000    |    |
|                                                                 |

Seeaccompanying notes to consolidated financialstatements

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TAG ENTERTAINMENTCORP.

CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARSENDED DECEMBER31

|                                                                           |  |        |            |         |  |        |            |         |  |  |
|---------------------------------------------------------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                                      |  | 2005   |            | 2004    |
| Cashflows from operating activities                                       |  |   |       |    |  |   |       |    |
| Net lossbefore minorityinterest                                           |  | $      | (2,100,000 | )  |  | $      | (4,322,000 | )  |
| Adjustmentsto reconcile net loss to net cash used in operatingactivities: |  |   |       |    |  |   |       |    |
| Amortization offilmcosts                                                  |  |   | 575,000    |    |  |   | 1,265,000  |    |
| Depreciationof fixedassets                                                |  |   | 49,000     |    |  |   | 48,000     |    |
| Legalsettlements                                                          |  |   | —    |    |  |   | 590,000    |    |
| Losson sale of fixedassets                                                |  |   | —    |    |  |   | 7,000      |    |
| Stockissued forservices                                                   |  |   | 143,000    |    |  |   | 580,000    |    |
| Amortizationof discount onfinancings                                      |  |   | 1,213,000  |    |  |   | —    |    |
| Amortizationof deferred financingcosts                                    |  |   | 83,000     |    |  |   | —    |    |
| Changesin operating assets andliabilities:                                |  |   |       |    |  |   |       |    |
| Accountsreceivable                                                        |  |   | (2,137,000 | )  |  |   | (172,000   | )  |
| Investmentsinfilms                                                        |  |   | (25,000    | )  |  |   | (1,006,000 | )  |
| Otherassets                                                               |  |   | 28,000     |    |  |   | (19,000    |    |
| Accountspayable                                                           |  |   | 589,000    |    |  |   | 335,000    |    |
| Bankoverdrafts                                                            |  |   | (124,000   | )  |  |   | 124,000    |    |
| Amountspayable to affiliatedpartnerships                                  |  |   | (297,000   | )  |  |   | 1,238,000  |    |
| Deferredrevenue                                                           |  |   | (81,000    | )  |  |   | (69,000    | )  |
| Accruedsalaries                                                           |  |   | 45,000     |    |  |   | 420,000    |    |
| Accruedpayrolltaxes                                                       |  |   | (153,000   | )  |  |   | 88,000     |    |
| Other                                                                     |  |   | 16,000     |    |  |   | 5,000      |    |
| Netcash used in operatingactivities                                       |  |   | (2,176,000 | )  |  |   | (888,000   | )  |
| Cashflows from investingactivities                                        |  |   |       |    |  |   |       |    |
| Issuanceof notesreceivable                                                |  |   | (2,000,000 | )  |  |   | (5,000     | )  |
| Investmentin filmpartnerships                                             |  |   | (200,000   | )  |  |   | (12,000    | )  |
| Proceedsfrom disposition ofequipment                                      |  |   | —    |    |  |   | 3,000      |    |
| Purchasesofequipment                                                      |  |   | (23,000    | )  |  |   | (153,000   | )  |
| Netcash used in investingactivities                                       |  |   | (2,223,000 | )  |  |   | (167,000   | )  |
| Cashflows from financingactivities                                        |  |   |       |    |  |   |       |    |
| Proceedsfrom issuance of notespayable                                     |  |   | 1,025,000  |    |  |   | 19,000     |    |
| Proceedsfrom issuance of convertible preferredstock                       |  |   | 5,000,000  |    |  |   | —    |    |
| Paymentson notepayable                                                    |  |   | (1,345,000 | )  |  |   | (236,000   | )  |
| Proceedsfor filmproduction                                                |  |   | 147,000    |    |  |   | 93,000     |    |
| Proceedsfrom private placement offerings due to relatedparty              |  |   | —    |    |  |   | 772,000    |    |
| Proceedsfrom private placement offerings of commonstock                   |  |   | 88,000     |    |  |   | 834,000    |    |
| Paymentof private placement offering proceeds due to relatedparty         |  |   | —    |    |  |   | (1,001,000 | )  |
| Paymentof financingcosts                                                  |  |   | (455,000   | )  |  |   | (219,000   | )  |
| Proceedsfrom exercise ofwarrants                                          |  |   | —    |    |  |   | 141,000    |    |
| Other                                                                     |  |   | (26,000    | )  |  |   | (10,000    | )  |
| Netcash provided by financingactivities                                   |  |   | 4,434,000  |    |  |   | 393,000    |    |
| Netincrease (decrease) incash                                             |  |   | 35,000     |    |  |   | (662,000   | )  |
| Cash atbeginning ofperiod                                                 |  |   | 23,000     |    |  |   | 685,000    |    |
| Cashat end ofperiod                                                       |  | $      | 58,000     |    |  | $      | 23,000     |    |
| Supplementaldisclosure of cash flowinformation:                           |  |   |       |    |  |   |       |    |
| Interestpaid                                                              |  | $      | 348,000    |    |  | $      | 9,000      |    |
|                                                                           |

Seeaccompanying notes to consolidated financialstatements

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TAGENTERTAINMENT CORP.    NOTES TOCONSOLIDATED FINANCIALSTATEMENTS

NOTE 1 — SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES 

Estimates andReclassifications

The accompanying consolidated financialstatements for the years ended December  31,  2005 and 2004have been prepared in accordance with accounting principles generallyaccepted in the United States (‘‘GAAP’’).The preparation of the financial statements in accordance with GAAPrequires management to make estimates and assumptions that affectreported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period.Actual results could differ from those and other estimates. Inpreparing the financial statements for comparative purposes, prior yearfinancial information has been reclassified to conform withclassifications of the current year.

Nature ofOperations

TAG Entertainment Corp. (the‘‘Company’’ or‘‘TAG’’) is a Delaware corporationheadquartered in Santa Monica, California. The Company is engaged inthe development, production and distribution of motion pictures and themanagement of studio facilities. The Company also acquires thecopyrights and/or distribution rights to already completed films formedia exhibition. In order to finance film production, the Companyraises funds through the establishment of single purpose limitedpartnerships and through the sale of equity or debt securities. TAGEntertainment USA, Inc. (‘‘TAG USA’’), theCompany's wholly-owned subsidiary, serves as the sole generalpartner of the following four limited partnerships: Majestic FilmPartners, LP, Majestic Film Partners II, LP, Majestic Film PartnersIII, LP and Majestic Film Partners IV, LP (the ‘‘LimitedPartnerships’’). TAG USA is also the distributor of filmsproduced by numerous other limited partnerships as well as assists infacilitating the production and distribution of films produced bylimited partnerships for which it receives an overhead and/orproduction fee. Five of these other limited partnerships have as theirgeneral partner an entity owned and controlled by Steve Austin, theCompany’s Chief Executive Officer.

The Company'srevenues are derived from motion picture production and distribution,which includes theatrical, home entertainment, television andinternational distribution. Theatrical revenues are derived from thedomestic theatrical release of motion pictures in North America. Homeentertainment revenues are derived from the sale of video and DVDreleases of the Company's own productions and acquired films,including theatrical releases and direct-to-video releases. Televisionrevenues are primarily derived from the licensing of theCompany's productions and acquired films to the domestic cable,free and pay television markets. International revenues are derivedfrom the licensing of the Company's productions and acquiredfilms to international markets on a territory-by-territory basis.

The Company's primary operating expenses include thefollowing: direct operating expenses, which include amortization ofproduction or acquisition costs, participation and residual expenses;distribution and marketing expenses; which primarily include the costsof theatrical ‘‘prints and advertising’’and of video and DVD duplication and marketing; and general andadministration expenses, which include salaries and other overhead.

Merger

On November  22,  2004, TAG USA wasacquired by Power Marketing, Inc., a Delaware corporation. In thetransaction, TAG USA merged with a subsidiary of Power Marketing, Inc.and became a wholly-owned subsidiary of Power Marketing, Inc. As aresult of this transaction, the 

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TAGENTERTAINMENT CORP.    NOTES TOCONSOLIDATED FINANCIALSTATEMENTS

stockholders and other security holders of TAGUSA became the owners of approximately 90% of theCompany's outstanding shares of common stock. The transaction wastreated as a reverse merger and a recapitalization of the Company forreporting purposes. In connection with the merger, Power Marketingchanged its corporate name to TAG Entertainment Corp., obtained the newtrading symbol TAGE.OB and all of the officers and directors of PowerMarketing resigned and Mr.  Austin, who was the majorityshareholder, Chief Executive Officer and sole director of TAG USAbecame the Company's Chief Executive Officer, Chief FinancialOfficer and sole director. The Company appointed five additionaldirectors to its board during 2005; however two of its independentdirectors resigned on March  20,  2006. The holders ofapproximately 1,122,000 shares of common stock of TAG USA that did notconsent in writing to the Company's acquisition of TAG USA wereentitled to exercise appraisal rights under the California CorporationsCode. The holder of an aggregate of 50,000 shares of common stock ofTAG USA has elected to its exercise its dissenters’ rights underthe California Corporations Code and has commenced a proceeding againstthe Company. The Company continues to negotiate with the claimant toresolve this matter.

Going Concern and ManagementPlans

The Company’s financial statements have beenpresented on the basis that it is a going concern, which contemplatesthe realization of assets and the satisfaction of liabilities in thenormal course of business. The Company has experienced recurring lossesand negative cash flows from operations and has a working capital and acapital deficit, which raises substantial doubt about its ability tocontinue as a going concern. The Company is currently devoting itsefforts to raising additional capital and achieving profitableoperations. The Company’s ability to continue as a going concernis dependent upon its ability to develop additional sources of capital.The accompanying financial statements do not include any adjustmentsthat might result from the outcome of these uncertainties. The Companyclosed on a bridge financing in the amount of $1,000,000 onMarch  30,  2005. On May  4,  2005, the Companycompleted a $5,000,000 preferred stock financing and retired the bridgeloan.

On March  30,  2005, the Company entered into aletter of intent to acquire 100% of the outstanding common stockof Myriad Pictures, Inc., which is engaged in the film production anddistribution business. The letter of intent provided for a purchaseprice of approximately $4,000,000, including an earnout payment of upto $2,000,000. In connection with the execution of the letter ofintent, the Company provided Myriad with a short term loan of $250,000,bearing interest at the rate of 3% per annum, which Myriad wasto use for working capital and to pay for its acquisition costs pendingthe closing (the ‘‘Myriad Loan’’). TheMyriad Loan is secured by a lien on the assets of Myriad. As ofFebruary  23,  2006, we notified Myriad that we wereterminating negotiations and the letter of intent, effectiveimmediately. Pursuant to its terms, the Myriad Loan (less certainexpenses) is repayable by March  30,  2006 and we have notreceived repayment as of the date hereof.

In order to satisfyfuture cash requirements, management is actively pursuing and hasentered into discussions regarding additional financing to supportexpansion plans and ongoing operations. The Company currently has nofirm agreements with any third parties for any future transactions andfuture financings.

Principles of Consolidation

Theaccompanying consolidated financial statements of the Company includethe accounts of TAG, TAG USA and of the Limited Partnerships which theCompany is the sole general partner. The General Partner has the fulland exclusive control of the management and operation of the businessof each partnership. The Company in its capacity as General Partnerparticipates in 1% of the losses of the limited partnerships butshares in 60% of any profits. All significant inter-companybalances and transactions have been eliminated inconsolidation.

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TAGENTERTAINMENT CORP.    NOTES TOCONSOLIDATED FINANCIALSTATEMENTS

Minority Interests

TAG consolidatesthe Limited Partnerships for which it is the sole general partner. Theamount of minority interest represents the aggregate net limitedpartnership capital of each partnership offset by 99% ofaccumulated Limited Partnership losses.

RevenueRecognition

Revenue from the sale or licensing of films andtelevision programs is recognized upon meeting all recognitionrequirements of SOP 00-2. Revenue from the theatrical release offeature films is recognized at the time of exhibition based on theCompany’s participation in box office receipts. Revenue from thesale of videocassettes and digital video disks(‘‘DVDs’’) in the retail market isrecognized on the ‘‘street date’’ when itis available for sale by the customer. Revenues from televisionslicensing are recognized when the feature film or television program isavailable to the licensee for telecast. Revenues from sales tointernational territories are recognized when the feature film ortelevision program is available to the distributor for exploitation andno conditions for delivery exist.

Production fees are earned onfilms where the Company has been engaged as producer by limitedpartnerships formed to finance the movie. In certain cases, such feesare fixed in amount and are earned and billed during the productionprocess. In other cases, the Company earns a fee based on the revenuesof the film and therefore recognizes its fee when revenues aredetermined and reported by the distributors of the film.

Oncertain films, the Company earns management fees in connection with itsrole as production manager for the limited partnerships where the ChiefExecutive Officer of the Company has assigned to TAG his management feerights during the production period.

The Company bills overheadfees to limited partnerships for reasonable, direct and allocable costsarising during the management of film projects.

Rental revenuefrom short-term operating leases of studio facilities is recognizedover the term of the lease.

Cash payments received which mayinclude minimum guarantees are recorded as deferred revenue until allconditions of revenue recognition have been met.

CashEquivalents

For purposes of reporting cash flows, the Companyconsiders all short-term, interest bearing deposits with originalmaturities of three months or less to be cashequivalents.

Capitalized Film Costs

Capitalized filmcosts consist of investments in films which include the unamortizedcosts of completed films which have been produced by the Company or forwhich the Company has acquired distribution rights or filmlibraries.

For films produced by the Company, capitalized costsinclude all direct production and financing costs, and productionoverhead. For acquired films, these capitalized costs consist ofminimum guarantee payments to acquire the distributionrights.

Costs of acquiring and producing films and of acquiredlibraries are amortized using the individual-film-forecast method,whereby these costs are amortized and participation and residual costsare accrued in the proportion that current year’s revenue bearsto management’s estimate of ultimate revenue at the beginning ofthe current year expected to be recognized from the exploitation,exhibition or sale of the films.

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TAGENTERTAINMENT CORP.    NOTES TOCONSOLIDATED FINANCIALSTATEMENTS

Ultimate revenue includes estimates over aperiod not to exceed ten years following the date of initial release.For titles included in acquired libraries, ultimate revenue includesestimates over a period not to exceed ten years following the date ofacquisition.

Capitalized film costs are stated at the lower ofamortized cost or estimated fair value on an individual film basis. Thevaluation of investment in films is reviewed on a title-by-title basis,when an event or changes in circumstances indicated that the fair valueof a film is less than its unamortized cost. The fair value of the filmis determined using management’s future revenue and costestimates. Additional amortization is recorded in the amount by whichthe unamortized costs exceed the estimated fair value of the film.Estimates of future revenue involve measurement uncertainty and it istherefore possible that reductions in the carrying value of investmentin films may be required as a consequence of changes inmanagement’s future revenue estimates.

Films in progressinclude the accumulated costs of production, which have not yet beencompleted by the Company.

Films in development include costs ofacquiring film rights to original screenplays and costs to adapt suchprojects. Such costs are capitalized and, upon commencement ofproduction, are transferred to production costs. Projects indevelopment are written off at the earlier of the date determined notto be recoverable or when abandoned, or three years from the date ofthe initial investment.

Advertising Expense

The Companyexpenses advertising costs as incurred. During the years endedDecember  31,  2005 and 2004, the Company had $6,000 and$5,500, respectively for advertisingcosts.

Equipment

Equipment is carried at cost and isdepreciated on the straight-line basis over their estimated usefullives of three to eight years. Repairs and maintenance are expensed asincurred. When assets are retired or otherwise disposed of, theproperty accounts are relieved of costs and accumulated depreciationand any existing gain or loss is credited or charged to operations.Depreciation expense was $49,000 and $48,000 in 2005 and 2004,respectively.

Impairment of Long-Lived Assets

Statementof Financial Accounting Standards No. 144, ‘‘Accountingfor the Impairment or Disposal of Long-Lived Assets’’(‘‘SFAS No. 144’’)requires that long-lived assets tobe disposed of by sale, including those of discontinuedoperations, be measured at the lowerof carrying amount orfair value less cost tosell, whether reported in continuing operations orin discontinued operations.  SFASNo. 144 broadens the reporting of discontinuedoperations to include all components of an entity with operations thatcan be distinguished from the rest of the entity and that will beeliminated from the ongoing operations of the entity ina disposal transaction. SFAS No. 144 alsoestablishes a ‘‘primary-asset’’approach to determine the cash flow estimation period for agroup of assets and liabilities that represents the unit of accountingfor a long-lived asset to be held and used. The Company has noimpairment issues to disclose.

Stock-BasedCompensation

The Company accounts for stock-based compensationin accordance with Statement of Financial Accounting Standards No. 123,‘‘Accounting for Stock-Based Compensation’’(‘‘SFAS 123’’). This standard requires theCompany to adopt the ‘‘fair value’’ methodwith respect to stock-based 

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TAGENTERTAINMENT CORP.    NOTES TOCONSOLIDATED FINANCIALSTATEMENTS

compensation of consultants and othernon-employees. The Company did not change its method of accounting withrespect to employee stock options; the Company continues to account forthese under the ‘‘intrinsic value’’ methodand to furnish the pro-forma disclosures required by SFAS123.

Valuation of the Company’s CommonStock

Unless otherwise disclosed, all stock-based transactionsentered into by the Company have been valued at the market value of theCompany’s common stock on the date the transaction was enteredinto or have been valued using the Black-Scholes to estimate the fairmarket value.

Concentrations of Risk

The Company’sfinancial instruments that are exposed to concentrations of credit riskconsist of cash and receivables. The Company invests its cash in bankswith high credit ratings; however, certain account balances have beenmaintained at levels in excess of federally insured limits. The Companyhas not experienced a loss in such accounts.

The Company extendscredit based on an evaluation of the customer’s financialcondition, generally without collateral. Exposure to losses onreceivables is principally dependent on each customer’sfinancial condition. The Company monitors its exposure for creditlosses and maintains allowances for anticipated losses, as required.The Company sub-distributes titles in both the domestic andinternational markets. The Company is typically paid an advance orminimum guarantee for these rights. Any overages (revenue in excess ofthe minimum guarantee) are reported to the Company 45 to 90 days afterthe reporting period. Because of the minimum guarantees and the detailsof the Company’s distribution relationships, theCompany’s outstanding balances may extend to greater than 90days.

At December  31,  2005, the Company’sreceivables included $1.6  million to be collected from aninternational film distributor for sub-distribution rights on a filmcompleted and delivered during the year. In addition, the Companyreceived a note for production funding provided to the investorpartnership that owns the underlying rights to this film. The notereceivable balance was $1.2  million at December31,  2005. The receivable from distributor represents a minimumguarantee under a distribution contract with the Company to becollected from receipts in various foreign markets. The notereceivable, which originally matured during the fourth quarter of 2005was extended until the fourth quarter of 2006. The amount due bearsinterest at 12% per annum and will be collected from thepartnership after payment of distribution and production fees andexpenses related to the film. The Company is arranging an extension ofthe maturity date with the partnership. While estimates of grossreceipts, including video and DVD sales, support the stated values ofthese amounts, the collection of these balances is subject to inherentrisks associated with the worldwide performance of the film and generalconditions in the various foreign markets.

IncomeTaxes

Deferred income taxes are recorded to reflect the taxconsequences in future years of temporary differences between the taxbasis of the assets and liabilities and their financial statementamounts at the end of each reporting period. Valuation allowances areestablished when necessary to reduce deferred tax assets to the amountexpected to be realized. Income tax expense is the tax payable for thecurrent period and the change during the period in deferred tax assetsand liabilities. The deferred tax assets and liabilities have beennetted to reflect the tax impact of temporary differences. A fullvaluation allowance has been established for net deferred tax assets asmanagement believes that it is more likely than not that a tax benefitwill not be realized.

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TAGENTERTAINMENT CORP.    NOTES TOCONSOLIDATED FINANCIALSTATEMENTS

Earnings per Common Share

TheCompany computes earnings per common share in accordance with Statementof Financial Accounting Standards No. 128, ‘‘Earnings perShare’’ (SFAS No. 128). The Statement requires dualpresentation of basic and diluted EPS on the face of the incomestatement for all entities with complex capital structures and requiresa reconciliation of the numerator and denominator of the basic EPScomputation to the numerator and denominator of the diluted EPScomputation. Basic EPS is computed by dividing income or loss availableto common shareholders by the weighted average number of common sharesoutstanding. The computation of diluted EPS is similar to the basic EPScomputation except the denominator is increased to include the numberof additional shares that would have been outstanding if the dilutivepotential common shares had been issued. In addition, the numerator isadjusted for any changes in income or loss that would result from theassumed conversions of those potential shares. However, suchpresentation is not required if the effect is anti-dilutive. Thediluted EPS amounts for the years ended December  31,  2005and 2004 do not reflect the impact of common share equivalents arisingfrom warrants and options totaling 7,363,000 and 4,990,000 atDecember  31,  2005 and 2004, respectively, as the effectswould be anti-dilutive in those periods.

Recently IssuedAccounting Pronouncements

In May  2005, the FASB issuedSFAS No. 154, ‘‘Accounting Changes and ErrorCorrections.’’ This statement applies to all voluntarychanges in accounting principle and requires retrospective applicationto prior periods' financial statements of changes in accountingprinciple, unless this would be impracticable. This statement alsomakes a distinction between ‘‘retrospectiveapplication’’ of an accounting principle and the‘‘restatement’’ of financial statements toreflect the correction of an error. This statement is effective foraccounting changes and corrections of errors made in fiscal yearsbeginning after December  15,  2005. SFAS No. 154 is notexpected to have a material effect on the consolidated financialposition or results of operations of the Company.

InFebruary  2006, FASB issued SFAS No. 155,‘‘Accounting for Certain Hybrid FinancialInstruments’’. SFAS No. 155 amends SFAS No 133,‘‘Accounting for Derivative Instruments and HedgingActivities’’, and SFAS No. 140,‘‘Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities’’. SFAS No.155, permits fair value remeasurement for any hybrid financialinstrument that contains an embedded derivative that otherwise wouldrequire bifurcation, clarifies which interest-only strips andprincipal-only strips are not subject to the requirements of SFAS No.133, establishes a requirement to evaluate interest in securitizedfinancial assets to identify interests that are freestandingderivatives or that are hybrid financial instruments that contain anembedded derivative requiring bifurcation, clarifies thatconcentrations of credit risk in the form of subordination are notembedded derivatives, and amends SFAS No. 140 to eliminate theprohibition on the qualifying special-purpose entity from holding aderivative financial instrument that pertains to a beneficial interestother than another derivative financial instrument. This statement iseffective for all financial instruments acquired or issued after thebeginning of the Company’s first fiscal year that begins afterSeptember  15,  2006. SFAS No. 155 is not expected to havea material effect on the consolidated financial position or results ofoperations of the Company.

In December  2004, the FASBissued SFAS No. 123 (Revised), entitled Share-Based Payment.This revised Statement eliminates the alternative to use APB OpinionNo. 25’s intrinsic value method of accounting that was providedin SFAS No. 123 as originally issued. Under Opinion 25, issuing stockoptions to employees generally resulted in recognition of nocompensation cost. This Statement requires entities to recognize thecost of employee services received in exchange for awards of equityinstruments based on the grant-date fair value of those awards. Forpublic companies that file as a small business issuer, this Statementis effective as of the beginning of the first interim or annual

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TAGENTERTAINMENT CORP.    NOTES TOCONSOLIDATED FINANCIALSTATEMENTS

reporting period that begins afterDecember  15,  2005. The adoption of SFAS 123 (Revised) isnot expected to have a material effect on the consolidated financialstatements.

In June  2005, the EITF reached consensus onIssue No. 05-6, Determining the Amortization Period for LeaseholdImprovements (‘‘EITF 05-6.’’) EITF 05-6provides guidance on determining the amortization period for leaseholdimprovements acquired in a business combination or acquired subsequentto lease inception. The guidance in EITF 05-6 will be appliedprospectively and is effective for periods beginning after June29,  2005. EITF 05-6 is not expected to have a material effect onits consolidated financial position or results ofoperations.

NOTE 2 — CAPITALIZED FILMCOSTS

Capitalized film costs for theatrical and non-theatricalfilms at December  31,2005:

|                               |  |           |           |                         |  |         |            |         |  |        |           |        |  |  |
|-------------------------------|--|-----------|-----------|-------------------------|--|---------|------------|---------|--|--------|-----------|--------|--|--|
|                          |  | Grosscost |           | Accumulatedamortization |  | Netcost |
| Produced and released films   |  | $         | 6,351,000 |                    |  | $       | (5,387,000 | )  |  | $      | 964,000   |   |
| Acquiredfilms and film rights |  |      | 393,000   |                    |  |    | (387,000   | )  |  |   | 6,000     |   |
| Filmsin progress              |  |      | 261,000   |                    |  |    | —    |    |  |   | 261,000   |   |
| Filmsunderdevelopment         |  |      | 272,000   |                    |  |    | —    |    |  |   | 272,000   |   |
| Total                         |  | $         | 7,277,000 |                    |  | $       | (5,774,000 | )  |  | $      | 1,503,000 |   |
|                               |

NOTE3 — INVESTMENT IN LIMITED PARTNERSHIPS

TAG has purchasedinterests in various affiliated unconsolidated partnerships by issuingTAG common stock for the partnership shares ranging in value at $1 to$2 per share of TAG common stock (accounted for at cost) asfollows:

|                             |  |        |        |         |  |        |         |        |  |  |
|-----------------------------|--|--------|--------|---------|--|--------|---------|--------|--|--|
| LimitedPartnerships         |  | %Owned |        | Cost    |
| Family Film Partners VII,LP |  |   | 5.94   | %  |  | $      | 200,000 |   |
| AnimalPartners, LP          |  |   | 14.21  | %  |  |   | 425,000 |   |
| Fairy TalePartners III, LP  |  |   | 0.47   | %  |  |   | 25,000  |   |
| Family FilmPartners, LP     |  |   |   |    |  |   | 13,000  |   |
| MotocrossKids               |  |   | 0.42   | %  |  |   | 25,000  |   |
|                        |  |   |   |    |  | $      | 688,000 |   |
|                             |

NOTE 4 —EQUIPMENT

Equipment is summarized as follows at December31,2005:

|                                          |  |        |          |         |  |  |
|------------------------------------------|--|--------|----------|---------|--|--|
| Vehicles                                 |  | $      | 105,000  |    |
| Furnitureand fixtures                    |  |   | 20,000   |    |
| Equipment                                |  |   | 26,000   |    |
| Leaseholdimprovements                    |  |   | 87,000   |    |
| Accumulated depreciationand amortization |  |   | (160,000 | )  |
|                                     |  | $      | 78,000   |    |
|                                          |

NOTE5 — AMOUNTS PAYABLE TO AFFILIATEDPARTNERSHIPS 

Net amounts payable to affiliatedpartnerships resulted from the advancement of funds by certainpartnerships to TAG which were required during the course of managingthe Company’s operations 

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TAGENTERTAINMENT CORP.    NOTES TOCONSOLIDATED FINANCIALSTATEMENTS

and facilitating the activities of thepartnerships. In addition, to meet the cash flow needs of otheraffiliated partnerships, funding transfers have also occurred betweenand among TAG and the affiliated partnerships. The amounts payable toaffiliated partnerships include various receivable and payable balancesbetween TAG and these affiliated entities.

The Company in itscapacity as general partner and distributor of various films producedby the limited partnerships is allowed to charge monthly overhead andproduction fees which get recorded to accounts with the affiliatedpartnerships. The Company plans on making a formal purchase offer tothe various partnerships in return for TAG stock thus settlingoutstanding balances owed to the partnerships. The Company has recordedinterest on amounts borrowed from related entities at the prime leadingrate and has included accrued interest in the amounts due to and fromthe related entities.

The receivable and payable balances amongaffiliated entities are as follows at December  31,2005:

|                               |  |        |            |         |  |  |
|-------------------------------|--|--------|------------|---------|--|--|
| SantaTrap, LLC                |  | $      | (19,000    | )  |
| Animal Partners,LP            |  |   | (616,000   | )  |
| Family Film Partners VII,LP   |  |   | 83,000     |    |
| Cinderella, LP                |  |   | 153,000    |    |
| Fairy Tale Partners III,LP    |  |   | (1,450,000 | )  |
| Family Film Partners, VIII,LP |  |   | (3,000     | )  |
| TAG Studios No. 1,LP          |  |   | 3,696,000  |    |
| Ghost Town, LP                |  |   | (643,000   | )  |
| American Black Beauty,LP      |  |   | (133,000   | )  |
| Black Beauty,LLC              |  |   | 292,000    |    |
| Red Riding Hood, LLC          |  |   | 1,250,000  |    |
| Motocross Kids, LP            |  |   | (1,233,000 | )  |
| Funny Money the Movie,LP      |  |   | (522,000   | )  |
| Down Town,LP                  |  |   | 957,000    |    |
| Supercross the Movie, LP      |  |   | (2,842,000 | )  |
| Austin FamilyEntertainment    |  |   | (7,000     | )  |
| Steve AustinProductions, LLC  |  |   | (472,000   | )  |
| Total                         |  | $      | (1,509,000 | )  |
|                               |

NOTE 6— RETURN OF CAPITAL

During the period from 1999 throughDecember  31,  2004, the Company’s principalstockholder and general partner of the consolidated limitedpartnerships received cash payments as return of capital anddistributions, totaling in the aggregate $3,110,000, including $498,000of accrued interest on the advances. During the fourth quarter of 2004,the principal stockholder returned 863,106 shares of theCompany’s common stock.

NOTE 7 — DEFERREDPRODUCTION FUNDING 

TAG deposited funds obtainedfrom third party producers for the purpose of producing specific films.In exchange for an ownership or participation percentage in the film,the third party producer has agreed to finance a portion of theproduction. The amounts received are recorded as a liability until cashis expended during production of the films.

NOTE 8 —ACCRUED PAYROLL TAXES

During the year ended December31,  2004, TAG Entertainment, Inc. was assessed $168,000 inCalifornia employee taxes by the Employment Development Department(EDD). TAG challenged 

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TAGENTERTAINMENT CORP.    NOTES TOCONSOLIDATED FINANCIALSTATEMENTS

this assessment and an audit was conducted bythe EDD. In 2005, the EDD completed the audit and revised theassessment to $15,000. The Company adjusted the accrual balance andcredited operating results during 2005 for the effects of the revisedassessment.

NOTE 9 — MINORITY INTERESTS

TAGconsolidates four limited partnerships for which it is the sole generalpartner. The amount of minority interests represents the aggregate netlimited partnership capital of each limited partnership and reduced by99% of the losses incurred directly by the LimitedPartnerships.

NOTE 10 — NOTES PAYABLE

During 2004,the Travolta Family provided consulting services on various filmseither produced and/or distributed by TAG. The Company is negotiating a$50,000 settlement under the consulting agreement.

Notes payableinclude $25,000 for a bridge loan arising from a film project. No termshave been set forth in connection with this loan.

Notes Payable, Related Party

In the matter ofBilly Star v. TAG Entertainment, Inc. and Steve Austin, the Companyentered into a Settlement Agreement and Mutual Release datedNovember  23,  2004 with this investor to dismiss allclaims against the Company for $150,000, payable as $100,000 byDecember  1,  2004 and $50,000 due by May  1,2005. Steve Austin paid the first installment upon execution of thesettlement agreement and the Company is currently indebted to him for$100,000. The Company made a final payment of $50,000 to the investorin 2005 and the investor returned his shares of commonstock.

NOTE 11 — FINANCINGACTIVITIES 

On March  30,  2005, theCompany entered into a Securities Purchase Agreement with SatelliteStrategic Finance Associates, LLC and an affiliated investor underwhich the Company issued $1,000,000 in aggregate principal amount ofSenior Secured Notes and Warrants to purchase 500,000 shares of itscommon stock in a private placement to accredited investors underRegulation D of the Securities Act of 1933, as amended. The Companyreceived gross proceeds of $1,000,000 which were intended for the filmproduction and general working capital requirements. The aggregateprincipal amount of the Notes was $1,150,000 with a 15% yieldfunded as original issuance discount. The Company also entered into aRegistration Rights Agreement and a Security Agreement with theinvestors and its subsidiary, TAG Entertainment USA, Inc. co-signed theSecurity Agreement and agreed to guaranty its obligations pursuant tothe financing agreements. Pursuant to the Security Agreement, theCompany granted the investors a first priority lien on all of itsassets, other than certain previously issued liens, in order to secureits obligations. The Notes were to mature on March  30,2006 and are sooner payable in full in the event the Companyconsummates a subsequent financing event, with certain exceptions, orupon the occurrence of an event of default. The warrants areexercisable at $1.00 per share, subject to adjustment upon certainevents, including as a result of its sale of equity securities at aprice below the exercise price. The warrants are exercisable at anytime on or before March  30,  2010. In connection with theissuance of the Notes and the related warrants, the Company allocatedthe net proceeds between the instruments based on the relative fairvalue of the warrants and the Notes. The fair value of the warrants wasdetermined using the Black-Scholes pricing model and the followingassumptions: contractual terms of five years, an average risk freeinterest rate of 2.5%, a dividend yield of 0%, and avolatility of 95.3%. Accordingly, the Company recorded anincrease in additional paid-in capital and note payable discount of$638,000 in connection with the issuance of the Notes andwarrants.

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TAGENTERTAINMENT CORP.    NOTES TOCONSOLIDATED FINANCIALSTATEMENTS

On May  4,  2005 the Companyconsummated a subsequent financing transaction with the holders ofthese notes, pursuant to which these secured notes were repaid in fulland the Company fulfilled its obligations under the Security Agreementand Guaranty. In this financing transaction, the Company completed aprivate placement of shares of its 6% Series A RedeemableConvertible Preferred Stock ("PreferredStock"), par value $.001 per share, and warrantsto purchase shares of TAG’s common stock. The placement was madepursuant to a Securities Purchase Agreement, dated May  3,2005 and the gross proceeds of this transaction were $5,000,000, whichmatures on May  3,  2008. The Company repaid out of thegross proceeds the secured notes the Company issued to the investors inthe bridge financing completed March  30,  2005. Afterpayment of the notes and financing expenses in the amount ofapproximately $370,000, the Company received net proceeds ofapproximately $3,480,000 from this financing. The Company has beenusing the net proceeds for the production, acquisition and distributionof feature films and general working capital. Financing expenses arebeing amortized over the three year maturity period of the PreferredStock.

In this financing, the Company issued 5,000 shares ofPreferred Stock, convertible at the option of the holder into aninitial aggregate amount of 2,000,000 shares of common stock, par value$.001 per share, at an initial conversion price of $2.50 per share, andwarrants to purchase an initial aggregate amount of 2,000,000 shares ofcommon stock at an initial exercise price of $2.50 per share, which areimmediately exercisable and expire in seven years. However, the declinein the market price of our common stock has resulted in an adjustmentof the conversion price to the floor amount of $1.00. Accordingly, theholders of our outstanding shares of Series A Preferred Stock are ableto convert these shares into an aggregate of 5,000,000 shares of ourcommon stock.

In connection with the issuance of the PreferredStock and the related warrants, the Company allocated the net proceedsbetween the instruments based on the relative fair value of thewarrants and the Preferred Stock before valuation of the beneficialconversion feature. The fair value of the warrants was determined usingthe Black-Scholes pricing model and the following assumptions:contractual terms of seven years, an average risk free interest rate of2.5%, a dividend yield of 0%, and a volatility of115%. Accordingly, the Company recorded an increase inadditional paid-in capital and a discount against the Preferred Stockof $2,586,000 in connection with the issuance of the Preferred Stockand warrants. The discount related to the warrants is being amortizedand charged to interest expense over the three year maturity period.Amortization of $571,000 was recorded as interest expense during theyear ended December  31,  2005.

The Companyevaluated the beneficial conversion feature of the Preferred Stock bymeasuring the effective conversion price after the discount for thewarrants against the current market price of TAG’s common stockof $3 per share at closing. In recognition of the intrinsic value ofthe conversion feature, the company recorded an additional discount of$2,414,000 against the Preferred Stock with a corresponding increase inadditional paid-in-capital. The discount is being amortized over threeyears and charged against retained earnings.

Each share ofPreferred Stock, which has a stated value of $1,000 per share, earnscumulative dividends at a rate of 6% per annum and matures threeyears from the date of issuance. The dividend and liquidation rights ofthe Preferred Stock are senior to those of its common stock. ThePreferred Stock does not carry voting rights.

As part of itscurrent financing efforts for operations, the Company has incurredfinancing costs totaling $83,000 through December  31,2005. Deferred financing expenses totaled $371,000 at December31,  2005 and are included with other current assets ($206,000)and other assets ($165,000).

NOTE 12 — COMMITMENTS ANDCONTINGENCIES

The Company’s primary offices are in SantaMonica, CA where it entered into a one year lease beginning inFebruary  2006. The base rent is $4,000 per month. InJanuary  2006, the Company 

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TAGENTERTAINMENT CORP.    NOTES TOCONSOLIDATED FINANCIALSTATEMENTS

terminated its previous lease in BeverlyHills, CA as an accommodation to the new landlord in connection withthe sale of the building. The remaining lease commitment, terminatingin September  2007, was $276,000 at December  31,2005. Management does not expect any material obligation to arise inconnection with the early termination of the lease. Total rent expensefor the years ended December  31,  2005 and 2004 was$222,000 and $385,000, respectively.

The Company has received acollection notice in the amount of $183,593 from Mr.  R.Michael Webb on behalf of Webb Development Pension Trust onFebruary  17,  2006. The collection notice seeks repaymentof a $250,000 loan made by the creditor to Supercross the Movie, LLC,which loan was guaranteed by TAG Entertainment, Inc. as well as thepersonal assets of Steve Austin. The loan was initially made inJuly  2004.

The Company’s subsidiary, TAGEntertainment USA, Inc., is entering into production and distributionagreements with Wild Stallion Productions LP, an unaffiliated thirdparty that holds the rights to the motion picture Wild Stallion.These arrangements provide TAG Entertainment with the rights to produceand distribute the motion picture. In July  2005, TAGEntertainment USA agreed to guarantee a loan in the amount of $250,000made by an individual lender to Wild Stallion Productions in order toinduce the lender to make this loan. The loan proceeds have been usedby Wild Stallion for the production of the motion picture. This loan,which bears interest at the rate of 10% per annum, was due onAugust  15,  2005 and has not been repaid by the limitedpartnership. The lender, however, has neither demanded repayment fromthe limited partnership nor notified TAG Entertainment USA of itsintention to collect under theguarantee.

Litigation

The Company was namedin an administrative proceedings with the securities regulatory agencyin the state of Texas regarding a private placement of limitedpartnership interests of Supercross the Movie, L.P. made to investorsin that state by Supercross the Movie, L.P. In February  2005,the Texas Securities Bureau and counsel for TAG and Supercross agreedthat Supercross the Movie, L.P. would undertake a rescission offer forthe limited partnership interests of Supercross sold in Texas and tomake all the required filings in that state. Counsel for Supercross isin the process of drafting the rescission offer to the investors inTexas who subscribed for Supercross, the Movie L.P. interests. Theestimated amount of partnership interests that would be subject to therescission offer is approximately $660,000. The Company is currentlyunable to determine at this time whether this claim will have amaterial adverse impact on its financial condition, results ofoperations or cash flow.

An arbitration was filed on July20,  2004, Philipson vs. Animal Partners, LP, et al, withthe American Arbitration Association which named TAG USA as arespondent. The arbitration allegedly arises out of thepetitioners’ purchase of several units of the Animal PartnersLimited Partnership. The petition alleges that respondents have neverfully reported any financial information pertaining to the limitedpartnership to the petitioners. TAG USA was named as a respondentdespite the fact that it is neither a limited partner nor the generalpartner of the limited partnership. TAG USA has a distributionarrangement with the limited partnership whereby it serves as thedistributor of the motion picture Miracle Dogs, which wasproduced by the limited partnership. This matter was settled inMarch  2005 and TAG USA was released from any claims. As part ofthis settlement, TAG acquired the outstanding limited partnershipinterests owned by the petitioners for $200,000. As of the date hereof,the parties have fully performed their obligations under the settlementagreement.

The Maryland Securities Bureau is investigating therole of TAG Entertainment Corp. in certain private offerings made bycertain limited partnerships (collectively, the‘‘LPs’’) for which the Company producedmotion pictures in light of the relationships between TAG and the LPs.The state has alleged that the sale of limited partnership interests toinvestors in Maryland by these limited partnerships may not have beenmade in compliance with the ‘‘blue sky’’laws of Maryland. In 

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TAGENTERTAINMENT CORP.    NOTES TOCONSOLIDATED FINANCIALSTATEMENTS

September  2005, the MarylandSecurities Bureau demanded that these LPs conduct a rescission offerwith respect to the limited partnership interests sold to Marylandresidents and also indicated its intention to seek a civil penalty of$5,000 against each LP for these alleged violations. TAG and the LPsare currently negotiating with the Maryland Securities Bureau to reacha mutually agreeable settlement of these allegations and anticipatethat each LP will offer rescission to the investors residing inMaryland. The total amount of interests sold in Maryland by these LPswas $419,000. The Company is currently unable to determine at this timewhether this claim will have a material adverse impact on its financialcondition, results of operations or cash flow.

OnSeptember  21,  2005 a complaint entitled Grobstein,Horwath & Co., LLP (‘‘Grobstein’’) vs.TAG Entertainment Corp., et al. was filed in the Superior Court ofThe State of California, County of Los Angeles, Northwest Division. Theplaintiff, the Company’s former auditing firm, alleges that theCompany owes the sum of approximately $152,000 arising out of anagreement related to Grobstein’s resignation as theCompany’s auditing firm. The parties stipulated to a settlementof this claim whereby defendants have agreed to pay Grobstein the sumof $110,000 in six equal installments commencing March  1,2006.

Certain limited partners in the entity Funny Money theMovie, L.P. have demanded that this limited partnership agree torescind their purchase of limited partnership interests, in theaggregate amount of $275,000, plus interest. The limited partnershiphas reached an agreement in principle with these limited partners andexpects to finalize, execute and exchange the settlement documentsamong the relevant parties. Further, these limited partners haveclaimed that the Company, due to its contractual relationship with thelimited partnership, has responsibility for the actions of the limitedpartnership. Management has denied any responsibility for the actionstaken in the name of the limited partnership and believes the Companywould have meritorious defenses to any claim asserted against it.Accordingly, management does not believe that the resolution of thisclaim will have a materially adverse effect on the Company’sfinancial condition. However, no assurances can be given that suchbelief will ultimately prove to be accurate or that other facts adverseto our position currently not known to management will not beuncovered, in which case the ultimate resolution of this claim couldpotentially have a material adverse effect on the Company’sfinancial condition.

On January  17,  2006, acomplaint was filed against TAG Entertainment, Inc. and Steve Austin byPark Avenue Entertainment, LLC claiming that we materially breached anagreement between the two companies to produce a motion picture. Thecomplaint was filed in the Superior Court of the State of California,County of Los Angeles, Central District, with the caption ParkAvenue Entertainment LLC et al. vs. TAG Entertainment, Inc.; SteveAustin et al. We have been advised that plaintiffs are seeking adefault judgment against the defendants; however, the defendants arecurrently contesting any such action on the grounds of defectiveservice. The claimants are seeking damages in the amount of $2,135,000based on production fees and participation rights that they areallegedly entitled to under the production contract. We have previouslydisputed plaintiffs’ allegations and notified them that we mayassert claims against them concerning their failure to properly performunder the agreement. We are currently reviewing the allegations made inthe complaint and the claims being asserted and we intend to defendthis action vigorously. Management is unable to determine at this timewhether this claim will have a material adverse impact on our financialcondition, results of operations or cash flow.

The Company andits Chief Executive Officer are involved in a dispute with Mr.Jeff  Franklin and F.W.E., Inc. regarding the production of twomotion pictures and business dealings between the Company’sChief Executive Officer, and Mr.  Franklin.  The disputesconcern the production and distribution relationship regarding thefilms Funny Money and American Black Beauty. In eachcase, Mr.  Franklin has alleged that the Company has not properlyperformed its obligations in connection with the production of thesemotion pictures. The Company has disputed the allegations of

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TAGENTERTAINMENT CORP.    NOTES TOCONSOLIDATED FINANCIALSTATEMENTS

Mr.  Franklin, has notified him of itspotential claims against him and F.W.E. and has been engaged inprotracted negotiations with him and F.W.E. in order to achieve aglobal settlement of the disagreements between the parties. Messrs.Franklin and Austin continue to negotiate and discuss their respectivepositions and the Company is currently unable to determine at this timewhether this claim will have a material adverse impact on its financialcondition, results of operations or cash flow.

The Company is adefendant in an action titled Fillmore et al. v. TAG Entertainmentet al., which is pending in State Court in Utah. The actionconcerns an allegation of non-payment in connection with the productionof the film Wild Stallion. Payment was to be by Wild StallionProductions, LLC to certain service providers; the parties however arein dispute over the sums now due. Plaintiff has claimed he is entitledto approximately $250,000, which claims TAG and the co-defendants haverefuted. The parties have stipulated to set aside a default judgmententered against the co-defendants and are engaged in discussions tosettle the matter without further resort to litigation. The Company iscurrently unable to determine at this time whether this claim will havea material adverse impact on its financial condition, results ofoperations or cash flow.

In September  2004, TAG filed suitagainst Martin Halfon (‘‘Halfon’’) andHalfon Properties, Inc. (‘‘HPI’’) in theLos Angeles Superior Court in an action to rescind TAG’sagreement for the acquisition of the business of Lone Star Studios andthe potential acquisition of the real estate on which Lone Star Studiosis situated. TAG sued Halfon and HPI for rescission and before anyresponsive pleading was filed. Halfon agreed that HPI will take backthe studio operations and accept 277,525 shares of TAG common stock inexchange for a full and final release of any claims against TAG valuedat $500,000. The Company has recorded a loss on legalsettlement.

The Company is involved in various claims and otherlegal proceedings that arise from time to time in the ordinary courseof business. The Company does not believe any of them will have amaterial adverse affect on the Company’s financial position orresults of operations. Litigation is inherently unpredictable andexcessive verdicts do occur. Although the Company believes it has validdefenses in these matters, the Company could in the future incurjudgments or enter into settlements of claims that could have amaterial adverse affect on the Company’s financial position orresults of operations in any particularperiod.

Consulting Agreements

The Companyentered into a consulting agreement with an investment/strategicadvisory firm on September  1,  2004. The agreement calledfor the investment advisor to assist the Company in devising financialand marketing strategies and raising funds on a non-exclusive basisthrough the offering of debt and/or equity securities. The Company willpay the investment advisor $10,000 per month plus approved expenses andhas issued 666,667 warrants to purchase the Company’s commonstock at $2.00 per share. The agreement contained confidentiality andnon-competition provisions. The consulting agreement terminated onAugust  31,  2005.

On August  16,  2004the Company entered into an Independent Contractor Agreement, expiringin one year, with an individual to provide management services for$10,000 per month and the issuance of warrants to purchase 222,023shares of common stock at $.20 per share. The agreement was amendedOctober  1,  2004 to allow for payments of $20,000 permonth and the issuance of options to purchase 200,000 shares of theCompany’s common stock at $2.00 expiring in seven years with acashless exercise provision, expense reimbursements not to exceed$3,000 per month and $20,000 per month for 6 months after termination,expiring in two years.

NOTE 13 — INCOME TAXES

TheCompany accounts for income taxes in accordance with SFAS 109,Accounting for Income Taxes. Due to the Company having incurred lossesin each year since inception, there was no provision for income taxesduring these periods.

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TAGENTERTAINMENT CORP.    NOTES TOCONSOLIDATED FINANCIALSTATEMENTS

A valuation allowance has been recordedfor the total deferred tax assets as a result of uncertaintiesregarding realization of the asset based upon the lack of profitabilityand the uncertainty of future profitability. The income tax benefitreconciled to the tax computed at the statutory rate was approximatelyas follows for the year ended December  31,  2005 and2004:

|                                              |  |        |          |         |  |        |            |         |  |  |
|----------------------------------------------|--|--------|----------|---------|--|--------|------------|---------|--|--|
|                                         |  | 2005   |          | 2004    |
| Taxbenefit computed at Federal statutoryrate |  | $      | (689,000 | )  |  | $      | (1,315,000 | )  |
| Other                                        |  |   | —  |    |  |   | 115,000    |    |
| Increasein valuationallowance                |  |   | 689,000  |    |  |   | 1,200,000  |    |
|                                         |  | $      | —  |    |  | $      | —    |    |
|                                              |

Thetax effects of significant temporary differences representing deferredtax assets as of December  31,  2005 are asfollows:

Deferred taxassets:

|                        |  |        |            |         |  |  |
|------------------------|--|--------|------------|---------|--|--|
| Netoperatingloss       |  | $      | 2,127,343  |    |
| Other                  |  |   | 386,430    |    |
| Valuationallowance     |  |   | (2,513,773 | )  |
| Totaldeferred taxasset |  | $      | 0          |    |
| Net deferredtax asset  |  | $      | 0          |    |
|                        |

TheCompany has unused net operating loss (NOL) carry forwards totaling$8.1  million, which expire at various dates through 2025.

NOTE 14 — STOCKHOLDERS’ EQUITY

During the yearended December  31,  2004, the Company sold 730,810 sharesof common stock at an average price of $1.60 per share through aprivate placement. Warrant holders also exercised 157,000 warrants atan average of $.90 exercise price. During the same period, the Companyissued 675,219 shares of common stock to purchase interests in variousconsolidated and unconsolidated affiliated limited partnerships atvalues of $1 to $2 per TAG share. The Company also issued 322,000shares of common stock to various consultants based on servicesrendered and milestone bonuses valued at $580,000. The Company issued277,525 shares to settle a legal claim regarding its interest in LoneStar Studios valued at $500,000.

During 2005, the Company issued35,000 shares of common stock valued at $143,000 to a consultant forservices rendered and 9,500 shares related to a cashless exercise of awarrant.

In January  2005 the Company commenced a privateplacement offering under Rule 506, promulgated under the Securities Actof 1933. This offering was terminated during the quarter endedJune  30,  2005. A total of $88,000 was raised inconnection with the issuance of 29,408 shares.

NOTE 15 —WARRANTS AND OPTIONS

In November  2004, the Companyadopted the 2004 Employee Stock Option Plan, which provides for thegranting of options to employees and independent consultants. 3,000,000shares of common stock are reserved under the Plan for the granting ofoptions. The Plan is in effect until November  2014. The optionsare exercisable to purchase common stock for a period of up to tenyears from the date of grant. The Board of Directors of the Companyapproved the granting of 2,259,088 options under this plan.

As ofDecember  31,  2005, the Company had warrants to purchase5,220,781 shares of common stock outstanding, and options to purchase2,142,526 shares of common stock outstanding. These 

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TAGENTERTAINMENT CORP.    NOTES TOCONSOLIDATED FINANCIALSTATEMENTS

securities give the holder the right topurchase shares of the Company’s restricted common stockindefinitely and in accordance with the terms of the instrument asfollows:

|                          |           |                         |  |        |        |        |
|--------------------------|-----------|-------------------------|--|--------|--------|--------|
| Numberof Warrants Issued |           | Exercise Price perShare |
|                     | 1,276,635 |                    |  | $      | 0.15   |   |
|                     | 600,457   |                    |  |   | 0.20   |   |
|                     | 566,607   |                    |  |   | 1.00   |   |
|                     | 777,082   |                    |  |   | 2.00   |   |
|                     | 2,000,000 |                    |  |   | 2.50   |   |
|                     | 5,220,781 |                    |  |   |   |   |
|                          |

|                        |  |                        |      |        |  |  |
|------------------------|--|------------------------|------|--------|--|--|
| Numberof OptionsIssued |  | ExercisePrice perShare |
| 2,142,526              |  | $                      | 2.00 |   |
|                        |

Thefollowing table summarizes the activity of options and warrants underall agreements and plans for the years ended December  31,2005 and December  31,2004:

|                               |  |                           |           |                                |  |         |           |          |  |        |         |        |  |        |         |        |  |  |
|-------------------------------|--|---------------------------|-----------|--------------------------------|--|---------|-----------|----------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                          |  | WeightedAverage Number of |           | Weighted Average ExercisePrice |
|                          |  | Options                   |           | Warrants                       |  | Options |           | Warrants |
| OUTSTANDING, DECEMBER 31,2003 |  |                      | —   |                           |  |    | 639,705   |     |  |   | — |   |  | $      | 0.23    |   |
| GRANTED                       |  |                      | 2,259,088 |                           |  |    | 2,664,281 |     |  | $      | 2.00    |   |  |   | — |   |
| EXPIRED/CANCELLED             |  |                      | —   |                           |  |    | (573,098  | )   |  |   | — |   |  |   | — |   |
| OUTSTANDING,DECEMBER 31,2004  |  |                      | 2,259,088 |                           |  |    | 2,730,888 |     |  | $      | 2.00    |   |  | $      | 0.71    |   |
| GRANTED                       |  |                      | —   |                           |  |    | 2,500,000 |     |  |   |    |   |  |   | 2.16    |   |
| EXERCISED                     |  |                      | —   |                           |  |    | (10,107   | )   |  |   | — |   |  |   | .20     |   |
| EXPIRED/CANCELLED             |  |                      | (116,562  | )                         |  |    | —   |     |  |   | — |   |  |   | — |   |
| OUTSTANDING,DECEMBER 31, 2005 |  |                      | 2,142,526 |                           |  |    | 5,220,781 |     |  | $      | 2.00    |   |  | $      | 1.41    |   |
|                               |

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SIGNATURES

Inaccordance with Section 13 or 15(d) of the Exchange Act, TAGEntertainment Corp. caused this Report to be signed on its behalf bythe undersigned, thereunto duly authorized.

|                      |  |                                                                                                                                                                                                                                                       |  |  |  |  |
|----------------------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| Date: April 12, 2006 |  | TAG ENTERTAINMENTCORP.                                                                                                                                                                                                                                |
|                 |  |                                                                                                                                                                                                                                                  |
|                 |  | By:  /s/SteveAustin                                     |
|                 |  |         SteveAustin                                                                                                                                                                                           |
|                 |  |         President and ChiefExecutive Officer                                                                                                                                                                  |
|                      |

In accordance with theExchange Act, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on thedatesindicated.

|                         |  |                                                                        |  |                |
|-------------------------|--|------------------------------------------------------------------------|--|----------------|
| Name                    |  | Title                                                                  |  | Date           |
|                         |
| /s/Steve Austin         |  | ChiefExecutive Officer, President, Chief Financial Officer andChairman |  | April 12, 2006 |
|                         |
| Steve Austin            |
|                         |
| /s/Raymond J. Skiptunis |  | Director                                                               |  | April 12,2006  |
|                         |
| Raymond J. Skiptunis    |
|                         |
| /s/ James L.Schneider   |  | Director                                                               |  | April 12,2006  |
|                         |
| James L.Schneider       |
|                         |
| /s/ John T. Botti       |  | Director                                                               |  | April 12,2006  |
|                         |
| John T.Botti            |
|                         |

Supplemental Information to beFurnished With Reports Filed Pursuant to Section 15(d) of the ExchangeAct by Non Reporting Issuers:

No annual report or proxy statementhas been sent to security holders.

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