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UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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Form 10-QSB

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|   | QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF1934 |

For the quarterly period endedMarch 31, 2006

or

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|   | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES AND EXCHANGE ACT OF 1934 |

For the transition periodfrom                to                .

Commission File No. 333-96257

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TAG Entertainment Corp.

(Exact name of Small Business Issuer asspecified in its charter)

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| Delaware                                                     |  | 13-3851304                          |
| (State orother jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.) |
| 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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Indicate by check mark whether theregistrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the preceding12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes     No

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act). Yes     No

APPLICABLE ONLY TO CORPORATEISSUERS

State the number of shares outstanding of each of theissuer’s classes of common equity, as of the latest practicabledate: The registrant had 21,414,948 shares of common stock, $0.001 parvalue, issued and outstanding as of May  15,  2006.

Transitional Small Business Disclosure Format (Check one): Yes     No

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TABLE OFCONTENTS

|                                     |  |                                                                |  |        |    |        |  |  |  |  |
|-------------------------------------|--|----------------------------------------------------------------|--|--------|----|--------|--|--|--|--|
| PARTI – FINANCIAL INFORMATION |
| Item1.                              |  | ConsolidatedCondensed Financial Statements                     |  |   | 4  |   |
| Item 2.                             |  | Management’s Discussion andAnalysis or Plan of Operation |  |   | 16 |   |
| Item 3.                             |  | Controls and Procedures                                        |  |   | 25 |   |
| PARTII – OTHER INFORMATION    |
| Item1.                              |  | Legal Proceedings                                              |  |   | 26 |   |
| Item 2.                        |  | Unregistered Sales of EquitySecurities and Use of Proceeds     |  |   | 28 |   |
| Item 3.                             |  | Defaults Upon Senior Securities                                |  |   | 28 |   |
| Item 4.                             |  | Submission ofMatters to a Vote of Security Holders             |  |   | 29 |   |
| Item 5.                             |  | Other Information                                              |  |   | 29 |   |
| Item 6.                             |  | Exhibits                                                       |  |   | 29 |   |
|                                     |

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FORWARD LOOKING STATEMENTS

This report Form 10-QSB for TAG Entertainment Corp. (the‘‘Company’’ or ‘‘TAG’’)contains ‘‘forward-looking statements’’ withinthe meaning 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, andsimilar 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:

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|  | •  | the Company’s inabilityto generate revenues sufficient to sustain operations or to raisecapital as and when required; |

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

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|  | •  | The Company’s inabilityto effectively compete with other entertainment providers; |

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|  | •  | The Company’s inabilityto protect its intellectual property from infringement by others; |

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

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

In evaluating forward-looking statements, readers should considerthe factors identified above as well as those risks outlined in thesection of this report titled ‘‘Management’sDiscussion and Analysis or Plan of Operation’’. Although webelieve that expectations reflected in the forward-looking statementsare reasonable, future results, levels of activity, or achievements arenot assured.

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Part I

Item 1.    Financial Statements

TAG ENTERTAINMENTCORP.

CONSOLIDATED CONDENSED BALANCE SHEETS

|                                                                                                        |  |               |            |                 |  |        |            |         |  |  |
|--------------------------------------------------------------------------------------------------------|--|---------------|------------|-----------------|--|--------|------------|---------|--|--|
|                                                                                                   |  | March 31,2006 |            | December31,2005 |
|                                                                                                   |  | (unaudited)   |            |            |
| ASSETS                                                                                                 |  |          |       |            |  |   |       |    |
| Currentassets                                                                                          |  |          |       |            |  |   |       |    |
| Cash                                                                                                   |  | $             | 431,000    |            |  | $      | 58,000     |    |
| Accountsreceivable, net                                                                                |  |          | 2,796,000  |            |  |   | 3,468,000  |    |
| Notes receivable                                                                                       |  |          | 1,382,000  |            |  |   | 1,205,000  |    |
| Other current assets                                                                                   |  |          | 347,000    |            |  |   | 220,000    |    |
| Total current assets                                                                                   |  |          | 4,956,000  |            |  |   | 4,951,000  |    |
| Capitalized film costs, net                                                                            |  |          | 1,435,000  |            |  |   | 1,503,000  |    |
| Investments in limited partnerships                                                                    |  |          | 913,000    |            |  |   | 688,000    |    |
| Equipment,net                                                                                          |  |          | 26,000     |            |  |   | 78,000     |    |
| Otherassets                                                                                            |  |          | 132,000    |            |  |   | 165,000    |    |
|                                                                                                   |  | $             | 7,462,000  |            |  | $      | 7,385,000  |    |
| LIABILITIESAND STOCKHOLDERS’EQUITY                                                               |  |          |       |            |  |   |       |    |
| Currentliabilities                                                                                     |  |          |       |            |  |   |       |    |
| Accounts payable andaccrued expenses                                                                   |  | $             | 1,066,000  |            |  | $      | 1,388,000  |    |
| Amounts payable to affiliated partnerships, net                                                        |  |          | 1,522,000  |            |  |   | 1,509,000  |    |
| Notespayable                                                                                           |  |          | 75,000     |            |  |   | 75,000     |    |
| Notespayable, related party                                                                            |  |          | 100,000    |            |  |   | 100,000    |    |
| Deferred production funding                                                                            |  |          | 138,000    |            |  |   | 138,000    |    |
| Accrued residuals                                                                                      |  |          | 70,000     |            |  |   | 67,000     |    |
| Accruedsalaries                                                                                        |  |          | 435,000    |            |  |   | 415,000    |    |
| Accrued payroll taxes                                                                                  |  |          | —    |            |  |   | 15,000     |    |
| Total current liabilities                                                                              |  |          | 3,406,000  |            |  |   | 3,707,000  |    |
| 6% Series A convertible preferredstock                                                                 |  |          |       |            |  |   |       |    |
| $.001 par value:500,000 shares authorized; 5,000 sharesoutstanding;                                    |  |          |       |            |  |   |       |    |
| mandatorily redeemable,$5,000,000 redemption value; net of unamortized discount                        |  |          | 1,528,000  |            |  |   | 1,111,000  |    |
| Commitments and contingencies                                                                          |  |          |       |            |  |   |       |    |
| Minority interest                                                                                      |  |          | 2,057,000  |            |  |   | 2,057,000  |    |
| Stockholders’ equity                                                                             |  |          |       |            |  |   |       |    |
| Common stock, $.001 par value:50,000,000 shares authorized;21,414,948 and 21,189,948 sharesoutstanding |  |          | 21,000     |            |  |   | 21,000     |    |
| Additional paid-in capital                                                                             |  |          | 9,375,000  |            |  |   | 9,072,000  |    |
| Accumulated (deficit)                                                                                  |  |          | (8,925,000 | )          |  |   | (8,583,000 | )  |
| Total stockholders’ equity                                                                       |  |          | 471,000    |            |  |   | 510,000    |    |
|                                                                                                   |  | $             | 7,462,000  |            |  | $      | 7,385,000  |    |
|                                                                                                        |

See accompanying notes toconsolidated financial statements.

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TAG ENTERTAINMENT CORP.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS(unaudited)

|                                     |  |                              |            |         |  |        |            |         |  |  |
|-------------------------------------|--|------------------------------|------------|---------|--|--------|------------|---------|--|--|
|                                |  | Three months ended March 31, |
|                                |  | 2006                         |            | 2005    |
| Revenue                             |  |                         |       |    |  |   |       |    |
| Filmrevenue                         |  | $                            | 181,000    |    |  | $      | 231,000    |    |
| Production fees                     |  |                         | 267,000    |    |  |   | —    |    |
| Distribution fees                   |  |                         | 29,000     |    |  |   | —    |    |
| Managementfees                      |  |                         | 69,000     |    |  |   | 90,000     |    |
| Overheadfees                        |  |                         | 110,000    |    |  |   | 60,000     |    |
| Sponsorship fees                    |  |                         | 135,000    |    |  |   | —    |    |
| Total revenue                       |  |                         | 791,000    |    |  |   | 381,000    |    |
| Operatingexpenses                   |  |                         |       |    |  |   |       |    |
| Amortization of filmcosts           |  |                         | 68,000     |    |  |   | 144,000    |    |
| Studiorent and other expenses       |  |                         | —    |    |  |   | 33,000     |    |
| Selling, general and administrative |  |                         | 574,000    |    |  |   | 670,000    |    |
| Total operating expenses            |  |                         | 642,000    |    |  |   | 847,000    |    |
| Income (loss) from operations       |  |                         | 149,000    |    |  |   | (466,000   | )  |
| Interest expense                    |  |                         | (290,000   | )  |  |   | —    |    |
| Interest andother income            |  |                         | —    |    |  |   | 4,000      |    |
| Net (loss) before minorityinterest  |  |                         | (141,000   | )  |  |   | (462,000   | )  |
| Minority interest                   |  |                         | —    |    |  |   | (1,000     | )  |
| Net (loss)                          |  | $                            | (141,000   | )  |  | $      | (463,000   | )  |
| Net (loss) pershare                 |  |                         |       |    |  |   |       |    |
| Basic and Diluted                   |  | $                            | (0.007     | )  |  | $      | (.022      | )  |
| Weighted averageshares              |  |                         |       |    |  |   |       |    |
| Basic and Diluted                   |  |                         | 21,415,000 |    |  |   | 21,062,000 |    |
|                                     |

See accompanying notes toconsolidated financial statements

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TAG ENTERTAINMENT CORP.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWSFOR THE THREEMONTHS ENDED MARCH 31 (unaudited)

|                                                                                           |  |        |          |         |  |        |           |         |  |  |
|-------------------------------------------------------------------------------------------|--|--------|----------|---------|--|--------|-----------|---------|--|--|
|                                                                                      |  | 2006   |          | 2005    |
| Cash flows from (to) operatingactivities                                                  |  |   |     |    |  |   |      |    |
| Net (loss) beforeminority interest                                                        |  | $      | (141,000 | )  |  | $      | (462,000  | )  |
| Adjustments to reconcile net (loss) to netcash provided by (used in) operatingactivities: |  |   |     |    |  |   |      |    |
| Amortization of filmcosts                                                                 |  |   | 68,000   |    |  |   | 144,000   |    |
| Depreciation                                                                              |  |   | 7,000    |    |  |   | 13,000    |    |
| Stock and warrant issued for consulting services                                          |  |   | 57,000   |    |  |   | —   |    |
| Amortization ofdiscount on debt financings                                                |  |   | 215,000  |    |  |   | —   |    |
| Amortization of deferredfinancing costs                                                   |  |   | 27,000   |    |  |   | —   |    |
| Changes in operating assets andliabilities:                                               |  |   |     |    |  |   |      |    |
| Accountsreceivable                                                                        |  |   | 672,000  |    |  |   | 224,000   |    |
| Investments in films                                                                      |  |   | —  |    |  |   | (46,000   | )  |
| Bank overdrafts                                                                           |  |   | —  |    |  |   | 116,000   |    |
| Accountspayable                                                                           |  |   | (322,000 | )  |  |   | (207,000  | )  |
| Amounts payable to affiliated partnerships                                                |  |   | 13,000   |    |  |   | (10,000   | )  |
| Deferredrevenue                                                                           |  |   | —  |    |  |   | (81,000   | )  |
| Accrued salaries                                                                          |  |   | 20,000   |    |  |   | 20,000    |    |
| Other                                                                                     |  |   | 38,000   |    |  |   | (36,000   | )  |
| Net cash provided by (used in) operating activities                                       |  |   | 654,000  |    |  |   | (325,000  | )  |
| Cash flows from (to) investingactivities                                                  |  |   |     |    |  |   |      |    |
| Issuance of notesreceivable                                                               |  |   | (342,000 | )  |  |   | (250,000  | )  |
| Collections on notes receivable                                                           |  |   | 165,000  |    |  |   | —   |    |
| Investment in filmpartnerships                                                            |  |   | (100,000 | )  |  |   | —   |    |
| Purchases of equipment                                                                    |  |   | (4,000   | )  |  |   | (12,000   | )  |
| Net cash (used in) investment activities                                                  |  |   | (281,000 | )  |  |   | (262,000  | )  |
| Cash flows from (to) financingactivities                                                  |  |   |     |    |  |   |      |    |
| Proceeds fromissuance of notes payable                                                    |  |   | —  |    |  |   | 1,025,000 |    |
| Payments on notes payable                                                                 |  |   | —  |    |  |   | (36,000   | )  |
| Proceeds fromrelated party                                                                |  |   | —  |    |  |   | 85,000    |    |
| Payments to related party                                                                 |  |   | —  |    |  |   | (7,000    | )  |
| Proceeds from private placementofferings of common stock                                  |  |   | —  |    |  |   | 60,000    |    |
| Minority interest capital returned                                                        |  |   | —  |    |  |   | (17,000   | )  |
| Proceeds for filmproduction                                                               |  |   | —  |    |  |   | 53,000    |    |
| Net cash provided by financingactivities                                                  |  |   | —  |    |  |   | 1,163,000 |    |
| Net increase in cash                                                                      |  |   | 373,000  |    |  |   | 576,000   |    |
| Cash at beginning of period                                                               |  |   | 58,000   |    |  |   | 23,000    |    |
| Cashat end of period                                                                      |  | $      | 431,000  |    |  | $      | 599,000   |    |
| Supplemental disclosure ofcash flow information:                                          |  |   |     |    |  |   |      |    |
| Interest andoriginal issue discount paid                                                  |  | $      | 73,973   |    |  | $      | 2,000     |    |
|                                                                                           |

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TAG ENTERTAINMENTCORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(UNAUDITED)

NOTE 1 – SUMMARY OF SIGNIFICANTACCOUNTING POLICIES

Accounting Principles and Use ofEstimates

The accompanying consolidated condensed financialstatements for the three month periods ended March  31,  2006and 2005 have been prepared in accordance with accounting principlesgenerally accepted in the United States(‘‘GAAP’’) and with the instructions to Form10-QSB and Item 310 of Regulation S-B. These financial statements havenot been audited by independent public accountants, but include alladjustments (consisting of normal recurring adjustments), which are, inthe opinion of management, necessary for a fair presentation of thefinancial condition, results of operations, and cash flows for suchperiods. However, these results are not necessarily indicative ofresults for any other interim period or for the full year. Theaccompanying consolidated condensed balance sheet as of December31,  2005 has been derived from the audited financial statements,but does not include all disclosures required by GAAP.

Certaininformation and footnote disclosures normally included in financialstatements prepared in accordance with GAAP have been omitted pursuantto guidelines of the Securities 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

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

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

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

OnMarch  30,  2005, the Company entered into a letter of intentto acquire 100% of the outstanding common stock of MyriadPictures, Inc. As of February  23,  2006, the Companynotified Myriad that it was terminating negotiations and the letter ofintent, effective immediately. Pursuant to its terms, the Myriad Loan(less certain expenses) was repayable by March  30,  2006 andthe Company has not received repayment as of the date hereof.

Inorder to satisfy future cash requirements, management is activelypursuing and has entered into discussions regarding additionalfinancing to support expansion plans and ongoing operations. TheCompany currently has no firm agreements with any third parties for anyfuture transactions and future financings.

Principles ofConsolidation

The accompanying consolidated financialstatements of the Company include the accounts of TAG, TAG USA and ofthe Limited Partnerships, which the Company is the sole generalpartner. The General Partner has the full and exclusive control of themanagement and operation of the business of each partnership. TheCompany in its capacity as General Partner participates in 1% ofthe losses of the limited partnerships but shares in 60% of anyprofits. All significant inter-company balances and transactions havebeen eliminated in consolidation.

Minority Interests

TAG consolidates the Limited Partnerships for which it is the solegeneral partner. The amount of minority interest represents theaggregate net limited partnership capital of each partnership offset by99% of accumulated 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 is recognizedon the ‘‘street date’’ when it is available forsale by the customer. Revenues from televisions licensing arerecognized when the feature film or television program is available tothe licensee for telecast. Revenues from sales to internationalterritories are recognized when the feature film or television programis available to the distributor for exploitation and no conditions fordelivery exist.

Production fees are earned on films where theCompany has been engaged as producer by limited partnerships formed tofinance the movie. In certain cases, such fees are fixed in amount andare earned and billed during the production process. In other cases,the Company earns a fee based on the revenues of the film and thereforerecognizes its fee when revenues are determined and reported by thedistributors of the film.

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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 theterms stipulated in the agreement.

Cash payments received whichmay include minimum guarantees are recorded as deferred revenue untilall conditions 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 cash equivalents.

Capitalized Film Costs

Capitalized film costs consist ofinvestments in films, which include the unamortized costs of completedfilms which have been produced by the Company or for which the Companyhas acquired distribution rights or film libraries.

For filmsproduced by the Company, capitalized costs include all directproduction and financing costs, and production overhead. For acquiredfilms, these capitalized costs consist of minimum guarantee payments toacquire the distribution rights.

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

Ultimate revenue includes estimates over a period not to exceed tenyears following the date of initial release. For titles included inacquired libraries, ultimate revenue includes estimates over a periodnot to exceed ten years following the date of acquisition.

Capitalized film costs are stated at the lower of amortized cost orestimated fair value on an individual film basis. The valuation ofinvestment in films is reviewed on a title-by-title basis, when anevent or changes in circumstances indicated that the fair value of afilm is less than its unamortized cost. The fair value of the film isdetermined using management’s future revenue and cost estimates.Additional amortization is recorded in the amount by which theunamortized costs exceed the estimated fair value of the film.Estimates of future revenue involve measurement uncertainty and it istherefore possible that reductions in the carrying value of investmentin films may be required as a consequence of changes inmanagement’s future revenue estimates.

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

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

Equipment

Equipment is carriedat cost and is depreciated on the straight-line basis over theirestimated useful lives of three to eight years. Repairs and maintenanceare expensed as incurred. 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 $7,000 and $13,000 at March  31,2006 and 2005, respectively.

Impairment of Long-LivedAssets

Statement of Financial Accounting Standards No. 144,‘‘Accounting for the Impairment or Disposal of Long-LivedAssets’’ (‘‘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’’ approachto determine the cash flow estimation period for a group ofassets and liabilities that represents the unit of accounting for along-lived asset to be held and used. The Company has noimpairment issues to disclose.

Stock-Based Compensation

Prior to the January 1, 2006 adoption of Statement ofFinancial Accounting Standards (‘‘SFAS’’)No. 123R, ‘‘Share-Based Payment,’’ theCompany accounted for stock-based compensation using the intrinsicvalue method prescribed in Accounting Principles Board (APB) OpinionNo. 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 whichcompensation expense is recognized in the Consolidated Statement ofOperations for the fair value of employee stock-based compensation. TheCompany has elected the modified-prospective transition method aspermitted by SFAS No. 123R and accordingly, prior periods havenot been restated to reflect the effect of SFAS No. 123R. Themodified-prospective transition method requires that stock-basedcompensation expense recognized in the first quarter of fiscal 2006include (1) quarterly amortization of all stock-based paymentsgranted prior to, but not vested as of January 1, 2006, based onthe grant 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 March  31,  2006, theCompany’s receivables included $1.3  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 March 31, 2006 Thereceivable from distributor represents a minimum guarantee under adistribution contract with the Company to be collected from receipts invarious foreign markets. The note receivable, which originally maturedduring the fourth quarter of 2005 was extended until the fourth quarterof 2006. The amount due bears interest at 12% per annum and willbe collected from the partnership after payment of distribution andproduction fees and expenses related to the film. While estimates ofgross receipts, including video and DVD sales, support the statedvalues of these amounts, the collection of these balances is subject toinherent risks associated with the worldwide performance of the filmand general conditions in the various foreign markets.

IncomeTaxes

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

Earnings per Common Share

TheCompany computes earnings per common share in accordance with Statementof Financial Accounting Standards No. 128, ‘‘Earnings perShare’’ (SFAS No. 128). The Statement requires dualpresentation of basic and diluted EPS on the face of the incomestatement for all entities with complex capital structures and requiresa reconciliation of the numerator and denominator of the basic EPScomputation to the numerator and denominator of the diluted EPScomputation. Basic EPS is computed by dividing income or loss availableto common shareholders by the weighted average number of common sharesoutstanding. The computation of diluted EPS is similar to the basic EPScomputation except the denominator is increased to include the numberof additional shares that would have been outstanding if the dilutivepotential common shares had been issued. In addition, the numerator isadjusted for any changes in income or loss that would result from theassumed conversions of those potential shares. However, suchpresentation is not required if the effect is anti-dilutive. Thediluted EPS amounts for the quarters ended March  31,  2006and 2005 do not reflect the impact of common share equivalents arisingfrom warrants and options totaling 7,713,000 and 5,567,000 atMarch  31,  2006 and 2005, respectively, as the effects wouldbe anti-dilutive in those periods.

Recently Issued AccountingPronouncements

In May  2005, the FASB issued SFAS No. 154,‘‘Accounting Changes and Error Corrections.’’This statement applies to all voluntary changes in accounting principleand requires retrospective application to prior periods' financialstatements of changes in accounting principle, unless this would

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be impracticable. This statement also makes adistinction 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 not hada material effect on the consolidated financial position or results ofoperations of the Company through the date of this filing.

InFebruary  2006, FASB issued SFAS No. 155, ‘‘Accountingfor Certain Hybrid Financial Instruments’’. SFAS No. 155amends SFAS No 133, ‘‘Accounting for Derivative Instrumentsand Hedging Activities’’, 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 financial instrumentthat contains an embedded derivative that otherwise would requirebifurcation, clarifies which interest-only strips and principal-onlystrips are not subject to the requirements of SFAS No. 133, establishesa requirement to evaluate interest in securitized financial assets toidentify interests that are freestanding derivatives or that are hybridfinancial instruments that contain an embedded derivative requiringbifurcation, clarifies that concentrations of credit risk in the formof subordination are not embedded derivatives, and amends SFAS No. 140to eliminate the prohibition on the qualifying special-purpose entityfrom holding a derivative financial instrument that pertains to abeneficial interest other than another derivative financial instrument.This statement is effective for all financial instruments acquired orissued after the beginning of the Company’s first fiscal yearthat begins after September  15,  2006. SFAS No. 155 is notexpected to have a material effect on the consolidated financialposition or results of operations of the Company.

In June2005, the EITF reached consensus on Issue No. 05-6, Determining theAmortization Period for Leasehold Improvements (‘‘EITF05-6.’’) EITF 05-6 provides guidance on determining theamortization period for leasehold improvements acquired in a businesscombination or acquired subsequent to lease inception. The guidance inEITF 05-6 will be applied prospectively and is effective for periodsbeginning after June  29,  2005. EITF 05-6 is not expected tohave a material effect on its consolidated financial position orresults of operations.

NOTE 2 – CAPITALIZED FILMCOSTS

Capitalized film costs for theatrical and non-theatricalfilms at March  31,  2006:

|                               |  |           |           |                         |  |          |            |         |  |        |           |        |  |  |
|-------------------------------|--|-----------|-----------|-------------------------|--|----------|------------|---------|--|--------|-----------|--------|--|--|
|                          |  | Grosscost |           | Accumulatedamortization |  | Net cost |
| Produced and released films   |  | $         | 6,351,000 |                    |  | $        | (5,495,000 | )  |  | $      | 856,000   |   |
| Acquired filmsand film rights |  |      | 393,000   |                    |  |     | (347,000   | )  |  |   | 46,000    |   |
| Films in progress             |  |      | 261,000   |                    |  |     | —    |    |  |   | 261,000   |   |
| Films underdevelopment        |  |      | 272,000   |                    |  |     | —    |    |  |   | 272,000   |   |
| Total                         |  | $         | 7,277,000 |                    |  | $        | (5,842,000 | )  |  | $      | 1,435,000 |   |
|                               |

NOTE 3 – INVESTMENT INLIMITED PARTNERSHIPS

TAG has purchased interests in variousaffiliated unconsolidated partnerships by issuing TAG common stock(except for Deal The Movie LP which was purchased for cash) for thepartnership shares ranging in value at $1 to $2 per share of TAG commonstock (accounted for at cost) as follows:

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|                                       |  |         |        |         |  |        |         |        |  |  |
|---------------------------------------|--|---------|--------|---------|--|--------|---------|--------|--|--|
| LimitedPartnerships                   |  | % Owned |        | Cost    |
| Family Film Partners VII, LP          |  |    | 5.94   | %  |  | $      | 200,000 |   |
| Animal Partners,LP                    |  |    | 14.21  | %  |  |   | 425,000 |   |
| FairyTale Partners III, LP            |  |    | 2.82   | %  |  |   | 150,000 |   |
| Family Film Partners, LP              |  |    | 0.05   | %  |  |   | 13,000  |   |
| Motocross Kids                        |  |    | 0.42   | %  |  |   | 25,000  |   |
| Deal The Movie LP(acquired with cash) |  |    |   |    |  |   | 100,000 |   |
|                                  |  |    |   |    |  | $      | 913,000 |   |
|                                       |

NOTE4 – FINANCING ACTIVITIES 

On March30,  2005, the Company entered into a Securities PurchaseAgreement with Satellite Strategic Finance Associates, LLC and anaffiliated 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 privateplacement to accredited investors under Regulation D of the SecuritiesAct of 1933, as amended. The Company received gross proceeds of$1,000,000, which were intended for the film production and generalworking capital requirements. The aggregate principal amount of theNotes was $1,150,000 with a 15% yield funded as originalissuance discount. The Company also entered into a Registration RightsAgreement and a Security Agreement with the investors and itssubsidiary, TAG Entertainment USA, Inc. co-signed the SecurityAgreement and agreed to guaranty its obligations pursuant to thefinancing agreements. Pursuant to the Security Agreement, the Companygranted the investors a first priority lien on all of its assets, otherthan certain previously issued liens, in order to secure itsobligations. The Notes were to mature on March  30,  2006 andare sooner payable in full in the event the Company consummates asubsequent financing event, with certain exceptions, or upon theoccurrence of an event of default. The warrants are exercisable at$1.00 per share, subject to adjustment upon certain events, includingas a result of its sale of equity securities at a price below theexercise price. The warrants are exercisable at any time on or beforeMarch  30,  2010. In connection with the issuance of theNotes and the related warrants, the Company allocated the net proceedsbetween the instruments based on the relative fair value of thewarrants and the Notes. The fair value of the warrants was determinedusing the Black-Scholes pricing model and the following assumptions:contractual terms of five years, an average risk free interest rate of2.5%, a dividend yield of 0%, and a volatility of95.3%. Accordingly, the Company recorded an increase inadditional paid-in capital and note payable discount of $638,000 inconnection with the issuance of the Notes and warrants.

OnMay  4,  2005 the Company consummated a subsequent financingtransaction with the holders of these notes, pursuant to which thesesecured notes were repaid in full and the Company fulfilled itsobligations under the Security Agreement and Guaranty. In thisfinancing transaction, the Company completed a private placement ofshares of its 6% Series A Redeemable Convertible Preferred Stock(‘‘Preferred Stock’’), par value $.001 pershare, and warrants to purchase shares of TAG’s common stock.The placement was made pursuant to a Securities Purchase Agreement,dated May  3,  2005 and the gross proceeds of thistransaction were $5,000,000, which matures on May  3,  2008.The Company repaid out of the gross proceeds the secured notes theCompany issued to the investors in the bridge financing completedMarch  30,  2005. After payment of the notes and financingexpenses in the amount of approximately $370,000, the Company receivednet proceeds of approximately $3,480,000 from this financing. TheCompany has used the net proceeds for the production, acquisition anddistribution of feature films and general working capital. Financingexpenses are being amortized over the three year maturity period of thePreferred Stock.

In this financing, the Company issued 5,000shares of Preferred Stock, convertible at the option of the holder intoan initial aggregate amount of 2,000,000 shares of common stock, parvalue $.001 per share, at an initial conversion price of $2.50 pershare, and warrants to purchase an initial aggregate amount of2,000,000 shares of common stock at an initial exercise price of $2.50per share, which are immediately exercisable and expire in seven years.However, the decline in the market price of our common stock hasresulted in an adjustment of the conversion price to the floor amountof $1.00. 

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Accordingly, the holders of the outstandingshares of Series A Preferred Stock are able to convert these sharesinto an aggregate of 5,000,000 shares of our common stock

Inconnection with the issuance of the Preferred Stock and the relatedwarrants, the Company allocated the net proceeds between theinstruments based on the relative fair value of the warrants and thePreferred Stock before valuation of the beneficial conversion feature.The fair value of the warrants was determined using the Black-Scholespricing model and the following assumptions: contractual terms of sevenyears, an average risk free interest rate of 2.5%, a dividendyield of 0%, and a volatility of 115%. Accordingly, theCompany recorded an increase in additional paid-in capital and adiscount against the Preferred Stock of $2,586,000 in connection withthe issuance of the Preferred Stock and warrants. The discount relatedto the warrants is being amortized and charged to interest expense overthe three year maturity period. Amortization of $216,000 was recordedas interest expense during the quarter ended March  31,2006.

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 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.

As part of its previous financing efforts foroperations, the Company has recorded financing costs totaling $41,000for the period ending March  31,  2006. Deferred financingexpenses totaled $340,000 at March  31,  2006 and areincluded with other current assets ($206,000) and other assets($134,000).

NOTE 5 – COMMITMENTS AND CONTINGENCIES

Litigation

On September  21,  2005a complaint entitled Grobstein, Horwath & Co., LLP(‘‘Grobstein’’) vs. TAG Entertainment Corp., etal. was filed in the Superior Court of The State of California,County of Los Angeles, Northwest Division. The plaintiff, theCompany’s former auditing firm, alleges that the Company owesthe sum of approximately $152,000 arising out of an agreement relatedto Grobstein’s resignation as the Company’s auditingfirm. The parties stipulated to a settlement of this claim wherebydefendants have agreed to pay Grobstein the sum of $110,000 in sixequal installments commencing March  1,  2006.

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 we intend todefend this action vigorously. Management is unable to determine atthis time whether this claim will have a material adverse impact on ourfinancial condition, results of operations or cash flow.

TheCompany and its Chief Executive Officer are involved in a dispute withMr.  Jeff  Franklin and F.W.E., Inc. regarding the productionof two motion pictures and business dealings between the 

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Company’s Chief Executive Officer, andMr.  Franklin.  The disputes concern the production anddistribution relationship regarding the films Funny Money andAmerican Black Beauty. In each case, Mr.  Franklin hasalleged that the Company has not properly performed its obligations inconnection with the production of these motion pictures. The Companyhas disputed the allegations of Mr.  Franklin, has notified him ofits potential claims against him and F.W.E. and has been engaged inprotracted negotiations with him and F.W.E. in order to achieve aglobal settlement of the disagreements between the parties. Messrs.Franklin and Austin continue to negotiate and discuss their respectivepositions and the Company is currently unable to determine at this timewhether this claim will have a material adverse impact on its financialcondition, results of operations or cash flow.

The Company isinvolved in various claims and other legal proceedings that arise fromtime to time in the ordinary course of business. The Company does notbelieve any of them will have a material adverse affect on theCompany’s financial position or results of operations.Litigation is inherently unpredictable and excessive verdicts do occur.Although the Company believes it has valid defenses in these matters,the Company could in the future incur judgments or enter intosettlements of claims that could have a material adverse affect on theCompany’s financial position or results of operations in anyparticular period.

Consulting Agreements

In March  2006, the company entered into a consulting agreementwith Relevant Entertainment Group to assist us in identifying,packaging and producing new motion picture and television projects. Inconsideration for the services of Relevant, the company issued 100,000shares of common stock valued at $78,000 and warrants to purchase anadditional 250,000 shares of common stock valued at $100,000. Thewarrants are exercisable at $0.75 per share for a period of five yearsand vest as follows: warrants to purchase 125,000 shares vested on thedate of issuance and the balance vests in equal installments over aperiod of twelve months commencing in April  2006. The Companyagreed to pay Relevant a percent of the fees received from projectsthat are successfully produced pursuant to this agreement.

Thefair value of the warrants was determined using the Black-Scholespricing model and the following assumptions: contractual terms of fiveyears, an average risk free interest rate of 4.5%, a dividendyield of 0%, and a volatility of 151.26%.

NOTE 6– STOCKHOLDERS’ EQUITY

In January  2005 theCompany commenced a private placement offering under Rule 506,promulgated under the Securities Act of 1933. This offering wasterminated during the quarter ended June  30,  2005. A totalof $88,000 was raised in connection with the issuance of 29,408shares.

During the quarter ending March  31,  2006,the Company issued 125,000 shares of common stock valued at $125,000 topurchase a partnership interest. Also, in this same period, the companyissued 100,000 shares of common stock valued at $78,000 to a firm whowill provide various consulting services including identifying andpackaging certain film projects. The Company also issued 250,000warrants to this same consulting firm. One half of the warrants vestedin March  2006 and the balance vests monthly over a period of oneyear beginning in April  2006.

In addition, the companyissued warrants to purchase 100,000 shares of common stock valued at$42,000 to a service provider in connection with a co-productionarrangement it entered into with them. These warrants are exercisableat $1.00 per share for a period of seven years and will be amortizedover the term of the agreement. 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 4.5%, a dividend yield of 0%, and avolatility of 151.26%.

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

Overview

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

Nature of Operations

TAG EntertainmentCorp. is a Delaware corporation headquartered in Santa Monica,California. We are engaged in the development, production anddistribution of motion pictures and the management of studiofacilities. We also acquire the copyrights and/or distribution rightsto already completed films for media exhibition. In order to financefilm production, we have raised funds through the establishment ofsingle purpose limited partnerships and through the sale of equity ordebt securities. 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 USA isalso 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.

Our revenues are derived from motion picture production anddistribution fees, which includes theatrical, home entertainment,television and international distribution. Theatrical revenues arederived from the domestic theatrical release of motion pictures inNorth America. Home entertainment revenues are derived from the sale ofvideo and DVD releases of our own productions and acquired films,including theatrical releases and direct-to-video releases. Televisionrevenues are primarily derived from the licensing of our productionsand acquired films to the domestic cable, free and pay televisionmarkets. International revenues are derived from the licensing of ourproductions and acquired films to international markets on aterritory-by-territory basis.

Our primary operating 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 owners of approximately90% of our outstanding shares of common stock. In connectionwith the merger, Power Marketing changed its corporate name to TAGEntertainment Corp., obtained the new trading symbol TAGE.OB and all ofthe officers and directors of Power Marketing resigned and Mr.Austin, who was the majority shareholder, Chief Executive Officer andsole director of TAG USA became our Chief Executive Officer, ChiefFinancial Officer and sole director. We appointed five additionaldirectors to our board during 2005; however, as of March20,  2006, two of our independent directors resigned. Thetransaction was treated as a reverse merger and a recapitalization ofthe 

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company for reporting purposes. The holdersof approximately 1,122,000 shares of common stock of TAG USA that didnot consent in writing to our acquisition of TAG USA were entitled toexercise appraisal rights under the California Corporations Code. Asdescribed in greater detail in our Annual Report on Form 10-KSB for theyear ended December  31,  2005, we are the respondent in aproceeding commenced by the holder of an aggregate of 50,000 shares ofcommon stock of TAG USA that has elected to its exercisedissenters’ rights under the California Corporations Code. Wecontinue to negotiate with the claimant to resolve this matter.

Going Concern and Management Plans

Our financial statementshave been presented on the basis that we are a going concern, whichcontemplates the realization of assets and the satisfaction ofliabilities in the normal course of business. We have experiencedrecurring losses and negative cash flows from operations and have aworking capital deficit, which raises substantial doubt about ourability to continue as a going concern and our independent auditorshave included a ‘‘going concern’’ explanatoryparagraph in their report on our financial statements for the yearended December  31,  2005. We are currently devotingefforts to raising additional capital and achieving profitableoperations. Our ability to continue as a going concern is dependentupon its 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 preferred stockfinancing 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 the assetsof Myriad. As of February  23,  2006, we notified Myriadthat 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 for the years ended December  31,  2005 and 2004have been prepared in accordance with accounting principles generallyaccepted in the United States (‘‘GAAP’’). Thepreparation of the financial statements in accordance with GAAPrequires management to make estimates and assumptions that affectreported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period.Actual results could differ from those and other estimates. Inpreparing the financial statements for comparative purposes, priorperiod financial information has been reclassified to conform withclassifications of the current period.

Principles ofConsolidation

The accompanying consolidated financialstatements include the accounts of TAG, TAG USA and of the MajesticLimited Partnerships, of which TAG USA is the sole general partner. TheGeneral Partner has the full and exclusive control of the managementand operation of the business 

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of each partnership. In its capacity asGeneral Partner, TAG USA participates in 1% of the losses of thelimited partnerships but shares in 60% of any profits. Allsignificant inter-company balances and transactions have beeneliminated in consolidation.

Minority Interests

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

Revenue Recognition

Revenue from the sale or licensing offilms and television programs is recognized upon meeting allrecognition requirements of SOP 00-2. Revenue from the theatricalrelease of feature films is recognized at the time of exhibition basedon our participation in box office receipts. Revenue from the sale ofvideocassettes and digital video disks(‘‘DVDs’’) in the retail market is recognizedon the ‘‘street date’’ when it is available forsale to the customer. Revenues from televisions licensing arerecognized when the feature film or television program is available tothe licensee for telecast. Revenues from sales to internationalterritories are recognized when the feature film or television programis available to the distributor for exploitation and no conditions fordelivery exist.

Production fees are earned on films where wehave been engaged as producer by limited partnerships formed to financethe movie. In certain cases, such fees are fixed in amount and areearned and billed during the production process. In other cases, weearn a fee based on the revenues of the film and therefore recognizesour fee when revenues are determined and reported by the distributorsof the film.

On certain films, we earn management fees inconnection with our role as production manager for the limitedpartnerships where our Chief Executive Officer has assigned to TAG hismanagement fee rights during the production period.

We billoverhead fees to limited partnerships for reasonable, direct andallocable costs arising during the management of film the projects.

Rental revenue from short-term operating leases of studio facilitiesis recognized over the term of the lease.

Sponsorship income isrecognized pursuant to the terms stipulated in the agreement.

Cash payments received which may include minimum guarantees may berecorded as deferred revenue until all conditions of revenuerecognition have been met.

Cash Equivalents

Forpurposes of reporting cash flows, we consider all short-term, interestbearing deposits with original maturities of three months or less to becash equivalents.

Capitalized Film Costs

Capitalizedfilm costs consist of investments in films, which include theunamortized costs of completed films which we have produced or forwhich we have acquired distribution rights or film libraries.

For films we produced, capitalized costs include all directproduction and financing costs, and production overhead. For acquiredfilms, these capitalized costs consist of minimum guarantee payments toacquire the distribution rights.

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

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

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

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

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 initial investment.

Equipment

Equipment is carried at cost and is depreciatedon the straight-line basis over their estimated useful lives of threeto eight years. Repairs and maintenance are expensed as incurred. Whenassets are retired or otherwise disposed of, the property accounts arerelieved of costs and accumulated depreciation and any existing gain orloss is credited or charged to operations.

Stock-BasedCompensation

Prior to the January 1, 2006 adoption ofStatement of Financial Accounting Standards(‘‘SFAS’’) No. 123R,‘‘Share-Based Payment,’’ the Company accountedfor stock-based compensation using the intrinsic value methodprescribed in Accounting Principles Board (APB) Opinion No. 25,‘‘Accounting for Stock Issued to Employees,’’and related interpretations. Accordingly, under APB OpinionNo. 25, no compensation expense was recognized because theexercise price of the Company’s employee stock options was equalto the market price of the underlying stock on the date of grant. TheCompany applied the disclosure provisions of SFAS No. 123,‘‘Accounting for Stock Based Compensation,’’ asamended by SFAS No. 148, ‘‘Accounting for StockBased Compensation – Transition and Disclosure,’’ asif the fair value method had been applied in measuring compensationexpense.

Effective January 1, 2006, the Company adoptedthe fair value recognition provisions of SFASNo.  123R, under which compensation expense is recognizedin the Consolidated Statement of Operations for the fair value ofemployee 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.

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Valuation of the Our Common Stock

Unless otherwise disclosed, all stock-based transactions enteredinto by us have been valued at the market value of our common stock onthe date the 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 such accounts.

We extend credit based on an evaluation of the customer’sfinancial condition, generally without collateral. Exposure to losseson receivables is principally dependent on each customer’sfinancial condition. We monitor our exposure for credit losses andmaintain allowances for anticipated losses, as required. Wesub-distribute titles in both the domestic and international markets.We are typically paid an advance or minimum guarantee for these rights.Any overages (revenue in excess of the minimum guarantee) are reportedto us 45 to 90 days after the reporting period. Because of the minimumguarantees and the details of our distribution relationships, ouroutstanding balances may extend to greater than 90 days.

AtMarch  31,  2006, our receivables included $1.3million to be collected from an international film distributor forsub-distribution rights on a film completed and delivered during 2005.In addition, we issued a note for production funding provided to theinvestor partnership that owns the underlying rights to this film. Thenote receivable balance was $1.0  million at March31,  2006. The receivable from distributor represents a minimumguarantee under a distribution contract with us to be collected fromreceipts in various foreign markets. The note receivable, whichoriginally matured during the fourth quarter of 2005, was extendeduntil the fourth quarter of 2006. The amount due bears interest at12% per annum and will be collected from the partnership afterpayment of distribution and production fees and expenses related to thefilm. While estimates of gross receipts, including video and DVD sales,support the stated values of these amounts, the collection of thesebalances is subject to inherent risks associated with the worldwideperformance of the film and general conditions in the various foreignmarkets.

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 perCommon Share

We compute earnings per common share in accordancewith 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 

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numerator is adjusted for any changes inincome or loss that would result from the assumed conversions of thosepotential shares. However, such presentation is not required if theeffect is anti-dilutive. The diluted EPS amounts for the three monthsended March  31,  2006 and the three months endedMarch  31,  2005, do not reflect the impact of common shareequivalents arising from warrants and options totaling 7,713,000 and5,567,000 at March  31,  2006 and 2005, respectively, asthe effects would be anti-dilutive in those periods.

Results of Operations: Three Months Ended March31,  2006 compared to March  31,  2005

Revenue

Gross revenues for the three monthsended March  31,  2006 and 2005 were $791,000 and $381,000,respectively, an increase of $410,000 or 108%. The increase inrevenues was principally attributable to the increase in production andfees arising from film projects where TAG was engaged to manage filmingand related production activities on behalf of certain investorpartnerships. Production, management and overhead fees for the threemonths ended March  31,  2006 increased by $296,000 from$150,000 during the three months ended March  31,  2005 to$446,000 for the three months ended March  31,  2006. Thisincrease was due to increased production and administrative supportactivity during the quarter on film projects. Distribution fees for thethree months ended March  31,  2006 increased by $29,000from $0 during the three months ended March  31,  2005 to$29,000 for the three months ended March  31,  2006.

In addition, sponsorship revenues increased as a result ofarrangements made by the Company with corporate sponsors on two filmprojects. Sponsorship fees for the three months ended March31,  2006 were $135,000 compared to $0 at March  31,2005.

Expenses

Operating expenses for thethree months ended March  31,  2006 were $642,000 comparedto $847,000 for the three months ended March  31,  2005, adecrease of $205,000. The decrease in expenses is primarily attributedto decreased amortization of film costs ($76,000), studio rent expenses($33,000) and selling, general and administrative expenses ($96,000).Film and amortization costs for the three months ended March31,  2006 were $68,000 compared to $144,000 for the three monthsended March  31,  2005. The decrease in film amortizationis directly related to decreased revenues on films either TAG orconsolidated limited partnerships previously financed and produced.Studio rent expenses for the three months ended March  31,2006 were $0 compared to $33,000 for the three months endedMarch  31,  2005. The decrease in studio rent expense wasthe result of the Company not pursing studio rental activities in 2006and our termination of this lease during the fiscal year ended 2005.Selling, general and administrative expenses for the three months endedMarch  31,  2006 were $574,000 compared to $670,000 for thethree months ended March  31,  2005. The decrease inselling, general and administrative expenses is primarily attributed toa decrease in legal expenses of $137,000 related to the Companybecoming public, decrease in accounting/auditing fess of $64,000 offsetby increases of $41,000 in consulting expense, loss on asset disposalof $49,000 and increase of $11,000 for payroll taxes.

Interestexpense was $290,000 for the three months ended March  31,2006 and included amortization of the convertible preferred stockdiscount associated with related warrants and interest on ourconvertible preferred stock. There was no interest expense in the priorperiod.

Financial Condition, Liquidity, and CapitalResources

As of March  31,  2006, we had$431,000 in cash and cash equivalents and we have an additional needfor cash to fund our working capital requirements and business modelobjectives. Since inception, we have financed our operations primarilythrough 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 

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granted the investor warrants to purchase atotal of 500,000 shares of our common stock, exercisable at $1.00 pershare, subject to adjustment upon certain events, including as a resultof our sale of equity securities at a price below the exercise price.The warrants are exercisable at any time on or before March30,  2010.

On May  4,  2005, we consummated asubsequent financing transaction with the holders of the secured notes,pursuant to which the secured notes were repaid in full and wefulfilled our obligations under the Security Agreement and Guaranty weentered in connection with our secured note financing. In thisfinancing transaction, we completed a private placement of shares ofTAG’s Series A Convertible Preferred Stock, par value $.001 pershare, and warrants to purchase shares of TAG’s common stock.The placement was made pursuant to a Securities Purchase Agreement,dated May  3,  2005 and the gross proceeds of thistransaction were $5,000,000. We repaid out of the gross proceeds thesecured note we issued to the investor in the bridge financingcompleted March  30,  2005. After payment of the note andoffering expenses in the amount of approximately $370,000, we receivednet proceeds of approximately $3,480,000 from this financing. We haveused the net proceeds for the production, acquisition and distributionof feature films and general working capital.

In this financing,we issued 5,000 shares of Series A Preferred Stock, convertible at theoption of the holder into an initial aggregate amount of 2,000,000shares of common stock, par value $.001 per share, at an initialconversion price of $2.50 per share, and warrants to purchase aninitial aggregate amount of 2,000,000 shares of common stock at aninitial exercise price of $2.50 per share, which are immediatelyexercisable and expire in seven years. Due to the decline in the marketprice of our common stock, the conversion rate of the shares of SeriesA Preferred Stock was adjusted to $1.00 and such shares are presentlyconvertible into an aggregate of 5,000,000 shares of common stock. Eachshare of Preferred Stock, which has a stated value of $1,000 per share,earns cumulative dividends at a rate of 6% per annum and maturesthree years from the date of issuance. The dividend and liquidationrights of the Preferred Stock are senior to those of its common stock.The Preferred Stock does not carry voting rights.

Net cash fromoperating activities for the three month period ending March31,  2006 was a positive $654,000 which primarily resulted fromcollections on accounts receivable balances.

Net cash used ininvesting activities for three month period ending March31,  2006 was $281,000 compared to $262,000 in the prior period.In the three month period ending March  31,  2006, wepurchased a partnership 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 three month periodending March  31,  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. We have notyet received repayment of this loan and were advised by Myirad that anaccounting of their expenses related to the failed acquisition will beprovided by May  31,  2006.

Net cash provided byfinancing activities for the three months ended March  31,2006 was $0 compared to $1,163,000 for the three months endedMarch  31,  2005, which primarily consisted of proceedsfrom debt financings offset by financing costs.

In 2005, weinvested $260,000 in a limited liability company created to produce afilm with the working title of Pool Hall Prophets. InMarch  2005, the limited liability company agreed to pay us aspecial distribution equal to our initial capital contribution plus10% for a total of $286,000. As of March  31,  2006,the limited liability company paid an amount of $260,000 on our behalfinto a new film production entity established for the production of anew 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 

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Stallion. These arrangements provide TAGUSA with the rights to produce and distribute the motion picture. InJuly  2005, TAG USA agreed to guarantee a loan in the amount of$250,000 made by an individual lender to Wild Stallion Productions inorder to induce the lender to make this loan. The loan proceeds havebeen used by Wild Stallion for the production of the motion picture.This loan, which bears interest at the rate of 10% per annum,was due on August  15,  2005 and has not been repaid by thelimited partnership. The lender, however, has provided us with aforbearance from enforcing his rights under the debt obligation untilfurther notice.

At March  31,  2006 our receivablesincluded $1.3  million to be collected from an international filmdistributor for sub-distribution rights on the film Supercross,which film was completed and delivered during 2005. In addition, weissued a note for production funding provided to the investorpartnership that owns the underlying rights to this film. The notereceivable balance was $1.1  million at December31,  2005. The receivable represents a minimum guarantee under adistribution contract with us to be collected from receipts in variousforeign markets. The note receivable, which originally matured duringthe fourth quarter of 2005 was extended until the fourth quarter of2006. The amount due bears interest at 12% per annum and will becollected from the partnership after payment of distribution andproduction fees and expenses related to the film.

We willcontinue to evaluate our intangible assets, including goodwill,acquired product rights, and other intangible assets, whenever eventsor circumstances occur which indicate that these assets might beimpaired. We have acquired limited partnership interests in fivelimited partnerships from the holders of such interests inconsideration for shares of our common stock. We have issued 925,000shares of our common stock in such transactions and acquired limitedpartnership interests valued at $938,000. We will recognize animpairment charge based on the amounts of these investments if wedetermine, in accordance with generally accepted accounting principles,that the carrying value of these assets exceeds the undiscounted futurecash flows expected from such assets as well as upon the eventualdisposition of such assets. If an asset is considered to be impaired,the impairment to be recognized is measured by the amount by which thecarrying amount of the asset exceeds the fair value of the asset. Wereview these assets on a quarterly basis to determine whether animpairment charge is appropriate.

In March  2006, weentered into separate production agreements with two entities pursuantto which we will seek to produce new motion pictures. Our agreementwith UFO Productions, LLC 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-KSB forthe year ended December  31,  2005, we are party to variousother claims, including claims made or threatened against certainlimited partnerships. As described therein, although we believe we havevalid defenses in these matters, we may incur judgments or enter intosettlements of claims that could have a material adverse effect on ourfinancial position or results of operations in any particular period.No assurances 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. Regardless of the ultimate liability to 

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any of these claimants, these disputes mayimpose financial and administrative challenges that may require theapplication of our resources and the time and attention of ourmanagement.

Cash Requirements and Need for AdditionalFunds

As of March  31,  2006 our cash balancewas approximately $431,000 and we have an additional need for cash tofund our working capital requirements and business model objectives.With the completion of the $5  million preferred stock financingin 2005, we received net proceeds of approximately $3.5  millionafter retirement of the $1  million bridge loan and payment ofclosing costs. We used these proceeds to fund our near term workingcapital requirements and business model objectives. In connection withthe execution of our business strategy and related expansion plans, weintend to either undertake private placements of our securities, eitheras a self-offering or with the assistance of registered broker-dealers,or negotiate a private sale of its securities to one or moreinstitutional investors. However, we currently have no firm agreementswith any third-parties for such transactions and no assurances can begiven that we will be successful in raising sufficient capital from anyof these proposed financings. Further, we cannot assure you that anyadditional financing will be available or, even if it is available thatit will be on terms acceptable to us. Any inability to obtain requiredfinancing on sufficiently favorable terms could have a material adverseeffect on our business, results of operations and financial condition.If we are unsuccessful in raising additional capital and increasingrevenues from operations, we will need to reduce costs and operationssubstantially. Further, if expenditures required to achieve our plansare greater than projected or if revenues are less than, or aregenerated more slowly than projected, we will need to raise a greateramount of funds than currently expected.

Off-Balance SheetArrangements

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

Wehave incurred debt to unconsolidated partnerships in the aggregateamount of $1,522,000 as of March  31,  2006, which werequired during the course of managing our operations and facilitatingthe activities of the partnerships. In addition, cash transfers wererequired between affiliated partnerships to meet cash flow needs andother obligations. Cash transfers were made between and among us andboth consolidated and unconsolidated partnerships.

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The receivable and payable balances amongaffiliated entities on March  31,  2006 and the amounts due(to) or from affiliated partnerships are as follows:

|                                 |  |        |            |         |  |  |
|---------------------------------|--|--------|------------|---------|--|--|
| Santa Trap, LLC                 |  | $      | (36,000    | )  |
| AnimalPartners, LP              |  |   | (622,000   | )  |
| Family FilmPartners VII, LP     |  |   | 113,000    |    |
| Cinderella,LP                   |  |   | 154,000    |    |
| Fairy Tale Partners III,LP      |  |   | (1,355,000 | )  |
| Family Film Partners, VIII,LP   |  |   | (3,000     | )  |
| Tag Studios No. 1, LP           |  |   | 3,760,000  |    |
| Ghost Town, LP                  |  |   | (644,000   | )  |
| American Black Beauty, LP       |  |   | (134,000   | )  |
| Black Beauty, LLC               |  |   | 297,000    |    |
| Red Riding Hood, LLC            |  |   | 1,250,000  |    |
| Motocross Kids, LP              |  |   | (1,219,000 | )  |
| Funny Money the Movie, LP       |  |   | (522,000   | )  |
| Down Town the Movie, LP         |  |   | 748,000    |    |
| Supercross the Movie, LP        |  |   | (2,841,000 | )  |
| Austin Family Entertainment,LLC |  |   | (7,000     | )  |
| Steve Austin Productions,LLC    |  |   | (461,000   | )  |
| Total                           |  | $      | (1,522,000 | )  |
|                                 |

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

We have entered into various agreements by which wemay be obligated to indemnify the other party with respect to certainmatters. Generally, these indemnification provisions are included incontracts arising in the normal course of business under which wecustomarily agree to hold the indemnified party harmless against lossesarising from a breach of representations related to such matters asintellectual property rights. Payments by us under such indemnificationclauses are generally conditioned on the other party making a claim.Such claims are generally subject to challenge by us and to disputeresolution procedures specified in the particular contract. Further,our obligations under these arrangements may be limited in terms oftime and/or amount and, in some instances, we may have recourse againstthird parties for certain payments made by us. It is not possible topredict the maximum potential amount of future payments under theseindemnification agreements due to the conditional nature of ourobligations and the unique facts of each particular agreement.Historically, we have not made any payments under these agreements thathave been material individually or in the aggregate. As of March31,  2006, we were not aware of any obligations under suchindemnification agreements that would require material payments.

Item 3.    Controls and Procedures.

DisclosureControls

As of the end of the period covered by this report, wecarried out an evaluation, under the supervision and with theparticipation of our management, including the chief executive officer(who also currently serves as our chief financial officer), of theeffectiveness of our disclosure controls and procedures as defined inExchange Act Rule 13a-15(e). The evaluation included certain internalcontrol areas in which we have made and are continuing to make changesto improve and enhance 

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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 year to provide reasonable assurance that informationwe are required to disclose in reports that we file or submit under theSecurities Exchange Act of 1934, as amended, is accurately recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms, and that suchinformation is accumulated and communicated to our management,including our chief executive officer and chief financial officer, asappropriate, to allow timely decisions regarding requireddisclosure.

Internal Controls

During the fiscal quarterended March  31,  2006, two consultants that were providinginternal 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 thisperiod, including the person that we had designated as our AuditCommittee Financial Expert. Due to these changes, we intend to retainnew accounting personnel and are seeking to fill the vacancies createdby the board resignations. Inherent with changes in accountingpersonnel is a change in the internal control environment over ourfinancial reporting and these changes, along with the resignation ofour board members may materially affect, or are reasonably likely tomaterially affect, our internal control over financial reporting.

There were no other changes in our system of internal control overfinancial reporting (as defined in Rule 13a-15(f) under the SecuritiesExchange Act of 1934) during our fiscal quarter ended March31,  2006 that has materially affected, or is reasonably likelyto materially affect, our internal control over financialreporting. 

We do not expect that disclosure controls orinternal controls over financial reporting will prevent all errors orall instances of fraud. A control system, no matter how well designedand operated, can provide only reasonable, not absolute, assurance thatthe control system’s objectives will be met. Further, the designof a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relativeto their costs. Because of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, within its companyhave been detected. These inherent limitations include the realitiesthat judgments in decision-making can be faulty, and that breakdownscan occur because of simple error or mistake. Controls can also becircumvented by the individual acts of some persons, by collusion oftwo or more people, or by management override of the controls. Thedesign of any system of controls is based in part upon certainassumptions about the likelihood of future events, and any design maynot succeed in achieving its stated goals under all potential futureconditions. Over time, controls may become inadequate because ofchanges in conditions or deterioration in the degree of compliance withpolicies or procedures. Because of the inherent limitation of acost-effective control system, misstatements due to error or fraud mayoccur and not be detected.

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 disclosed in our AnnualReport on Form 10-KSB for the year ended December  31,2005 and as set forth below.

On September  21,  2005a complaint entitled Grobstein, Horwath & Co., LLP(‘‘Grobstein’’) vs. TAG Entertainment Corp.,Steve Austin, et al. was filed in the Superior Court of The Stateof 

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California, County of Los Angeles, NorthwestDivision. The plaintiff, our former auditing firm, alleged that we owethe sum of approximately $152,000 arising out of an agreement relatedto Grobstein’s decision to resign as our auditing firm. Theparties stipulated to a settlement of this claim whereby defendantshave agreed to pay Grobstein the sum of $110,000 in six equalinstallments commencing March  1,  2006.

Certainlimited partners in the entity Funny Money the Movie, L.P. andSupercross, LP have demanded that these limited partnerships agree torescind their purchase of limited partnership interests. In addition,these limited partners have claimed that TAG, due to its contractualrelationship with the limited partnerships, has responsibility for theactions of the limited partnership. We have denied any responsibilityfor the actions taken in the name of the limited partnership andbelieve we would have meritorious defenses to any claim assertedagainst us. The limited partnerships have been engaged in negotiationswith these limited partners in an effort to resolve any potentialclaims these persons may allege. Although a lawsuit was filed by theselimited partners against the limited partnerships and TAG, we believethat the limited partnerships have reached an agreement in principlewith these limited partners to settle all claims. The parties arecurrently negotiating the terms and conditions of the settlementdocuments. However, no assurances can be given that the proposedsettlement agreements will ultimately be executed by all parties andlitigation against us may proceed.

On January  17,2006, a complaint was filed against TAG Entertainment, Inc. and SteveAustin by Park Avenue Entertainment, LLC claiming that we materiallybreached an agreement between the two companies to produce a motionpicture. The complaint was filed in the Superior Court of the State ofCalifornia, County of Los Angeles, Central District, with the captionPark Avenue Entertainment LLC et al. vs. TAG Entertainment, Inc.;Steve Austin et al. We have been advised that plaintiffs areseeking a default judgment against the defendants; however, thedefendants are currently contesting any such action on the grounds ofdefective service. The claimants are seeking damages in the amount of$2,135,000 based on production fees and participation rights that theyare allegedly entitled to under the production contract. We havepreviously disputed plaintiffs’ allegations and notified themthat we may assert claims against them concerning their failure toproperly perform under the agreement. We are currently preparing ouranswer to the complaint and we intend to defend this action vigorously.Management is unable to determine at this time whether this claim willhave a material adverse impact on our financial condition, results ofoperations or cash flow.

We are involved in various claims andother legal proceedings that arise from time to time in the ordinarycourse of business, including claims asserted by guilds and unionsrepresenting creative talent. Based on the facts of which we arecurrently aware, management does not believe that any of these matterswill have a material adverse effect on our financial position orresults 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 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

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although we expect reimbursement from thelimited partnerships, this cannot be assured. These situations havenegatively impacted our cash position and distracted management fromfocusing on our business. With respect to claims, adverse decisions orsettlements may occur in one or more of these matters and it is notpossible to estimate the possible loss or losses, if any. Based on thefacts of which we are currently aware, management believes that theresolution of these claims will not have a materially adverse effect onour condition. However, no assurances can be given that such beliefwill ultimately prove to be accurate or that other facts adverse to ourposition currently not known to management will not be uncovered, inwhich case the ultimate resolution of some or all of these claims couldpotentially have a material adverse effect on our financialcondition.

Item 2.    Unregistered Sales of Equity Securitiesand Use of Proceeds

During the quarter ended March31,  2006, we issued 125,000 shares of our common stock to alimited partner in a limited partnership for which an entity affiliatedwith our Chief Executive Officer serves as general partner. The shareswere issued pursuant to Section 3(a)(9) of the Securities Act of 1933,as amended, as the limited partner was previously granted the right toconvert his interests in the limited partnership into shares of ourcommon stock. The acquirer is an accredited investor and the securitieswere issued without any form of general solicitation or generaladvertising.

In March  2006, we issued 100,000 shares ofcommon stock and warrants to purchase an additional 250,000 shares to aservice provider in connection with a co-production arrangement weentered into with it. The warrants are exercisable at $0.75 per sharefor a period of five years and vest as follows: warrants to purchase125,000 shares vested on the date of issuance and the balance vests inequal installments over a period of twelve months commencing inMarch  2006. The issuance of these securities was exempt fromregistration under the Securities Act of 1933, as amended, underSection 4(2) thereof inasmuch as the securities were issued without anyform of general solicitation or general advertising and the acquirerwas provided with access to material information concerning thecompany.

In March  2006, we issued warrants to purchase100,000 shares to a service provider in connection with a co-productionarrangement we entered into with them. The warrants are exercisable at$1.00 per share for a period of seven years. The issuance of thesesecurities was exempt from registration under the Securities Act of1933, as amended, under Section 4(2) thereof inasmuch as the securitieswere issued without any form of general solicitation or generaladvertising and the acquirer was provided with access to materialinformation concerning the company.

During the quarter endedMarch  31,  2006, we did not repurchase any shares of theCompany’s common stock.

Item 3.    Defaults UponSenior Securities

In May  2005, we completed a privatesale of shares of our Series A Preferred Stock and common stockpurchase warrants. Under the terms of the registration rights agreemententered into with the investors in this transaction, we agreed to filea registration statement on Form SB-2 with the SEC within 45 days fromthe closing to register for public resale the shares of common stockwhich we may issue (i) upon conversion of the shares of Series APreferred Stock; (ii) upon exercise of the warrants; (iii) in paymentof the dividends on the preferred stock; and (iv) pursuant to theanti-dilution provisions of the Series A Preferred Stock and warrants.We also agreed to maintain the effectiveness of the registrationstatement until the earlier to occur of the date on which all of thesecurities eligible for resale pursuant to the registration statementhave been publicly sold or the date on which all of such sharesremaining to be sold under the registration statement may beimmediately sold to the public under Rule 144(k) under the SecuritiesAct. We also agreed that we would pay the holders of such securitiesliquidated damages of $75,000 for each 30 day period during which theregistration statement was not continually effective.

As theregistration statement was initially declared effective by theCommission on August  10,  2005 and we have not filed apost-effective amendment thereto for the purpose of 

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maintaining its effectiveness, the holdersmay require us to pay the liquidated damages penalties referred toabove. Further, the Certificate of Designations of Series A PreferredStock provides that a default under the transaction agreements,including the Registration Rights Agreement, gives the holders theright to demand the redemption of the outstanding shares of Series APreferred Stock at a price equal to 101% of the stated value foreach share redeemed. Due to these events, the holders of our Series APreferred Stock may exercise such right as to all 5,000 shares ofSeries A Preferred Stock issued.

We are seeking waivers orforbearance agreements from the holders of our Series A PreferredStock. If we are unable to obtain such concessions, the holders maydemand we pay the amounts specified under the Certificate ofDesignations of Series A Preferred Stock and the liquidated damagespayments under the Registration Rights Agreement. No assurances can begiven that we will be successful in obtaining any waiver or forbearancefrom the holders.

Item 4.    Submission of Matters to a Voteof Security Holders

None.

Item 5.    OtherInformation

None.

Item 6.    Exhibits

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

|               |  |                                                                                                                                                                                                |  |  |  |  |
|---------------|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNumber |  | Description of Document                                                                                                                                                                        |
| 31.1*         |  | Certification ofChief Executive Officer and Chief Financial Officer pursuant toExchange Act Rules 13a-14(a) and 15(d)-14(a), adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1*         |  | Certification of Chief Executive Officer andChief Financial Officer pursuant to 18 U.S.C. Section 1350, adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of2002.                       |
|               |

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SIGNATURES

In accordance withSection 13 or 15(d) of the Exchange Act, TAG Entertainment Corp. hascaused this Report to be signed on its behalf by the undersigned,thereunto duly authorized.

|                      |  |                        |  |                                                                         |  |  |  |  |  |  |
|----------------------|--|------------------------|--|-------------------------------------------------------------------------|--|--|--|--|--|--|
| Date: May  22,  2006 |  | TAGENTERTAINMENT CORP. |
|                 |  | By:                    |  | /s/ Steve Austin                                                        |
|                 |  |                   |  | Steve AustinPresident and Chief ExecutiveOfficer,Chief FinancialOfficer |
|                      |

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