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UNITEDSTATESSECURITIES AND EXCHANGECOMMISSIONWashington, D.C.20549

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Form 10-QSB

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|   | QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGEACT OF 1934 |

For the quarterly period ended September30,  2006

or

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|--------|--------------------------------------------------------------------------------------------|
|   | TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGEACT OF 1934 |

For the transition period from                to                 .

CommissionFileNo. 333-96257

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TAGEntertainment Corp.(Exact nameof Small Business Issuer as specified in itscharter)

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|--------------------------------------------------------------|--|--|-------------------------------------|
| Delaware                                                     |  |  | 13-3851304                          |
| (Stateor other jurisdiction of incorporation ororganization) |  |  | (I.R.S. Employer IdentificationNo.) |
|                                                              |

|                                             |  |  |           |
|---------------------------------------------|--|--|-----------|
| 1333Second Street, Suite 240Santa Monica,CA |  |  | 90401     |
| (Addressof principal executive offices)     |  |  | (ZipCode) |
|                                             |

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Issuer’stelephone number:(310) 260-3350

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Indicateby check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Actduring the preceding 12 months (or for such shorter period thatthe registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.    Yes            No

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct).    Yes          No

APPLICABLEONLY TO CORPORATE ISSUERS

State the number of shares outstandingof each of the issuer’s classes of common equity, as of thelatest practicable date:    The registrant had 21,414,948 shares ofcommon stock, $0.001 par value, issued and outstanding as ofDecember  15,  2006.

Transitional Small BusinessDisclosure Format (Check one):     Yes        No

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TABLEOFCONTENTS

|                                     |  |  |                                                                |  |  |  |  |    |  |
|-------------------------------------|--|--|----------------------------------------------------------------|--|--|--|--|----|--|
| PARTI – FINANCIAL INFORMATION |
| Item1.                              |  |  | ConsolidatedCondensed Financial Statements                     |  |  |  |  | 2  |  |
| Item2.                              |  |  | Management’s Discussion and Analysis or Plan ofOperation |  |  |  |  | 16 |  |
| Item 3.                             |  |  | Controls andProcedures                                         |  |  |  |  | 26 |  |
| PARTII – OTHER INFORMATION    |
| Item1.                              |  |  | Legal Proceedings                                              |  |  |  |  | 26 |  |
| Item2.                         |  |  | Unregistered Sales of Equity Securities and Use ofProceeds     |  |  |  |  | 27 |  |
| Item 3.                             |  |  | Defaults UponSenior Securities                                 |  |  |  |  | 27 |  |
| Item4.                              |  |  | Submission of Matters to a Vote of SecurityHolders             |  |  |  |  | 28 |  |
| Item 5.                             |  |  | OtherInformation                                               |  |  |  |  | 28 |  |
| Item6.                              |  |  | Exhibits                                                       |  |  |  |  | 28 |  |
|                                     |

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FORWARDLOOKING STATEMENTS

This report Form 10-QSB for TAG EntertainmentCorp. (the ‘‘Company’’ or‘‘TAG’’) contains‘‘forward-looking statements’’ within themeaning of the Private Securities Litigation Reform Act of 1995. Insome cases, forward-looking statements may be identified by terms suchas ‘‘may,’’‘‘intend,’’‘‘will,’’‘‘should,’’‘‘could,’’‘‘would,’’‘‘expect,’’‘‘believe,’’‘‘estimate,’’‘‘expect’’ or the negative of these terms,and similar expressions intended to identify forward-lookingstatements.

These forward-looking statements reflect theCompany’s current views with respect to future events and arebased on assumptions and are subject to risks and uncertainties. Also,these forward-looking statements present estimates and assumptions onlyas of the date of this report. Except for the ongoing obligation todisclose material information as required by federal securities laws,the Company does not intend to update readers concerning any futurerevisions to forward-looking statements to reflect events orcircumstances occurring after the date of this report. Some of thefactors that could cause actual results to vary from theforward-looking statements include:

|  |              |                                                                                                                            |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------|
|  | •  | theCompany’s inability to generate revenues sufficient to sustainoperations or to raise capital as and whenrequired; |

|  |              |                                                                                                                           |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------|
|  | •  | unanticipated increases indevelopment, production or marketing expenses related to theCompany’s businessactivities; |

|  |              |                                                                                        |
|--|--------------|----------------------------------------------------------------------------------------|
|  | •  | the Company’sinability to effectively compete with other entertainmentproviders; |

|  |              |                                                                                               |
|--|--------------|-----------------------------------------------------------------------------------------------|
|  | •  | the Company’sinability to protect its intellectual property from infringement byothers; |

|  |              |                                                                                     |
|--|--------------|-------------------------------------------------------------------------------------|
|  | •  | the Company’s inabilityto fully implement its business plan for any reason;or |

|  |              |                                                                                              |
|--|--------------|----------------------------------------------------------------------------------------------|
|  | •  | the loss of the services of theCompany’s Chief Executive Officer or other key persons. |

Inevaluating forward-looking statements, readers should consider thefactors identified above as well as those risks outlined in the sectionof this report titled ‘‘Management’s Discussionand Analysis or Plan of Operation’’. Although we believethat expectations reflected in the forward-looking statements arereasonable, future results, levels of activity, or achievements are notassured.

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PartI

Item 1.    Financial Statements

TAGENTERTAINMENT CORP.

CONSOLIDATED CONDENSED BALANCESHEET

|                                                                                                                                                     |  |  |                  |   |             |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--|--|------------------|---|-------------|---|
|                                                                                                                                                |  |  | September30,2006 |
|                                                                                                                                                |  |  | (unaudited)      |
| ASSETS                                                                                                                                              |  |  |                  |   |        |   |
| Currentassets                                                                                                                                       |  |  |                  |   |        |   |
| Cash                                                                                                                                                |  |  |                  | $ | 55,000      |   |
| Accountsreceivable, net of allowance of$391,000                                                                                                     |  |  |                  |   | 2,423,000   |   |
| Receivables fromaffiliatedpartnerships                                                                                                              |  |  |                  |   | 1,514,000   |   |
| Notesreceivable, net of allowance of$396,000                                                                                                        |  |  |                  |   | 981,000     |   |
| Other currentassets                                                                                                                                 |  |  |                  |   | 213,000     |   |
| Totalcurrent assets                                                                                                                                 |  |  |                  |   | 5,186,000   |   |
| Capitalized filmcosts, net                                                                                                                          |  |  |                  |   | 1,477,000   |   |
| Investments inlimitedpartnerships                                                                                                                   |  |  |                  |   | 1,013,000   |   |
| Equipment,net                                                                                                                                       |  |  |                  |   | 20,000      |   |
| Otherassets                                                                                                                                         |  |  |                  |   | 144,000     |   |
| Totalassets                                                                                                                                         |  |  |                  | $ | 7,840,000   |   |
| LIABILITIESAND STOCKHOLDERS’(DEFICIT)                                                                                                         |  |  |                  |   |        |   |
| Currentliabilities                                                                                                                                  |  |  |                  |   |        |   |
| Accounts payable andaccrued expenses                                                                                                                |  |  |                  | $ | 1,131,000   |   |
| Cashoverdraft                                                                                                                                       |  |  |                  |   | 40,000      |   |
| Payables toaffiliatedpartnerships                                                                                                                   |  |  |                  |   | 2,842,000   |   |
| Notespayable                                                                                                                                        |  |  |                  |   | 75,000      |   |
| Notes payable, relatedparty                                                                                                                         |  |  |                  |   | 100,000     |   |
| Deferred productionfunding                                                                                                                          |  |  |                  |   | 7,000       |   |
| Accruedresiduals                                                                                                                                    |  |  |                  |   | 70,000      |   |
| Accruedsalaries                                                                                                                                     |  |  |                  |   | 535,000     |   |
| Totalcurrentliabilities                                                                                                                             |  |  |                  |   | 4,800,000   |   |
| 6%Series A convertible preferredstock                                                                                                               |  |  |                  |   |        |   |
| $.001 par value: 500,000shares authorized; 5,000 shares outstanding; mandatorily redeemable,$5,000,000 redemption value; net of unamortizeddiscount |  |  |                  |   | 2,361,000   |   |
| Commitmentsand contingencies                                                                                                                        |  |  |                  |   |        |   |
| Minority interest                                                                                                                                   |  |  |                  |   | 2,034,000   |   |
| Stockholders’equity                                                                                                                           |  |  |                  |   |        |   |
| Common stock, $.001 parvalue: 50,000,000 shares authorized; 21,414,948 sharesoutstanding                                                            |  |  |                  |   | 21,000      |   |
| Additionalpaid-in capital                                                                                                                           |  |  |                  |   | 9,417,000   |   |
| Accumulated(deficit)                                                                                                                                |  |  |                  |   | (10,793,000 | ) |
| Totalstockholders’ (deficit)                                                                                                                  |  |  |                  |   | (1,006,000  | ) |
|                                                                                                                                                |  |  |                  | $ | 7,840,000   |   |
|                                                                                                                                                     |

Seeaccompanying notes to consolidated financialstatements.

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TAG ENTERTAINMENTCORP.

CONSOLIDATED CONDENSED STATEMENTS OFOPERATIONS(unaudited)

|                                          |  |  |                                |   |            |      |  |  |  |   |            |   |
|------------------------------------------|--|--|--------------------------------|---|------------|------|--|--|--|---|------------|---|
|                                     |  |  | Threemonths ended September30, |
|                                     |  |  | 2006                           |   |            | 2005 |
| Revenue                                  |  |  |                                |   |       |      |  |  |  |   |       |   |
| Filmrevenue                              |  |  |                                | $ | 14,000     |      |  |  |  | $ | 721,000    |   |
| Productionfees                           |  |  |                                |   | 34,000     |      |  |  |  |   | 800,000    |   |
| Distributionfees                         |  |  |                                |   | 18,000     |      |  |  |  |   | —    |   |
| Managementfees                           |  |  |                                |   | 68,000     |      |  |  |  |   | 68,000     |   |
| Overheadfees                             |  |  |                                |   | 82,000     |      |  |  |  |   | 159,000    |   |
| Sponsorshipfees                          |  |  |                                |   | 35,000     |      |  |  |  |   | —    |   |
| Totalrevenue                             |  |  |                                |   | 251,000    |      |  |  |  |   | 1,748,000  |   |
| Operatingexpenses                        |  |  |                                |   |       |      |  |  |  |   |       |   |
| Amortizationof filmcosts                 |  |  |                                |   | (82,000    | )    |  |  |  |   | 328,000    |   |
| Studiorent and otherexpenses             |  |  |                                |   | —    |      |  |  |  |   | —    |   |
| Selling,general andadministrative        |  |  |                                |   | 1,423,000  |      |  |  |  |   | 736,000    |   |
| Totaloperatingexpenses                   |  |  |                                |   | 1,341,000  |      |  |  |  |   | 1,064,000  |   |
| Income(loss) fromoperations              |  |  |                                |   | (1,090,000 | )    |  |  |  |   | 684,000    |   |
| Interestexpense                          |  |  |                                |   | (291,000   | )    |  |  |  |   | (291,000   | ) |
| Otherincome/(expense)                    |  |  |                                |   | (11,000    | )    |  |  |  |   | 4,000      |   |
| Netincome (loss) before minorityinterest |  |  |                                |   | (1,392,000 | )    |  |  |  |   | 397,000    |   |
| Minorityinterest                         |  |  |                                |   | 18,000     |      |  |  |  |   | 192,000    |   |
| Netincome(loss)                          |  |  |                                | $ | (1,374,000 | )    |  |  |  | $ | 589,000    |   |
| Netincome (loss) pershare                |  |  |                                |   |       |      |  |  |  |   |       |   |
| Basic andDiluted                         |  |  |                                | $ | (0.06      | )    |  |  |  | $ | 0.03       |   |
| Weightedaverage shares                   |  |  |                                |   |       |      |  |  |  |   |       |   |
| BasicandDiluted                          |  |  |                                |   | 21,358,000 |      |  |  |  |   | 21,107,000 |   |
|                                          |

Seeaccompanying notes to consolidated financialstatements.

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TAG ENTERTAINMENTCORP.

CONSOLIDATED CONDENSED STATEMENTS OFOPERATIONS(unaudited)

|                                   |  |  |                               |   |            |      |  |  |  |   |            |   |
|-----------------------------------|--|--|-------------------------------|---|------------|------|--|--|--|---|------------|---|
|                              |  |  | Ninemonths ended September30, |
|                              |  |  | 2006                          |   |            | 2005 |
| Revenue                           |  |  |                               |   |       |      |  |  |  |   |       |   |
| Filmrevenue                       |  |  |                               | $ | 239,000    |      |  |  |  | $ | 1,080,000  |   |
| Productionfees                    |  |  |                               |   | 666,000    |      |  |  |  |   | 800,000    |   |
| Distributionfees                  |  |  |                               |   | 92,000     |      |  |  |  |   | —    |   |
| Managementfees                    |  |  |                               |   | 203,000    |      |  |  |  |   | 248,000    |   |
| Overheadfees                      |  |  |                               |   | 277,000    |      |  |  |  |   | 279,000    |   |
| Sponsorshipfees                   |  |  |                               |   | 305,000    |      |  |  |  |   | —    |   |
| Totalrevenue                      |  |  |                               |   | 1,782,000  |      |  |  |  |   | 2,407,000  |   |
| Operatingexpenses                 |  |  |                               |   |       |      |  |  |  |   |       |   |
| Amortizationof filmcosts          |  |  |                               |   | 4,000      |      |  |  |  |   | 524,000    |   |
| Studiorent and otherexpenses      |  |  |                               |   | —    |      |  |  |  |   | 43,000     |   |
| Selling,general andadministrative |  |  |                               |   | 2,535,000  |      |  |  |  |   | 2,402,000  |   |
| Totaloperatingexpenses            |  |  |                               |   | 2,539,000  |      |  |  |  |   | 2,969,000  |   |
| Income(loss) fromoperations       |  |  |                               |   | (757,000   | )    |  |  |  |   | (562,000   | ) |
| Interestexpense                   |  |  |                               |   | (872,000   | )    |  |  |  |   | (1,275,000 | ) |
| Interestand otherincome           |  |  |                               |   | —    |      |  |  |  |   | 15,000     |   |
| Net(loss) before minorityinterest |  |  |                               |   | (1,629,000 | )    |  |  |  |   | (1,822,000 | ) |
| Minorityinterest                  |  |  |                               |   | 23,000     |      |  |  |  |   | 211,000    |   |
| Net(loss)                         |  |  |                               | $ | (1,606,000 | )    |  |  |  | $ | (1,611,000 | ) |
| Net(loss) pershare                |  |  |                               |   |       |      |  |  |  |   |       |   |
| Basic andDiluted                  |  |  |                               | $ | (0.08      | )    |  |  |  | $ | (0.08      | ) |
| Weightedaverage shares            |  |  |                               |   |       |      |  |  |  |   |       |   |
| BasicandDiluted                   |  |  |                               |   | 21,299,000 |      |  |  |  |   | 21,079,000 |   |
|                                   |

Seeaccompanying notes to consolidated financialstatements.

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TAG ENTERTAINMENTCORP.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWSFORTHE NINE MONTHS ENDED September  30(unaudited)

|                                                                                           |  |  |      |   |            |      |  |  |  |   |            |   |
|-------------------------------------------------------------------------------------------|--|--|------|---|------------|------|--|--|--|---|------------|---|
|                                                                                      |  |  | 2006 |   |            | 2005 |
| Cashflows from (to) operatingactivities                                                   |  |  |      |   |       |      |  |  |  |   |       |   |
| Net (loss)before minorityinterest                                                         |  |  |      | $ | (1,629,000 | )    |  |  |  | $ | (1,822,000 | ) |
| Adjustmentsto reconcile net (loss) to net cash provided by (used in) operatingactivities: |  |  |      |   |       |      |  |  |  |   |       |   |
| Amortization offilmcosts                                                                  |  |  |      |   | 4,000      |      |  |  |  |   | 524,000    |   |
| Depreciation                                                                              |  |  |      |   | 13,000     |      |  |  |  |   | 35,000     |   |
| Baddebtexpense                                                                            |  |  |      |   | 934,000    |      |  |  |  |   | —    |   |
| Stockand warrants issued for consultingservices                                           |  |  |      |   | 220,000    |      |  |  |  |   | 177,000    |   |
| Amortizationof discount on debtfinancings                                                 |  |  |      |   | 647,000    |      |  |  |  |   | 996,000    |   |
| Amortizationof deferred financingcosts                                                    |  |  |      |   | 93,000     |      |  |  |  |   | 53,000     |   |
| Loss ondisposal ofassets                                                                  |  |  |      |   | 49,000     |      |  |  |  |   | —    |   |
| Changesin operating assets andliabilities:                                                |  |  |      |   |       |      |  |  |  |   |       |   |
| Accountsreceivable                                                                        |  |  |      |   | 512,000    |      |  |  |  |   | (1,446,000 | ) |
| Investmentsinfilms                                                                        |  |  |      |   | 22,000     |      |  |  |  |   | (37,000    | ) |
| Othercurrentassets                                                                        |  |  |      |   | (65,000    | )    |  |  |  |   | —    |   |
| Bankoverdrafts                                                                            |  |  |      |   | 40,000     |      |  |  |  |   | (124,000   | ) |
| Accountspayable                                                                           |  |  |      |   | (258,000   | )    |  |  |  |   | 263,000    |   |
| Duefrom/to affiliatedpartnerships                                                         |  |  |      |   | (181,000   | )    |  |  |  |   | (39,000    | ) |
| Deferredrevenue                                                                           |  |  |      |   | (131,000   | )    |  |  |  |   | (81,000    | ) |
| Accruedsalaries                                                                           |  |  |      |   | 120,000    |      |  |  |  |   | (30,000    | ) |
| Other                                                                                     |  |  |      |   | (12,000    | )    |  |  |  |   | 19,000     |   |
| Netcash provided by (used in) operatingactivities                                         |  |  |      |   | 378,000    |      |  |  |  |   | (1,512,000 | ) |
| Cashflows from (to) investingactivities                                                   |  |  |      |   |       |      |  |  |  |   |       |   |
| Issuance ofnotesreceivable                                                                |  |  |      |   | (342,000   | )    |  |  |  |   | (2,250,000 | ) |
| Collectionson notesreceivable                                                             |  |  |      |   | 165,000    |      |  |  |  |   | —    |   |
| Investmentin filmpartnerships                                                             |  |  |      |   | (200,000   | )    |  |  |  |   | (258,000   | ) |
| Paymentof proposed acquisitioncosts                                                       |  |  |      |   |       |      |  |  |  |   | (278,000   | ) |
| Proceedsfrom disposition ofequipment                                                      |  |  |      |   | —    |      |  |  |  |   | 49,000     |   |
| Purchasesofequipment                                                                      |  |  |      |   | (4,000     | )    |  |  |  |   | (14,000    | ) |
| Netcash (used in) investmentactivities                                                    |  |  |      |   | (381,000   | )    |  |  |  |   | (2,751,000 | ) |
| Cashflows from (to) financingactivities                                                   |  |  |      |   |       |      |  |  |  |   |       |   |
| Proceedsfrom issuance of notespayable                                                     |  |  |      |   | —    |      |  |  |  |   | 1,025,000  |   |
| Paymentson notespayable                                                                   |  |  |      |   | —    |      |  |  |  |   | (1,345,000 | ) |
| Proceedsfrom issuance of convertible preferredstock                                       |  |  |      |   | —    |      |  |  |  |   | 5,000,000  |   |
| Proceedsfrom relatedparty                                                                 |  |  |      |   | —    |      |  |  |  |   | —    |   |
| Paymentsto relatedparty                                                                   |  |  |      |   | —    |      |  |  |  |   | —    |   |
| Proceedsfrom private placement offerings of commonstock                                   |  |  |      |   | —    |      |  |  |  |   | 88,000     |   |
| Paymentof financingcosts                                                                  |  |  |      |   | —    |      |  |  |  |   | (455,000   | ) |
| Minorityinterest capitalreturned                                                          |  |  |      |   | —    |      |  |  |  |   | (17,000    | ) |
| Proceedsfor filmproduction                                                                |  |  |      |   | —    |      |  |  |  |   | 147,000    |   |
| Netcash provided by financingactivities                                                   |  |  |      |   | —    |      |  |  |  |   | 4,443,000  |   |
| Netincrease (decrease) incash                                                             |  |  |      |   | (3,000     | )    |  |  |  |   | 180,000    |   |
| Cashat beginning ofperiod                                                                 |  |  |      |   | 58,000     |      |  |  |  |   | 23,000     |   |
| Cashat end ofperiod                                                                       |  |  |      | $ | 55,000     |      |  |  |  | $ | 203,000    |   |
| Supplementaldisclosure of cash flowinformation:                                           |  |  |      |   |       |      |  |  |  |   |       |   |
| Interest andoriginal issue discountpaid                                                   |  |  |      | $ | 149,000    |      |  |  |  | $ | 272,000    |   |
|                                                                                           |

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TAGENTERTAINMENT CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTS (UNAUDITED)

NOTE 1 — SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES 

AccountingPrinciples and Use of Estimates

The accompanying consolidatedcondensed financial statements for the nine month periods endedSeptember  30,  2006 and 2005 have been prepared inaccordance with accounting principles generally accepted in the UnitedStates (‘‘GAAP’’) and with the instructionsto Form 10-QSB and Item 310 of Regulation S-B. These consolidatedfinancial statements have not been audited by independent publicaccountants, but include all adjustments (consisting of normalrecurring adjustments), which are, in the opinion of management,necessary for a fair presentation of the financial condition, resultsof operations, and cash flows for such periods. However, these resultsare not necessarily indicative of results for any other interim periodor for the full year.

Certain information and footnotedisclosures normally included in financial statements prepared inaccordance with GAAP have been omitted pursuant to guidelines of theSecurities and Exchange Commission (the‘‘SEC’’). Management believes that thedisclosures included in the accompanying interim financial statementsand footnotes are adequate to make the information not misleading, butthe disclosures contained herein should be read in conjunction with theconsolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-KSB for the year endedDecember  31,  2005.

The preparation of the financialstatements in accordance with GAAP requires management to makeestimates and assumptions that affect reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differfrom those and other estimates.

Nature of Operations

TAGEntertainment 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-territorybasis.

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The Company’s primary operatingexpenses include the following: direct operating expenses, whichinclude amortization of production or acquisition costs, participationand residual expenses; distribution and marketing expenses; whichprimarily include the costs of theatrical ‘‘prints andadvertising’’ and of video and DVD duplication andmarketing; and general and administration expenses, which includesalaries and other overhead.

Going Concern and ManagementPlans

The Company’s consolidated financial statementshave been presented on the basis that it is a going concern, whichcontemplates the realization of assets and the satisfaction ofliabilities in the normal course of business. The Company hasexperienced recurring losses and negative cash flows from operationsand has a capital deficit, which raises substantial doubt about itsability to continue as a going concern. The Company is currentlydevoting its efforts to raising additional capital and achievingprofitable operations. The Company’s ability to continue as agoing concern is dependent upon its ability to develop additionalsources of capital. The accompanying financial statements do notinclude any adjustments that might result from the outcome of theseuncertainties.

On March  30,  2005, the Companyentered into a letter of intent to acquire 100% of theoutstanding common stock of Myriad Pictures, Inc. As of February23,  2006, the Company notified Myriad that it was terminatingnegotiations and the letter of intent, effective immediately. Pursuantto its terms, the Myriad Loan (less certain expenses) was repayable byMarch  30,  2006 and the Company has not received repaymentas of the date hereof.

In order to satisfy future cashrequirements, management is actively pursuing and has entered intodiscussions regarding additional financing to support expansion plansand ongoing operations. The Company currently has no firm agreementswith any third parties for any future transactions and futurefinancings.

Principles of Consolidation

The accompanyingconsolidated financial statements of the Company include the accountsof TAG, TAG USA and of the Limited Partnerships, which the Company isthe sole general partner. The General Partner has the full andexclusive control of the management and operation of the business ofeach 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.

Minority Interests

TAG consolidates theLimited 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 thefilm.

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On certain films, the Company earnsmanagement fees in connection with its role as production manager forthe limited partnerships where the Chief Executive Officer of theCompany has assigned to TAG his management fee rights during theproduction period.

The Company bills overhead fees to limitedpartnerships for reasonable, direct and allocable costs arising duringthe management of film projects.

Rental revenue from short-termoperating leases of studio facilities is recognized over the term ofthe lease.

Sponsorship income is recognized pursuant to the termsstipulated in the agreement.

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.

Ultimate revenue includesestimates over a period not to exceed ten years following the date ofinitial release. For titles included in acquired libraries, ultimaterevenue includes estimates over a period not to exceed ten yearsfollowing the date of acquisition.

Capitalized film costs arestated at the lower of amortized cost or estimated fair value on anindividual film basis. The valuation of investment in films is reviewedon a title-by-title basis, when an event or changes in circumstancesindicated that the fair value of a film is less than its unamortizedcost. The fair value of the film is determined usingmanagement’s future revenue and cost estimates. Additionalamortization is recorded in the amount by which the unamortized costsexceed the estimated fair value of the film. Estimates of futurerevenue involve measurement uncertainty and it is therefore possiblethat reductions in the carrying value of investment in films may berequired as a consequence of changes in management’s futurerevenue estimates.

Films in progress include the accumulatedcosts of production, which have not yet been completed by theCompany.

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 

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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 $13,000 and $35,000 for the nine months endedSeptember  30,  2006 and 2005,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

Prior to the January 1, 2006 adoption ofStatement of Financial Accounting Standards(‘‘SFAS’’) No. 123R,‘‘Share-Based Payment,’’ the Companyaccounted for stock-based compensation using the intrinsic value methodprescribed in Accounting Principles Board (APB) Opinion No. 25,‘‘Accounting for Stock Issued toEmployees,’’ and related interpretations. Accordingly,under APB Opinion No. 25, no compensation expense was recognizedbecause the exercise price of the Company’s employee stockoptions was equal to the market price of the underlying stock on thedate of grant. The Company applied the disclosure provisions of SFASNo. 123, ‘‘Accounting for Stock BasedCompensation,’’ as amended by SFAS No. 148,‘‘Accounting for Stock Based Compensation –Transition and Disclosure,’’ as if the fair value methodhad been applied in measuring compensation expense.

EffectiveJanuary 1, 2006, the Company adopted the fair value recognitionprovisions of SFAS No. 123R, under which compensation expense isrecognized in the Consolidated Statement of Operations for the fairvalue of employee stock-based compensation. The Company has elected themodified-prospective transition method as permitted by SFASNo. 123R and accordingly, prior periods have not been restatedto reflect the effect of SFAS No. 123R. The modified-prospectivetransition method requires that stock-based compensation expenserecognized in the first quarter of fiscal 2006 include(1) quarterly amortization of all stock-based payments grantedprior to, but not vested as of January 1, 2006, based on thegrant date fair value estimated in accordance with the originalprovisions of SFAS No. 123 and (2) quarterly amortizationof all stock-based payments granted subsequent to January 1,2006, based on the grant date fair value estimated in accordance withthe provisions of SFAS No. 123R. In addition, pursuant to SFASNo. 123R, the Company is required to estimate the amount ofexpected forfeitures when calculating stock-based compensation expense,rather than accounting for forfeitures as incurred, which was theCompany’s previous method. Compensation expense will berecognized over the requisite service (vesting) period using thestraight-line attribution method.

Valuation of theCompany’s Common Stock

Unless otherwise disclosed, allstock-based transactions entered into by the Company have been valuedat the market value of the Company’s common stock on the datethe transaction was entered into or have been valued using theBlack-Scholes to estimate the fair market value.

Concentrationsof Risk

The Company’s financial instruments that areexposed to concentrations of credit risk consist of cash andreceivables. The Company invests its cash in banks with high creditratings; however, certain account balances have been maintained atlevels in excess of federally insured limits. The Company has notexperienced a loss in such accounts.

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The Company extends 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. The Companymonitors its exposure for credit losses and maintains allowances foranticipated losses, as required. The Company sub-distributes titles inboth the domestic and international markets. The Company is typicallypaid an advance or minimum guarantee for these rights. Any overages(revenue in excess of the minimum guarantee) are reported to theCompany 45 to 90 days after the reporting period. Because of theminimum guarantees and the details of the Company’s distributionrelationships, the Company’s outstanding balances may extend togreater than 90 days.

At September  30,  2006, theCompany’s receivables included $1.2  million to becollected from an international film distributor for sub-distributionrights on a film completed and delivered during 2005. In addition, theCompany received a note for production funding provided to the investorpartnership that owns the underlying rights to this film. The notereceivable balance was $1.0  million at September30,  2006. 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 of$1,035,000 bears interest at 12% per annum and will be collectedfrom the partnership after payment of distribution and production feesand expenses related to the film. While estimates of gross receipts,including video and DVD sales, support the stated values of theseamounts, the collection of these balances is subject to inherent risksassociated with the worldwide performance of the film and generalconditions in the various foreign markets. Based upon theCompany’s evaluation of updated projections of receivables fromthe above-referenced international distributor, the Company elected toestablish a reserve of $391,000 against the receivable from theinternational distributor and a reserve of $396,000 against the notefor the period ending September  30,  2006. During the ninemonths ended September  30,  2006 the Company also advancedin the form of a note receivable a total of $342,000 for the movie‘‘Deal’’ which is due on December31,  2006.

Income Taxes

Deferred income taxes arerecorded to reflect the tax consequences in future years of temporarydifferences between the tax basis of the assets and liabilities andtheir financial statement amounts at the end of each reporting period.Valuation allowances are established when necessary to reduce deferredtax assets to the amount expected to be realized. Income tax expense isthe tax payable for the current period and the change during the periodin deferred tax assets and liabilities. The deferred tax assets andliabilities have been netted to reflect the tax impact of temporarydifferences. A full valuation allowance has been established for netdeferred tax assets as management believes that it is more likely thannot that a tax benefit will not be realized.

Earnings per CommonShare

The Company computes earnings per common share inaccordance with Statement of Financial Accounting Standards No. 128,‘‘Earnings per Share’’ (SFAS No. 128). TheStatement requires dual presentation of basic and diluted EPS on theface of the income statement for all entities with complex capitalstructures and requires a reconciliation of the numerator anddenominator of the basic EPS computation to the numerator anddenominator of the diluted EPS computation. Basic EPS is computed bydividing income or loss available to common shareholders by theweighted average number of common shares outstanding. The computationof diluted EPS is similar to the basic EPS computation except thedenominator is increased to include the number of additional sharesthat would have been outstanding if the dilutive potential commonshares had been issued. In addition, the numerator is adjusted for anychanges in income or loss that would result from the assumedconversions of those potential shares. However, such presentation isnot required if the effect is anti-dilutive. The diluted EPS amountsfor the periods ended September  30,  2006 and 2005 do notreflect the impact of common share equivalents arising from warrantsand options totaling 7,713,000 and 5,567,000 at September30,  2006 and 2005, respectively, as the effects would beanti-dilutive in those periods.

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Recently Issued AccountingPronouncements

In May  2005, the FASB issued SFAS 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 has nothad a material effect on the consolidated financial position or resultsof operations of the Company through the date of this filing.

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 re-measurement 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 June  2005, the EITF reachedconsensus on Issue No. 05-6, Determining the Amortization Period forLeasehold Improvements (‘‘EITF 05-6.’’)EITF 05-6 provides guidance on determining the amortization period forleasehold improvements acquired in a business combination or acquiredsubsequent to lease inception. The guidance in EITF 05-6 will beapplied prospectively and is effective for periods beginning afterJune  29,  2005. EITF 05-6 is not expected to have amaterial effect on its consolidated financial position or results ofoperations.

NOTE 2 — CAPITALIZED FILMCOSTS

Capitalized film costs for theatrical and non-theatricalfilms at September  30,2006:

|                              |  |  |           |   |           |                         |  |  |         |   |            |   |  |  |  |   |           |  |
|------------------------------|--|--|-----------|---|-----------|-------------------------|--|--|---------|---|------------|---|--|--|--|---|-----------|--|
|                         |  |  | Grosscost |   |           | Accumulatedamortization |  |  | Netcost |
| Produced and releasedfilms   |  |  |           | $ | 6,351,000 |                         |  |  |         | $ | (5,465,000 | ) |  |  |  | $ | 886,000   |  |
| Acquiredfilms and filmrights |  |  |           |   | 393,000   |                         |  |  |         |   | (313,000   | ) |  |  |  |   | 80,000    |  |
| Filmsin progress             |  |  |           |   | 261,000   |                         |  |  |         |   | —    |   |  |  |  |   | 261,000   |  |
| Filmsunderdevelopment        |  |  |           |   | 250,000   |                         |  |  |         |   | —    |   |  |  |  |   | 250,000   |  |
| Total                        |  |  |           | $ | 7,255,000 |                         |  |  |         | $ | (5,778,000 | ) |  |  |  | $ | 1,477,000 |  |
|                              |

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NOTE 3 — INVESTMENT IN LIMITEDPARTNERSHIPS

TAG has purchased interests in various affiliatedunconsolidated partnerships by issuing TAG common stock (except forDeal The Movie LP which was purchased for cash) for the partnershipshares 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            |  |  |        |  | 2.82   | %    |  |  |  |   | 150,000   |  |
| Family FilmPartners,LP               |  |  |        |  | 0.05   | %    |  |  |  |   | 13,000    |  |
| MotocrossKids                        |  |  |        |  | 0.42   | %    |  |  |  |   | 25,000    |  |
| Deal TheMovie LP (acquired withcash) |  |  |        |  |   |      |  |  |  |   | 200,000   |  |
|                                 |  |  |        |  |   |      |  |  |  | $ | 1,013,000 |  |
|                                      |

NOTE4 — RECEIVABLES/PAYABLES FROM/TO AFFILIATEDPARTNERSHIPS

The Company incurred net debt to unconsolidatedpartnerships in the aggregate amount of $1,328,000 as ofSeptember  30,  2006, which it required during the courseof managing its operations and facilitating the activities of thepartnerships. There is an accounts receivable due from thesepartnerships in the amount of $1,514,000 and a payable to thepartnerships in the amount of $2,842,000. Cash transfers were requiredbetween affiliated partnerships to meet cash flow needs and otherobligations. Cash transfers were made between and among the Company andboth consolidated and unconsolidated partnerships.

The receivableand payable balances among affiliated entities on September30,  2006 and the amounts due (to) or from related affiliatedpartnerships are asfollows:

|                               |  |  |                             |  |            |             |  |  |  |   |            |   |
|-------------------------------|--|--|-----------------------------|--|------------|-------------|--|--|--|---|------------|---|
| Movie                         |  |  | Balance(Payable)/Receivable |  |            | NetBalance* |
| SantaTrap                     |  |  |                             |  |       |             |  |  |  |   |       |   |
| Santa TrapLLC                 |  |  |                             |  | (19,169    | )           |  |  |  |   |       |   |
| Family FilmPartners VIILP     |  |  |                             |  | 116,546    |             |  |  |  | $ | 97,377     |   |
| Popstar                       |  |  |                             |  |       |             |  |  |  |   |       |   |
| GhostownLP                    |  |  |                             |  | (642,707   | )           |  |  |  |   |       |   |
| DowntownLP                    |  |  |                             |  | 749,729    |             |  |  |  |   | 107,022    |   |
| BlackBeauty                   |  |  |                             |  |       |             |  |  |  |   |       |   |
| Black BeautyLLP               |  |  |                             |  | 296,542    |             |  |  |  |   |       |   |
| American BlackBeautyLP        |  |  |                             |  | (133,847   | )           |  |  |  |   | 162,695    |   |
| Supercross                    |  |  |                             |  |       |             |  |  |  |   |       |   |
| TagStudios                    |  |  |                             |  | 3,839,604  |             |  |  |  |   |       |   |
| SupercrossThe MovieLP         |  |  |                             |  | (2,846,045 | )           |  |  |  |   | 993,559    |   |
| CinderellaLLC                 |  |  |                             |  | 153,795    |             |  |  |  |   | 153,795    |   |
| ReceivablefromAffiliates      |  |  |                             |  |       |             |  |  |  | $ | 1,514,448  |   |
| MiracleDogs                   |  |  |                             |  |       |             |  |  |  |   |       |   |
| Animal PartnersLP             |  |  |                             |  | (605,769   | )           |  |  |  | $ | (605,769   | ) |
| RedRiding Hood                |  |  |                             |  |       |             |  |  |  |   |       |   |
| Red RidingHood LLC            |  |  |                             |  | 1,255,846  |             |  |  |  |   |       |   |
| FairyTale Partners IIILP      |  |  |                             |  | (1,274,308 | )           |  |  |  |   | (18,462    | ) |
| MotocrossKids                 |  |  |                             |  |       |             |  |  |  |   |       |   |
| Motocross KidsLP              |  |  |                             |  | (1,171,525 | )           |  |  |  |   | (1,171,525 | ) |
| SteveAustinPartnerships       |  |  |                             |  |       |             |  |  |  |   |       |   |
| SteveAustin ProductionsLLC    |  |  |                             |  | (514,317   | )           |  |  |  |   |       |   |
| Austin FamilyEntertainmentLLC |  |  |                             |  | (6,725     | )           |  |  |  |   | (521,042   | ) |
| Family FilmPartnersVIII       |  |  |                             |  | (2,920     | )           |  |  |  |   | (2,920     | ) |
| FunnyMoney                    |  |  |                             |  | (522,387   | )           |  |  |  |   | (522,387   | ) |
| AmountsPayable toAffiliates   |  |  |                             |  |       |             |  |  |  | $ | (2,842,105 | ) |
|                               |

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|  |
|--|
|  |  |
|  |

|   |                                                                                                                                                                                                                                                                                                         |
|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| * | The informationpresented under this column shows the aggregate amounts receivable fromand payable to various entities established for the purpose of filmproduction projects. These amounts represent intercompany balancesbetween these entities which are updated and reconciled on a continualbasis. |

NOTE 5 — FINANCING ACTIVITIES

OnMarch  30,  2005, the Company entered into a SecuritiesPurchase Agreement with Satellite Strategic Finance Associates, LLC andan affiliated investor under which the Company issued $1,000,000 inaggregate principal amount of Senior Secured Notes and Warrants topurchase 500,000 shares of its common stock in a private placement toaccredited investors under Regulation D of the Securities Act of 1933,as amended. The Company received gross proceeds of $1,000,000, whichwere intended for the film production and general working capitalrequirements. The aggregate principal amount of the Notes was$1,150,000 with a 15% yield funded as original issuancediscount. The Company also entered into a Registration Rights Agreementand a Security Agreement with the investors and its subsidiary, TAGEntertainment USA, Inc. co-signed the Security Agreement and agreed toguaranty its obligations pursuant to the financing agreements. Pursuantto the Security Agreement, the Company granted the investors a firstpriority lien on all of its assets, other than certain previouslyissued liens, in order to secure its obligations. The Notes were tomature on March  30,  2006 and are sooner payable in fullin the event the Company consummates a subsequent financing event, withcertain exceptions, or upon the occurrence of an event of default. Thewarrants are exercisable at $1.00 per share, subject to adjustment uponcertain events, including as a result of its sale of equity securitiesat a price below the exercise price. The warrants are exercisable atany time on or before March  30,  2010. In connection withthe issuance of the Notes and the related warrants, the Companyallocated the net proceeds between the instruments based on therelative fair value of the warrants and the Notes. The fair value ofthe warrants was determined using the Black-Scholes pricing model andthe following assumptions: contractual terms of five years, an averagerisk free interest rate of 2.5%, a dividend yield of 0%,and a volatility 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.

On May  4,  2005 the Company consummated asubsequent financing transaction with the holders of these notes,pursuant to which these secured notes were repaid in full and theCompany fulfilled its obligations under the Security Agreement andGuaranty. 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 warrants topurchase 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 used thenet proceeds for the production, acquisition and distribution offeature films and general working capital. Financing expenses are beingamortized 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 its common stock has resulted in an adjustmentof the conversion price to the floor amount of $1.00. Accordingly, theholders of the outstanding shares of Series A Preferred Stock are ableto convert these shares into an aggregate of 5,000,000 shares of theCompany’s common stock.

In connection with the issuance ofthe Preferred Stock and the related warrants, the Company allocated thenet proceeds between the instruments based on the relative fair valueof the warrants 

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and the Preferred Stock before valuation ofthe beneficial conversion feature. The fair value of the warrants wasdetermined using the Black-Scholes pricing model and the followingassumptions: contractual terms of seven years, an average risk freeinterest rate of 2.5%, a dividend yield of 0%, and avolatility of 115%. Accordingly, the Company recorded anincrease in additional paid-in capital and a discount against thePreferred Stock of $2,586,000 in connection with the issuance of thePreferred Stock and warrants. The discount related to the warrants isbeing amortized and charged to interest expense over the three yearmaturity period. Amortization of $647,000 was recorded as interestexpense during the nine months ended September  30,2006.

The Company evaluated the beneficial conversion feature ofthe Preferred Stock by measuring the effective conversion price afterthe discount for the warrants against the current market price ofTAG’s common stock of $3 per share at closing. In recognition ofthe intrinsic value of the conversion feature, the company recorded anadditional discount of $2,414,000 against the Preferred Stock with acorresponding increase in additional paid-in-capital. The discount isbeing amortized over three years and charged against retainedearnings.

Each share of Preferred Stock, which has a stated valueof $1,000 per share, earns cumulative dividends at a rate of 6%per annum and matures three years from the date of issuance. Thedividend and liquidation rights of the Preferred Stock are senior tothose of its common stock. The Preferred Stock does not carry votingrights.

As part of its previous financing efforts for operations,the Company has recorded financing costs totaling $30,000 for the ninemonths ended September  30,  2006. Deferred financingexpenses totaled $215,000 at September  30,  2006 and areincluded with other current assets ($186,000) and other assets($72,000).

NOTE 6 — COMMITMENTS ANDCONTINGENCIES

Litigation

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. The outstanding balance has been paid in full.

OnJanuary  17,  2006, a complaint was filed against TAGEntertainment, Inc. and Steve Austin by Park Avenue Entertainment, LLCclaiming that we materially breached an agreement between the twocompanies to produce a motion picture. The complaint was filed in theSuperior Court of the State of California, County of Los Angeles,Central District, with the caption Park Avenue Entertainment LLC etal. vs. TAG Entertainment, Inc.; Steve Austin et al. The Companyhas been advised that plaintiffs are seeking a default judgment againstthe defendants; however, the defendants are currently contesting anysuch action on the grounds of defective service. The claimants areseeking damages in the amount of $2,135,000 based on production feesand participation rights that they are allegedly entitled to under theproduction contract. The Company has previously disputedplaintiffs’ allegations and notified them that the Company mayassert claims against them concerning their failure to properly performunder the agreement. The Company is currently reviewing the allegationsmade in the complaint and the claims being asserted and the Companyintends to defend this action vigorously. Management is unable todetermine at this time whether this claim will have a material adverseimpact on its financial condition, results of operations or cashflow.

The Company and its Chief Executive Officer are involved ina dispute with Mr.  Jeff  Franklin and F.W.E. Inc.regarding the production of two motion pictures and business dealingsbetween the Company’s Chief Executive Officer, and Mr.Franklin.  The disputes concern the production and distributionrelationship regarding the films Funny Money and AmericanBlack Beauty. In each case, Mr.  Franklin has alleged thatthe Company has not properly performed its obligations in connection

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with the production of these motionpictures. The Company has disputed the allegations of Mr.Franklin, has notified him of its potential claims against him andF.W.E. and has been engaged in protracted negotiations with him andF.W.E. in order to achieve a global settlement of the disagreementsbetween the parties. Messrs. Franklin and Austin continue to negotiateand discuss their respective positions and 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.

The Company is the respondent in aproceeding commenced in California state court under the captionBarrus et al. v. Steven Austin, et al. Plaintiff is the holderof an aggregate of 50,000 shares of common stock of TAG EntertainmentUSA, Inc. and has elected to its exercise dissenters’ rightsunder the California Corporations Code. The Company had beennegotiating with the claimant to resolve this matter and during thequarter ended September 30, 2006, the Company settled this matter withthe claimant and paid $50,000 to the claimant in connection with theresolution of the dispute.

The Company is involved in variousclaims and other legal proceedings that arise from time to time in theordinary course of business. The Company does not believe any of themwill have a material adverse affect on the Company’s financialposition or results of operations. Litigation is inherentlyunpredictable and excessive verdicts do occur. Although the Companybelieves it has valid defenses in these matters, the Company could inthe future incur judgments or enter into settlements of claims thatcould have a material adverse affect on the Company’s financialposition or results of operations in any particularperiod.

Consulting Agreements

InMarch  2006, the company entered into a consulting agreement withRelevant Entertainment Group to assist in identifying, packaging andproducing new motion picture and television projects. In considerationfor the services of Relevant, the company issued 100,000 shares ofcommon stock valued at $78,000 and warrants to purchase an additional250,000 shares of common stock valued at $100,000. The warrants areexercisable at $0.75 per share for a period of five years and vest asfollows: warrants to purchase 125,000 shares vested on the date ofissuance and the balance vests in equal installments over a period oftwelve months commencing in April  2006. The Company agreed topay Relevant a percentage of the fees received from projects that aresuccessfully produced pursuant to this agreement.

The fair valueof the warrants was determined using the Black-Scholes pricing modeland the following assumptions: contractual terms of five years, anaverage risk free interest rate of 4.5%, a dividend yield of0%, and a volatility of 151.26%.

In April2006, the Company entered into a production agreement with UFOProductions, LLC pursuant to which it will seek to produce new motionpictures. The Company’s agreement with UFO Productions, LLCprovides for the parties to co-produce six new motion pictures for theSci-Fi Network. Pursuant to this agreement, the Company issued warrantsto purchase 100,000 shares of its common stock to UFO Productions whichare exercisable at $1.00 per share for a period of seven years, valuedat $42,000.

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 of4.5%, a dividend yield of 0%, and a volatility of151.26%.

NOTE 7 — STOCKHOLDERS’EQUITY

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 endedSeptember  30,  2005. A total of $88,000 was raised inconnection with the issuance of 29,408 shares.

During the ninemonths ended September  30,  2006, the Company issued125,000 shares of common stock valued at $125,000 to purchase apartnership interest.

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Item2.    Management’s Discussion and Analysis or Plan ofOperation.

Overview

This management’sdiscussion and analysis of financial condition contains forward-lookingstatements that involve risks and uncertainties. Thismanagement’s discussion and analysis contains information that webelieve is relevant to an assessment and understanding of our resultsof operations and financial condition. You should read the followingdiscussion in conjunction with the audited financial statements and thenotes to such financial statements included in our Annual Report onForm 10-KSB as well as the unaudited financial statements and relatednotes contained in this Quarterly Report on Form 10-QSB. Thepreparation of these financial statements requires management to makeestimates and assumptions that affect the reported amounts of assetsand liabilities and the disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. On an on-goingbasis, management evaluates its estimates and judgments. Managementbases its estimates and judgments on historical experience and onvarious other factors that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgmentsabout the carrying value of assets and liabilities that are not readilyapparent from other sources. Our actual results may differ materiallyfrom those discussed in the forward-looking statements as a result ofvarious factors, including but not limited to those discussed in ourAnnual Report on Form 10-KSB and 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. We also acquire the copyrights and/or distribution rights toalready completed films for media exhibition. In order to finance filmproduction, we have raised funds through the establishment of singlepurpose limited partnerships and through the sale of equity or debtsecurities. TAG Entertainment USA, Inc. (‘‘TAGUSA’’), our wholly-owned subsidiary, serves as the solegeneral partner of the following four limited partnerships: MajesticFilm Partners, LP, Majestic Film Partners II, LP, Majestic FilmPartners III, LP and Majestic Film Partners IV, LP (the‘‘Majestic Limited Partnerships’’). TAG USAis also the distributor of films produced by numerous other limitedpartnerships as well as assists in facilitating the production anddistribution of films produced by limited partnerships for which itreceives an overhead and/or production fee. Five of these other limitedpartnerships have as their general partner an entity owned andcontrolled by Steve Austin, our Chief Executive Officer.

Ourrevenues are derived from motion picture production and distributionfees, 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 our own productions and acquired films, includingtheatrical releases and direct-to-video releases. Television revenuesare primarily derived from the licensing of our productions andacquired films to the domestic cable, free and pay television markets.International revenues are derived from the licensing of ourproductions and acquired films to international markets on aterritory-by-territory basis.

Our primary operating expensesinclude the following: direct operating expenses, which includeamortization of production or acquisition costs, participation andresidual expenses, distribution and marketing expenses; which primarilyinclude the costs of theatrical ‘‘prints andadvertising’’ and of video and DVD duplication andmarketing; and general and administration expenses, which includesalaries and other overhead.

Merger

On November22,  2004, TAG USA was acquired by Power Marketing, Inc., aDelaware corporation. In the transaction, TAG USA merged with asubsidiary of Power Marketing, Inc. and became a wholly-ownedsubsidiary of Power Marketing, Inc., now operating as a separateentity. As a result of this transaction, the stockholders and othersecurity holders of TAG USA became the 

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owners of approximately 90% of ouroutstanding shares of common stock. In connection with the merger,Power Marketing changed its corporate name to TAG Entertainment Corp.,obtained the new trading symbol TAGE.OB and all of the officers anddirectors of Power Marketing resigned and Mr.  Austin, who wasthe majority shareholder, Chief Executive Officer and sole director ofTAG USA became our Chief Executive Officer, Chief Financial Officer andsole director. The transaction was treated as a reverse merger and arecapitalization of the company for reporting purposes. We appointedfive additional directors to our board during 2005; however, as ofMarch  20,  2006, two of our independent directorsresigned. The holders of approximately 1,122,000 shares of common stockof TAG USA that did not consent in writing to our acquisition of TAGUSA were entitled to exercise appraisal rights under the CaliforniaCorporations Code. As described in greater detail in our Annual Reporton Form 10-KSB for the year ended December  31,  2005, weare the respondent in a proceeding commenced by the holder of anaggregate of 50,000 shares of common stock of TAG USA that has electedto its exercise dissenters’ rights under the CaliforniaCorporations Code. This matter was resolved during the quarter endedSeptember  30,  2006 and the Company paid $50,000 to theclaimant.

Going Concern and Management Plans

Ourfinancial statements have been presented on the basis that we are agoing concern, which contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business. We haveexperienced recurring losses and negative cash flows from operationsand have a working capital deficit, which raises substantial doubtabout our ability to continue as a going concern and our independentauditors have included a ‘‘going concern’’explanatory paragraph in their report on our financial statements forthe year ended December  31,  2005. We are currentlydevoting efforts to raising additional capital and achieving profitableoperations. Our ability to continue as a going concern is dependentupon our ability to develop additional sources of capital. Theaccompanying financial statements do not include any adjustments thatmight result from the outcome of these uncertainties. We closed on abridge financing in the amount of $1,000,000 on March  30,2005. On May  4,  2005, we completed a $5,000,000 preferredstock financing and retired the bridge loan.

On March30,  2005, we entered into a Letter of Intent to acquire aprivately held company, Myriad Pictures, Inc., which is engaged in thefilm production and distribution business. The letter of intentprovided for a purchase price of approximately $4,000,000, including anearnout payment of up to $2,000,000. In connection with the executionof the letter of intent, we provided Myriad with a short term loan of$250,000, bearing interest at the rate of 3% per annum, whichMyriad was to use for working capital and to pay for its acquisitioncosts pending the closing (the ‘‘MyriadLoan’’). The Myriad Loan is secured by a lien on theassets of Myriad. As of February  23,  2006, we notifiedMyriad that we were terminating negotiations and the letter of intent,effective immediately. Pursuant to its terms, the Myriad Loan (lesscertain expenses) is repayable by March  30,  2006 and wehave not received repayment as of the date hereof.

In order tosatisfy future cash requirements, management is actively pursuing andhas entered into discussions regarding additional financing to supportthe proposed acquisition, related expansion plans, and ongoingoperations. We currently have no firm agreements with any third partiesfor any future transactions and future financings.

CriticalAccounting Policies

Accounting Principles, Estimates andReclassifications

The accompanying consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States(‘‘GAAP’’). The preparation of thefinancial statements in accordance with GAAP requires management tomake estimates and assumptions that affect reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results coulddiffer from those and other estimates. In preparing the financialstatements for comparative purposes, prior period financial informationhas been reclassified to conform with classifications of the currentperiod.

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Principles of Consolidation

Theaccompanying consolidated financial statements include the accounts ofTAG, TAG USA and of the Majestic Limited Partnerships, of which TAG USAis the sole general partner. The General Partner has the full andexclusive control of the management and operation of the business ofeach partnership. In its capacity as General Partner, TAG USAparticipates 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.

Minority Interests

We consolidate theMajestic Limited Partnerships, of which TAG USA is the sole generalpartner. The amount of minority interest represents the aggregate netlimited partnership capital of each partnership offset by 99% ofaccumulated Majestic 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 ourparticipation 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 recognize 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.

Webill overhead fees to limited partnerships for reasonable, direct andallocable costs arising during the management of film theprojects.

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

Sponsorship income is recognized pursuant to the termsstipulated in the agreement.

Cash payments received which mayinclude minimum guarantees may be recorded as deferred revenue untilall conditions of revenue recognition have been met.

CashEquivalents

For purposes of reporting cash flows, we considerall short-term, interest bearing deposits with original maturities ofthree months or less to be cash equivalents.

Capitalized FilmCosts

Capitalized film costs consist of investments in films,which 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.

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Costs of acquiring and producing films andof acquired libraries are amortized using the individual-film-forecastmethod, whereby these costs are amortized and participation andresidual costs are accrued in the proportion that the currentyear’s revenue bears to management’s estimate of ultimaterevenue at the beginning of the current year expected to be recognizedfrom the exploitation, exhibition or sale of the films.

Ultimaterevenue includes estimates over a period not to exceed ten yearsfollowing the date of initial release. For titles included in acquiredlibraries, ultimate revenue includes estimates over a period not toexceed ten years following the date of acquisition.

Capitalizedfilm costs are stated at the lower of amortized cost or estimated fairvalue on an individual film basis. The valuation of investment in filmsis reviewed on a title-by-title basis, when an event or changes incircumstances indicated that the fair value of a film is less than itsunamortized cost. The fair value of the film is determined usingmanagement’s future revenue and cost estimates. Additionalamortization is recorded in the amount by which the unamortized costsexceed the estimated fair value of the film. Estimates of futurerevenue involve measurement uncertainty and it is therefore possiblethat reductions in the carrying value of investment in films may berequired as a consequence of changes in management’s futurerevenue estimates.

Films in progress include the accumulatedcosts of production, which have not yet been completed.

Films indevelopment include costs of acquiring film rights to originalscreenplays and costs to adapt such projects. Such costs arecapitalized and, upon commencement of production, are transferred toproduction costs. Projects in development are written off at theearlier of the date determined not to be recoverable or when abandoned,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 tooperations.

Stock-Based Compensation

Prior to theJanuary 1, 2006 adoption of Statement of Financial AccountingStandards (‘‘SFAS’’) No. 123R,‘‘Share-Based Payment,’’ the Companyaccounted for stock-based compensation using the intrinsic value methodprescribed in Accounting Principles Board (APB) Opinion No. 25,‘‘Accounting for Stock Issued toEmployees,’’ and related interpretations. Accordingly,under APB Opinion No. 25, no compensation expense was recognizedbecause the exercise price of the Company’s employee stockoptions was equal to the market price of the underlying stock on thedate of grant. The Company applied the disclosure provisions of SFASNo. 123, ‘‘Accounting for Stock BasedCompensation,’’ as amended by SFAS No. 148,‘‘Accounting for Stock Based Compensation –Transition and Disclosure,’’ as if the fair value methodhad been applied in measuring compensation expense.

EffectiveJanuary 1, 2006, the Company adopted the fair value recognitionprovisions of SFAS No. 123R, under which compensation expense isrecognized in the Consolidated Statement of Operations for the fairvalue of employee stock-based compensation. The Company has elected themodified-prospective transition method as permitted by SFASNo. 123R and accordingly, prior periods have not been restatedto reflect the effect of SFAS No. 123R. The modified-prospectivetransition method requires that stock-based compensation expenserecognized in the first quarter of fiscal 2006 include(1) quarterly amortization of all stock-based payments grantedprior to, but not vested as of January 1, 2006, based on thegrant date fair value estimated in accordance with the originalprovisions of SFAS No. 123 and (2) quarterly amortizationof all stock-based payments granted subsequent to January 1,2006, based on the grant date fair value estimated in accordance withthe provisions of SFAS No. 123R. In addition, pursuant to SFASNo. 123R, the Company is required to 

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estimate the amount of expected forfeitureswhen calculating stock-based compensation expense, rather thanaccounting for forfeitures as incurred, which was the Company’sprevious method. Compensation expense will be recognized over therequisite service (vesting) period using the straight-line attributionmethod.

Valuation of the Our Common Stock

Unlessotherwise disclosed, all stock-based transactions entered into by ushave been valued at the market value of our common stock on the datethe transaction was entered into or have been valued using theBlack-Scholes to estimate the fair market value.

Concentrationsof Risk

Our financial instruments that are exposed toconcentrations of credit risk consist of cash and receivables. Weinvest our cash in banks with high credit ratings; however, certainaccount balances have been maintained at levels in excess of federallyinsured limits. We have not experienced a loss in suchaccounts.

We extend credit based on an evaluation of thecustomer’s financial condition, generally without collateral.Exposure to losses on receivables is principally dependent on eachcustomer’s financial condition. We monitor our exposure forcredit losses and maintain allowances for anticipated losses, asrequired. 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 September  30,  2006, ourreceivables included $1.2  million to be collected from aninternational film distributor for sub-distribution rights on a filmcompleted and delivered during 2005. In addition, we issued a note forproduction funding provided to the investor partnership that owns theunderlying rights to this film. The note receivable balance was$1.0  million at September  30,  2006. 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 of $1,035,000 bears interest at 12% per annum andwill be collected from the partnership after payment of distributionand production fees and expenses related to the film. While estimatesof gross 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. Based upon theCompany’s evaluation of updated projections of receivables fromthe above-referenced international distributor, the Company elected toestablish a reserve of $391,000 against the receivable from theinternational distributor and a reserve of $396,000 against the notefor the period ending September  30,  2006. During the ninemonths ended September  30,  2006 the Company also advancedin the form of a note receivable a total of $342,000 for the movie‘‘Deal’’ which is due on December31,  2006.

Income Taxes

Deferred income taxes arerecorded to reflect the tax consequences in future years of temporarydifferences between the tax basis of the assets and liabilities andtheir financial statement amounts at the end of each reporting period.Valuation allowances are established when necessary to reduce deferredtax assets to the amount expected to be realized. Income tax expense isthe tax payable for the current period and the change during the periodin deferred tax assets and liabilities. The deferred tax assets andliabilities have been netted to reflect the tax impact of temporarydifferences. A full valuation allowance has been established for netdeferred tax assets as management believes that it is more likely thannot that a tax benefit will not be realized.

Earnings per CommonShare

We compute earnings per common share in accordance withStatement of Financial Accounting Standards No. 128,‘‘Earnings per Share’’ (SFAS No. 128). TheStatement requires dual presentation 

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of basic and diluted EPS on the face of theincome statement for all entities with complex capital structures andrequires a reconciliation of the numerator and denominator of the basicEPS computation 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 three and nine months endedSeptember  30,  2006 and 2005, do not reflect the impact ofcommon share equivalents arising from warrants and options totaling7,713,000 and 5,567,000 at September  30,  2006 and 2005,respectively, as the effects would be anti-dilutive in thoseperiods.

Results of Operations: Three Months EndedSeptember  30,  2006 compared to September30,  2005

Revenue

Gross revenuesfor the three months ended September  30,  2006 and 2005were $251,000 and $1,748,000, respectively, a decrease of ($1,497,000)or 86%. The decrease in revenues was principally attributable tothe decrease in production and fees arising from film projects whereTAG was engaged to manage filming and related production activities onbehalf of certain investor partnerships. Production, management andoverhead fees for the three months ended September  30,2006 decreased by ($843,000) from $1,027,000 during the three monthsended September  30,  2005 to $184,000 for the three monthsended September  30,  2006. This decrease was due todecreased production and administrative support activity during thequarter on film projects. Distribution fees, including film revenues,for the three months ended September  30,  2006 decreasedby ($689,000) from $721,000 during the three months endedSeptember  30,  2005 to $32,000 for the three months endedSeptember  30,  2006. This decrease was primarilyattributable to lesser sales results from the company’sdistribution network, and minimal new film releases by the company.

These decreases were offset by increases in sponsorship fees as aresult of arrangements made by us with corporate sponsors on filmprojects. Sponsorship fees for the three months ended September30,  2006 were $35,000 for the three months endedSeptember  30,  2006 compared to $0 the three months endedSeptember  30,2005.

Expenses

Operating expenses for thethree months ended September  30,  2006 were $1,341,000compared to $1,064,000 for the three months ended September30,  2005, an increase of $277,000. The increase in expenses isprimarily attributed to an increase in selling, general andadministrative expenses of $687,000 offset by decreases in amortizationof film costs ($410,000). Film and amortization costs for the threemonths ended September  30,  2006 were a negative $82,000compared to $328,000 for the three months ended September30,  2005. The decrease in film amortization is directly relatedto decreased revenues on films either TAG or consolidated limitedpartnerships previously financed and produced. Selling, general andadministrative expenses for the three months ended September30,  2006 were $1,423,000 compared to $736,000 for the threemonths ended September  30,  2005, an increase of $687,000.The increase in selling, general and administrative expenses isprimarily attributable to an increase of $787,000 in a bad debtallowance due to slow and less than anticipated collections on thepreviously released Supercross and Popstar movies, an increase inconsulting expenses of $66,000, an increase in legal fees of $15,000and an increase in accounting/auditing fees of $13,000. These increaseswere offset by a decrease in payroll and staffing cost of ($81,000)relating to our cost cutting endeavors, a decrease in marketing andinvestor relations costs of ($36,000) related to our cost cuttingendeavors, a decrease of ($34,000) in travel and entertainment, adecrease in rent expense of ($19,000) as a result of a new lessexpensive office facility, and a decrease in overall corporate officeexpenses of approximately ($24,000) related to our cost cuttingendeavors.

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Interest expense was $291,000 for thethree months ended September  30,  2006 compared to$291,000 for the three months ended September  30,  2005,representing no increase or decrease, and included amortization of theconvertible preferred stock discount associated with related warrantsand interest on our convertible preferredstock.

Results of Operations: Nine Months EndedSeptember  30,  2006 compared to September30,  2005

Revenue

Gross revenuesfor the nine months ended September  30,  2006 and 2005were $1,782,000 and $2,407,000, respectively, a decrease of ($625,000)or 26%. The decrease in revenues was principally attributable tothe decrease in distribution fees, including film revenues, as theresult of lesser sales by the company’s distributors and aminimal release of new projects. Distribution fees, including filmrevenues, for the nine months ended September  30,  2006decreased by ($749,000) from $1,080,000 for the nine months endedSeptember  30,  2005 to $331,000 for the nine month periodending September  30,  2006. Production, management andoverhead fees for the nine months ended September  30,2006 decreased by ($181,000) from $1,327,000 during the nine monthsended September  30,  2005 to $1,146,000 for the ninemonths ended September  30,  2006.

The decrease ingross revenues was offset by an increase of $305,000 in sponsorshiprevenues as a result of arrangements made by us with corporate sponsorson two film projects. Sponsorship fees for the nine months endedSeptember  30,  2006 were $305,000 compared to $0 the ninemonths ended September  30,2005.

Expenses

Operating expenses for thenine months ended September  30,  2006 were $2,539,000compared to $2,969,000 for the nine months ended September30,  2005, a decrease of ($430,000). The decrease in expenses isprimarily attributed to decreased amortization of film costs($520,000), a decrease in studio rent expenses of ($43,000) and anincrease in selling, general and administrative expenses of $133,000.Film and amortization costs for the nine months ended September30,  2006 were $4,000 compared to $524,000 for the nine monthsended September  30,  2005. The decrease in filmamortization is directly related to decreased revenues on films eitherTAG or consolidated limited partnerships previously financed andproduced. Studio rent expenses for the nine months endedSeptember  30,  2006 were $0 compared to $43,000 for thenine months ended September  30,  2005. The decrease instudio rent expense was the result of the Company not pursing studiorental activities in 2006 and our termination of this lease during thefiscal year ended 2005. The increase in selling, general andadministrative expenses is primarily attributed to an increase in othercorporate office expenses of $63,000 and an increase in bad debtexpense of $934,000 for certain distributors. This bad debt expense wasthe result of less than expected sales and collections from variousdistributors. One of these distributors, with whom the company had along relationship, was sold and as a result sales and collections fromthis particular distributor were much less than historical performance.Secondly, two other major distributors communicated to us actual salesat a rate lower than had originally been expected for two films, withthe company electing to establish a reserve for certain accountsreceivable due from these distributors. Finally, the company alsoelected to write off two small projects in development totaling$43,000.

These increases were offset by a decrease in staffingcosts of ($205,000) related to our cost cutting endeavors, a decreasein legal expenses of ($251,000) related to the Company becoming public,a decrease in accounting/auditing fees of ($93,000), a decrease inconsulting expense of ($136,000), a decrease in marketing and investorrelations cost of ($102,000) related to our cost cutting measures, adecrease in travel and entertainment expense of ($79,000), and adecrease in rent expense of ($89,000) as a result of a new lessexpensive office facility. Interest expense was $872,000 for the ninemonths ended September  30,  2006 compared to $1,275,000for the nine months ended September  30,  2005, a decreaseof ($403,000), and included amortization of the convertible preferredstock discount associated with related warrants and interest on ourconvertible preferred stock.. This decrease was primarily attributableto the recording of deferred interest payable on the Satellitefinancing transaction in May of 2005.

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Financial Condition, Liquidity, andCapital Resources

As of September  30,  2006,we had $55,000 in cash and cash equivalents and we have an additionalneed for cash to fund our working capital requirements and businessmodel objectives. Since inception, we have financed our operationsprimarily through the sale of equity securities and issuance of debtinstruments.

In March  2005, we completed a secured debtfinancing transaction, which provided us with cash of $1,000,000. Wehave used the funds for the production and distribution of films,including acquisition of additional product and/or distribution assetsand for general working capital. We also granted the investor warrantsto purchase a total of 500,000 shares of our common stock, exercisableat $1.00 per share, subject to adjustment upon certain events,including as a result of our sale of equity securities at a price belowthe exercise price. The warrants are exercisable at any time on orbefore March  30,  2010.

On May  4,2005, we consummated a subsequent financing transaction with theholders of the secured notes, pursuant to which the secured notes wererepaid in full and we fulfilled our obligations under the SecurityAgreement and Guaranty we entered in connection with our secured notefinancing. In this financing transaction, we completed a privateplacement of shares of TAG’s Series A Convertible PreferredStock, par value $.001 per share, and warrants to purchase shares ofTAG’s common stock. The placement was made pursuant to aSecurities Purchase Agreement, dated May  3,  2005 and thegross proceeds of this transaction were $5,000,000. We repaid out ofthe gross proceeds the secured note we issued to the investor in thebridge financing completed March  30,  2005. After paymentof the note and offering expenses in the amount of approximately$370,000, we received net proceeds of approximately $3,480,000 fromthis financing. We have used the net proceeds for the production,acquisition and distribution of feature films and general workingcapital.

In this financing, we issued 5,000 shares of Series APreferred 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. Due to the declinein the market price of our common stock, the conversion rate of theshares of Series A Preferred Stock was adjusted to $1.00 and suchshares are presently convertible into an aggregate of 5,000,000 sharesof common stock. Each share of Preferred Stock, which has a statedvalue of $1,000 per share, earns cumulative dividends at a rate of6% per annum and matures three years from the date of issuance.The dividend and liquidation rights of the Preferred Stock are seniorto those of its common stock. The Preferred Stock does not carry votingrights.

Net cash from operating activities for the nine monthperiod ending September  30,  2006 was a positive $378,000which primarily resulted from collections on accounts receivablebalances as well as non-cash charges of $934,000 for bad debt expense,$647,000 for amortization of debt discounts and offset by increases inliabilities and deferred revenue.

Net cash used in investingactivities for nine months ended September  30,  2006 was anegative ($381,000) compared to $2,751,000 in the prior period. In thenine months ended September  30,  2006, we purchased apartnership interest in a movie project(‘‘Deal’’) and also made an advance to thissame project in the amount of $342,000 and purchased computer equipmentin the amount of $4,000 and this was offset by a $165,000 collection onthe note receivable due from Supercross. In the nine months endedSeptember  30,  2005, we loaned $250,000 to MyriadPictures, Inc., in connection with a proposed acquisition. 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. As of the datehereof, we have not received repayment of this loan nor have we beenprovided with a detailed accounting of Myriad’s expenses relatedto the failed acquisition.

Net cash provided by financingactivities for the nine months ended September  30,  2006was $0 compared to $4,443,000 for the nine months endedSeptember  30,  2005, which primarily consisted of proceedsfrom debt and preferred stock financings offset by financingcosts.

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In 2005, we invested $260,000 in a limitedliability company created to produce a film with the working title ofPool Hall Prophets. In March  2005, the limited liabilitycompany agreed to pay us a special distribution equal to our initialcapital contribution plus 10% for a total of $286,000. As ofSeptember  30,  2006, the limited liability company paid anamount of $260,000 on our behalf into a new film production entityestablished for the production of a new film(‘‘Deal’’). We expect the balance of$26,000 to be paid on the next distribution. We retain a minorityinterest in the company and may receive further disbursements fromoperating cash in the future subject to the limited liabilitycompany’s prior obligations and the results of itsoperations.

Our subsidiary, TAG USA, entered into production anddistribution agreements with Wild Stallion Productions LP, anunaffiliated third party that holds the rights to the motion pictureWild Stallion. These arrangements provide TAG USA with therights 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 provided us with a forbearancefrom enforcing his rights under the debt obligation until furthernotice.

We have received a collection notice in the amount ofapproximately $369,000 from Mr.  R.  Michael Webb on behalfof Webb Development Pension Trust on August  11,  2006. Thecollection notice seeks repayment of the loan made by the creditor toSupercross the Movie, LLC, which loan was guaranteed by TAGEntertainment, Inc. as well as the personal assets of Steve Austin. Theloan was initially made in July  2004. We are currentlynegotiating a resolution of this matter with this creditor. However, noassurances can be given that we will be able to reach a mutuallyacceptable arrangement to resolve this matter.

AtSeptember  30,  2006 our receivables included $1.2million to be collected from an international film distributor forsub-distribution rights on the film Supercross, which film wascompleted and delivered during 2005. In addition, we issued a note forproduction funding provided to the investor partnership that owns theunderlying rights to this film. The note receivable balance was$1.0million at September  30,  2006. The receivablerepresents a minimum guarantee under a distribution contract with us tobe collected 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. Based upon the Company’sevaluation of updated projections of receivables from theabove-referenced international distributor, the Company elected toestablish a reserve of $391,000 against the receivable from theinternational distributor and a reserve of $396,000 against the notefor the period ending September  30,  2006. During the ninemonths ended September  30,  2006 the Company also advancedin the form of a note receivable at total of $342,000 for the movie‘‘Deal’’ which is due on December31,  2006.

We will continue to evaluate our intangibleassets, including goodwill, acquired product rights, and otherintangible assets, whenever events or circumstances occur whichindicate that these assets might be impaired. We have acquired limitedpartnership interests in five limited partnerships from the holders ofsuch interests in consideration for shares of our common stock. We haveissued an aggregate of 800,000 shares of our common stock in suchtransactions and acquired limited partnership interests valued at$938,000. 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.

InMarch  2006, we entered into separate production agreements withtwo entities pursuant to which we will seek to produce new motionpictures. Our agreement with UFO Productions, LLC 

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provides for the parties to co-produce sixnew motion pictures for the Sci-Fi Network. Pursuant to this agreement,we issued warrants to purchase 100,000 shares of our common stock toUFO Productions which are exercisable at $1.00 per share for a periodof seven years, valued at $42,000. We also agreed to share the feesderived from projects that are successfully produced pursuant to thisagreement with UFO Productions. Pursuant to our agreement with RelevantEntertainment Group, we will utilize their services to assist us inidentifying, packaging and producing new motion picture and televisionprojects. In consideration for the services of Relevant, we issued them100,000 shares of common stock and warrants to purchase an additional250,000 shares of common stock. The warrants are exercisable at $0.75per share for a period of five years and vest as follows: warrants topurchase 125,000 shares vested on the date of issuance and the balancevests in equal installments over a period of twelve months commencingin March  2006. We agreed to pay to Relevant a percent of thefees we receive from projects that are successfully produced pursuantto this agreement.

As described below in Item 1 of Part II ofthis Quarterly Report under the caption ‘‘LegalProceedings,’’ and in our Annual Report on Form 10-KSBfor the year ended December  31,  2005, 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.

Cash Requirements andNeed for Additional Funds

As of September  30,2006 our cash balance was approximately $55,000 and we have animmediate additional need for cash to fund our working capitalrequirements and business model objectives. With the completion of the$5  million preferred stock financing in 2005, we received netproceeds of approximately $3.5  million after retirement of the$1  million bridge loan and payment of closing costs. We usedthese proceeds to fund our near term working capital requirements andbusiness model objectives. In connection with the execution of ourbusiness strategy and related expansion plans, we intend to eitherundertake private placements of our securities, either as aself-offering or with the assistance of registered broker-dealers, ornegotiate a private sale of its securities to one or more institutionalinvestors. However, we currently have no firm agreements with anythird-parties for such transactions and no assurances can be given thatwe will be successful in raising sufficient capital from any of theseproposed financings. Further, we cannot assure you that any additionalfinancing will be available or, even if it is available that it will beon terms acceptable to us. Any inability to obtain required financingon sufficiently 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 in Note 4 to the financial statements included inthis Quarterly Report on Form 10-QSB, we do not have any arrangementsor relationships with entities that are not consolidated into ourfinancial statements that are reasonably likely to materially affectour liquidity or the availability of our capitalresources.

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Item3.    Controls and Procedures.

Disclosure Controls

As of the end of the period covered bythis report, we carried out an evaluation, under the supervision andwith the participation of our management, including the chief executiveofficer (who also currently serves as our chief financial officer), ofthe effectiveness of our disclosure controls and procedures as definedin Exchange Act Rule 13a-15(e). The evaluation included certaininternal control areas in which we have made and are continuing to makechanges to improve and enhance controls, as described in greater detailbelow. In designing and evaluating the disclosure controls andprocedures, management recognized that any controls and procedures, nomatter how well designed and operated, can provide only reasonableassurance of achieving the desired control objectives, and managementis required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

Based on thatevaluation, our chief executive officer and chief financial officerconcluded that our disclosure controls and procedures were effective asof the end of the period covered by this report to provide reasonableassurance that information we are required to disclose in reports thatwe file or submit under the Securities Exchange Act of 1934, asamended, is accurately recorded, processed, summarized and reportedwithin the time periods specified in Securities and Exchange Commissionrules and forms, and that such information is accumulated andcommunicated to our management, including our chief executive officerand chief financial officer, as appropriate, to allow timely decisionsregarding required disclosure.

Internal Controls

Duringthe period ended September 30, 2006, two consultants that wereproviding internal accounting and financial services for us ended theirengagement with us. In addition, two of our independent directorsresigned from their service on our board of directors during the ninemonths ended September 30, 2006, including the person that we haddesignated as our Audit Committee Financial Expert. Due to thesechanges, we intend to retain new accounting personnel and are seekingto fill the vacancies created by the board resignations. Inherent withchanges in accounting personnel is a change in the internal controlenvironment over our financial reporting and these changes, along withthe resignation of our board members may materially affect, or arereasonably likely to materially affect, our internal control overfinancial reporting.

There were no other changes in our systemof internal control over financial reporting (as defined in Rule13a-15(f) under the Securities Exchange Act of 1934) during our fiscalquarter ended September 30, 2006 that has materially affected, or isreasonably likely to materially affect, our internal control overfinancial reporting. 

We do not expect that disclosurecontrols or internal controls over financial reporting will prevent allerrors or all instances of fraud. A control system, no matter how welldesigned and operated, can provide only reasonable, not absolute,assurance that the control system’s objectives will be met.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.

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Part II

Item 1.    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 described below and asdisclosed in our Annual Report on Form 10-KSB for the year endedDecember  31,  2005 and as described in Note 6 to thefinancial statements included with this Quarterly Report on Form10-QSB.

Certain limited partners in the entity Funny Money theMovie, L.P. and Supercross, LP have demanded that these limitedpartnerships agree to rescind their purchase of limited partnershipinterests. In addition, these limited partners have claimed that TAG,due to its contractual relationship with the limited partnerships, hasresponsibility for the actions of the limited partnership. We havedenied any responsibility for the actions taken in the name of thelimited partnership and believe we would have meritorious defenses toany claim asserted against us. Although a lawsuit was filed by theselimited partners against the limited partnerships and TAG, a settlementagreement was entered into among the claimants, the limitedpartnerships, the general partners and us. Pursuant to this agreement,the respondents agreed to repurchase the limited partnership interestsheld by the claimants. Although we are a party to the settlementagreement, the limited partnerships and/or their general partners aremaking the agreed-upon payments to the claimants. Upon fullsatisfaction of these obligations, the claimants will dismiss thepending litigation and provide the respondents with a generalrelease.

We have received a collection notice in the amount ofapproximately $369,000 from Mr.  R.  Michael Webb on behalfof Webb Development Pension Trust on August  11,  2006. Thecollection notice seeks repayment of the loan made by the creditor toSupercross the Movie, LLC, which loan was guaranteed by TAGEntertainment, Inc. as well as the personal assets of Steve Austin. Theloan was initially made in July  2004. We are currentlynegotiating a resolution of this matter with this creditor. However, noassurances can be given that we will be able to reach a mutuallyacceptable arrangement to resolve this matter.

The Company is therespondent in a proceeding commenced in California state court underthe caption Barrus et al. v. Steven Austin, et al. Plaintiff isthe holder of an aggregate of 50,000 shares of common stock of TAGEntertainment USA, Inc. and has elected to its exercisedissenters’ rights under the California Corporations Code. TheCompany had been negotiating with the claimant to resolve this matterand during the quarter ended September 30, 2006, the Company settledthis matter with the claimant and paid $50,000 to the claimant inconnection with the resolution of the dispute.

We are involved invarious claims and other legal proceedings that arise from time to timein the ordinary course of business, including claims asserted by guildsand unions representing creative talent. Based on the facts of which weare currently aware, management does not believe that any of thesematters will have a material adverse effect on our financial positionor results of operations. Litigation is inherently unpredictable andexcessive verdicts do occur. Although we believe we have valid defensesin these matters, we may incur judgments or enter into settlements ofclaims that could have a material adverse effect on our financialposition or results of operations in any particular period. Noassurances can be given that management’s assessment of theseclaims 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 some or all ofthese claims could potentially have a material adverse effect on ourfinancial condition. Further, the occurrence of intervening events mayalso result in management reconsidering their assessment of the impactof these matters.

We and TAG USA have been involved in variousclaims made or threatened against certain limited partnerships.Although these claims concern the actions of the specific limitedpartnerships, we have been involved in these proceedings due to theinterests arising out of our production and distribution activities onbehalf of these limited partnerships and, in certain situations, wherean affiliate of our Chief Executive Officer serves as general partnerof the limited partnership entity. In certain situations, thesearrangements have led to limited partners asserting claims against andseeking redress from us. Regardless of the ultimate liability to any ofthese claimants, these disputes may 

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impose financial and administrativechallenges that may require the application of our resources and thetime and attention of our management. Further, based on our productionrelationship with certain limited partnerships, cash resources wereused to satisfy obligations of the limited partnerships and although weexpect reimbursement from the limited partnerships, this cannot beassured. These situations have negatively impacted our cash positionand distracted management from focusing on our business. With respectto claims, adverse decisions or settlements may occur in one or more ofthese matters and it is not possible to estimate the possible loss orlosses, if any. Based on the facts of which we are currently aware,management believes that the resolution of these claims will not have amaterially adverse effect on our condition. However, no assurances canbe given that such belief 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.

Item 2.    Unregistered Sales ofEquity Securities and Use of Proceeds

Disclosure of issuances ofunregistered equity securities during the nine months endedSeptember  30,  2006 is contained in Note 6 and Note 7 tothe financial statements included with this Form 10-QSB.

Item3.    Defaults Upon Senior Securities

We are obligated topay dividends to the holders of our shares of Series A Preferred Stockat the rate of 6% per annum on January  1, April  1,July  1 and October  1 of each calendar year. The Companywas not able to pay Preferred Stock holders the accrued dividends dueon October  1,  2006. Further, as described in our priorQuarterly Reports on Form 10-QSB, we have not maintained theeffectiveness of our registration statement on Form SB-2, which wasfiled in compliance with the registration rights agreement that weentered into with the holders of our Series A Preferred Stock of ourSeries A Preferred Stock. Accordingly, the holders of our Series APreferred Stock may require us to pay as liquidated damages an amountequal to $75,000 for each 30 day period during which we are not incompliance with our obligations. Further, the Certificate ofDesignations of Series A Preferred Stock provides that a default underthe transaction agreements, including the Registration RightsAgreement, gives the holders the right to demand the redemption of theoutstanding shares of Series A Preferred Stock at a price equal to101% of the stated value for each share redeemed. Due to theseevents, the holders of our Series A Preferred Stock may exercise suchright as to all 5,000 shares of Series A Preferred Stockissued.

The Company is in discussions with the holders of thePreferred Stock regarding these matters and is seeking waivers orforbearance agreements from the holders. If we are unable to obtainsuch concessions, the holders may demand we pay the amounts specifiedunder the Certificate of Designations of Series A Preferred Stock andthe liquidated damages payments under the Registration RightsAgreement. Although we have not received any demand for payment fromthe holders of our Series A Preferred Stock, no assurances can be giventhat we will be successful in obtaining any waiver or forbearance fromthe holders or that the holders will not demand payment at anytime.

Item 4.    Submission of Matters to a Vote of SecurityHolders

None.

Item 5.    Other Information

OnDecember 13, 2006, the Company entered into a Deal Memo with GT Media,Inc., describing the parameters of a contemplated transaction pursuantto which the Company would enter into two definitive agreements with GTMedia pursuant to which the Company would license certain exploitationrights to its film library to GT Media; however, the Deal Memo providesthat that it is binding with respect to its subject matter until suchtime as the contemplated definitive agreements 

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are executed. The contemplated agreementsare a Catalog License Agreement and a First Look Label Agreement. Noassurances can be given, however, that the Company will in fact executethe definitive agreements comtemplated by the Deal Memo.

Item6.    Exhibits

The exhibits designated with an asterisk (*)are filedherewith.

|               |  |  |                                                                                                                                                                                               |
|---------------|--|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |  |  | DescriptionofDocument                                                                                                                                                                         |
| 31.1*         |  |  | Certificationof Chief 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*         |  |  | Certificationof Chief Executive Officer and Chief Financial Officer pursuant to 18U.S.C. Section 1350, adopted pursuant to Section 906 of theSarbanes-Oxley Act of2002.                       |
|               |

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SIGNATURES

Inaccordance with Section 13 or 15(d) of the Exchange Act, TAGEntertainment Corp. has caused this Report to be signed on its behalfby the undersigned, thereunto dulyauthorized.

|                          |  |  |                        |  |  |                                                                                                                                                                                                                                                                |
|--------------------------|--|--|------------------------|--|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Date:December  21,  2006 |  |  | TAG ENTERTAINMENTCORP. |
|                     |  |  | By:                    |  |  | /s/SteveAustin                                         |
|                     |  |  |                   |  |  | SteveAustin President and Chief Executive Officer,Chief FinancialOfficer                                                                                                                                                                                       |
|                          |

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