**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

##### **FORM 10-Q**

(MarkOne)

**x****                             ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period endedDecember 31, 2005**

 

**OR**

 

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**Forthe transition period from                       to                       **

**Commission File Number:  1-07115**

**K-TELINTERNATIONAL, INC.**

(Exact name of registrant as specified in its charter)

| **Minnesota**                    | ** ** | **41-0946588**                        |
|----------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  |       |                                  |

 

| **2491 Xenium Lane North, Plymouth, Minnesota** | ** ** | **55441**  |
|-------------------------------------------------|------------|------------|
| (Address of  principal executive offices)       |       | (Zip Code) |

 

Registrant’s telephone number, including area code:  **(763)559-5566**

Securities registeredpursuant to Section 12(b) of the Act:

**None**

Securities registeredpursuant to Section 12(g) of the Act:

**Common Stock, par value $0.01**

(Title of class)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes o  No  x

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer”  in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer o | Accelerated  Filer o | Non-Accelerated Filer | x |
|---------------------------|----------------------|-----------------------|---|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes o  No  x

 

As of November 13, 2006, the registrant had 13,653,738 shares of CommonStock outstanding.

 

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**K-TELINTERNATIONAL, INC. AND SUBSIDIARIES**

**FORM 10-Q**

**FOR THE THREE AND SIX MONTH PERIODS**

**ENDED DECEMBER 31, 2005**

INDEX
| PART I.                     | Financial Information (Unaudited): | ** **                                                  |
|-----------------------------|------------------------------------|-------------------------------------------------------------|
|                        |                               | ** **                                                  |
|                        | Item 1.                            | Financial Statements                                        |   |
|                        |                               |                                                        |   |
|                        |                               | Condensed  Consolidated Balance Sheets as of                |   |
|                        |                               | December 31,  2005 and June 30, 2005                        |   |
|                        |                               |                                                        |   |
|                        |                               | Condensed  Consolidated Statements of Operations            |   |
|                        |                               | for the Three  and Six Months Ended                         |   |
|                        |                               | December 31,  2005 and 2004                                 |   |
|                        |                               |                                                        |   |
|                        |                               | Condensed  Consolidated Statements of Cash Flows            |   |
|                        |                               | for the Six  Months Ended December 31, 2005 and 2004        |   |
|                        |                               |                                                        |   |
|                        |                               | Notes to  Condensed Consolidated Financial Statements       |   |
|                        |                               |                                                        |   |
|                        | Item 2.                            | Management’s  Discussion and Analysis of Financial     |   |
|                        |                               | Condition and  Results of Operations                        |   |
|                        |                               |                                                        |   |
|                        | Item 3.                            | Quantitative  and Qualitative Disclosures About Market Risk |   |
|                        |                               |                                                        |   |
|                        | Item 4.                            | Controls and  Procedures                                    |   |
|                        |                               |                                                        |   |
| PART II. Other Information: |                               |
|                        |                               |
|                        | Item 1.                            | Legal Proceedings                                           |   |
|                        |                               |                                                        |   |
|                        | Item  6.                           | Exhibits                                                    |   |
|                        |                               |                                                        |   |
| Signatures                  |                               |                                                        |   |
|                        |                               |                                                        |   |
| Index  to Exhibits          |                               |                                                        |

 

**SAFE HARBOR STATEMENT UNDER THE**

**PRIVATESECURITIES LITIGATION REFORM ACT OF 1995**

Certainstatements of a non-historical nature under the caption “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andelsewhere in this Form 10-Q constitute “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995. Suchforward-looking statements may be identified by the use of terminology such as “may,”“will,” “expect,” “anticipate,” “estimate,” “should,” or “continue” or thenegative thereof or other variations thereon or comparable terminology. Suchforward-looking statements are subject to certain risks and uncertainties thatcould cause actual results to differ materially from historical results or fromthose results currently anticipated or projected. Such factors include, amongother things, the following: changes in consumer purchasing; demand for andmarket acceptance of new and existing products; the impact from competition forrecorded music; the outcome of legal proceedings; dependence on suppliers anddistributors; success of marketing and promotion efforts; technological changesand difficulties; availability of financing; foreign currency variations;general economic, political and business conditions; and other matters. Weundertake no obligation to release publicly the result of any revisions tothese forward-looking statements, except as required by law.

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**K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS - UNAUDITED**

*(inthousands — except share data*)
| ** **                                                                                                                       | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                       | ** ** | **2005**              | ** ** | **2005**          | ** ** |
|                                                                                                                             |       |                  |       |              |       |
| ASSETS                                                                                                                           |       |                  |       |              |       |
|                                                                                                                             |       |                  |       |              |       |
| Current assets:                                                                                                                  |       |                  |       |              |       |
| Cash and cash  equivalents                                                                                                       |       | $                     | 1,298      |              | $          | 1,272 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $4 at December 31 and  June 30                                   |       | 1,590                 |       | 2,045             |       |
| Inventories                                                                                                                      |       | 465                   |       | 563               |       |
| Royalty advances                                                                                                                 |       | 6                     |       | 6                 |       |
| Prepaid expenses  and other                                                                                                      |       | 211                   |       | 227               |       |
| Total current  assets                                                                                                            |       | 3,570                 |       | 4,113             |       |
|                                                                                                                             |       |                  |       |              |       |
| Property  and equipment, net of accumulated depreciation and amortization of $1,146 at  December 31 and $1,138 at June 30        |       | 64                    |       | 84                |       |
|                                                                                                                             |       |                  |       |              |       |
| Owned  catalog masters, net of accumulated amortization of  $3,196 at December 31 and $3,115 at June 30                     |       | 416                   |       | 498               |       |
|                                                                                                                             |       |                  |       |              |       |
|                                                                                                                             |       | $                     | 4,050      |              | $          | 4,695 |   |
|                                                                                                                             |       |                  |       |              |       |
|                                                                                                                             |       |                  |       |              |       |
| LIABILITIES AND  SHAREHOLDERS’ DEFICIT                                                                                      |       |                  |       |              |       |
|                                                                                                                             |       |                  |       |              |       |
| Current liabilities:                                                                                                             |       |                  |       |              |       |
| Notes payable to  affiliate and other                                                                                            |       | $                     | 11,690     |              | $          | 11,518 |   |
| Accounts payable                                                                                                                 |       | 1,219                 |       | 1,727             |       |
| Accrued  royalties                                                                                                               |       | 1,901                 |       | 1,760             |       |
| Reserve for  returns                                                                                                             |       | 256                   |       | 221               |       |
| Net liabilities  of discontinued operations                                                                                      |       | 30                    |       | 30                |       |
| Total current  liabilities                                                                                                       |       | 15,096                |       | 15,256            |       |
|                                                                                                                             |       |                  |       |              |       |
|                                                                                                                             |       |                  |       |              |       |
|                                                                                                                             |       |                  |       |              |       |
| Shareholders’ deficit:                                                                                                      |       |                  |       |              |       |
| Common stock —  50,000,000 shares authorized; par value $.01; 13,653,738 issued and  outstanding at December 31 and June 30 |       | 136                   |       | 136               |       |
| Additional  paid-in capital                                                                                                      |       | 21,292                |       | 21,292            |       |
| Accumulated  deficit                                                                                                             |       | (32,352               | )          | (31,923           | )          |
| Accumulated  other comprehensive loss                                                                                            |       | (122                  | )          | (66               | )          |
| Total  shareholders’ deficit                                                                                                |       | (11,046               | )          | (10,561           | )          |
|                                                                                                                             |       |                  |       |              |       |
|                                                                                                                             |       | $                     | 4,050      |              | $          | 4,695 |   |

 

The accompanyingnotes are an integral part of these financial statements.

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**K-TEL INTERNATIONAL, INC. ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED**

*(inthousands - except per share data)*
| ** **                                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                            | ** ** | **December 31,**            | ** ** | **December 31,**          | ** ** |
| ** **                                                            | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                                             |       | $                                | 1,302      |                           | $          | 1,695 |   | $ | 2,498 |   | $ | 3,531 |   |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Costs and  expenses:                                                  |       |                             |       |                           |       |   |   |   |   |
| Cost of goods sold                                                    |       | 580                              |       | 772                            |       | 1,085 |   | 1,693 |   |
| Advertising                                                           |       | 68                               |       | 40                             |       | 88 |   | 67 |   |
| Selling, general and administrative                                   |       | 588                              |       | 873                            |       | 1,331 |   | 1,790 |   |
| Total costs and expenses                                              |       | 1,236                            |       | 1,685                          |       | 2,504 |   | 3,550 |   |
| Operating income  (loss)                                              |       | 66                               |       | 10                             |       | (6 | ) | (19 | ) |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Other income  (expense):                                              |       |                             |       |                           |       |   |   |   |   |
| Interest expense                                                      |       | (212                             | )          | (157                           | )          | (399 | ) | (302 | ) |
| Other income (expense), net                                           |       | (19                              | )          | 125                            |       | (21 | ) | 147 |   |
| Total other expense                                                   |       | (231                             | )          | (32                            | )          | (420 | ) | (155 | ) |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Loss from  continuing operations                                      |       | (165                             | )          | (22                            | )          | (426 | ) | (174 | ) |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Discontinued  operations:                                             |       |                             |       |                           |       |   |   |   |   |
| Gain (loss) from discontinued operations, net of taxes                |       | —                           |       | 212                            |       | (3 | ) | 211 |   |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Net income  (loss)                                                    |       | $                                | (165       | )                              | $          | 190 |   | $ | (429 | ) | $ | 37 |   |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Income (loss)  per share — basic and diluted:                    |       |                             |       |                           |       |   |   |   |   |
| Continuing operations                                                 |       | $                                | (.01       | )                              | $          | — |   | $ | (.03 | ) | $ | (.01 | ) |
| Discontinued operations                                               |       | —                           |       | .02                            |       | — |   | .02 |   |
| Net income (loss)                                                     |       | $                                | (.01       | )                              | $          | .02 |   | $ | (.03 | ) | $ | .01 |   |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Shares used in  the calculation of loss per share - basic and diluted |       | 13,654                           |       | 13,654                         |       | 13,654 |   | 13,654 |   |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Comprehensive  income (loss):                                         |       |                             |       |                           |       |   |   |   |   |
| Net income (loss)                                                     |       | $                                | (165       | )                              | $          | 190 |   | $ | (429 | ) | $ | 37 |   |
| Translation adjustment                                                |       | (36                              | )          | 65                             |       | (56 | ) | 110 |   |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Comprehensive income  (loss)                                          |       | $                                | (201       | )                              | $          | 255 |   | $ | (485 | ) | $ | 147 |   |

 

The accompanyingnotes are an integral part of these financial statements.

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**K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES**

##### **CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS - UNAUDITED**

*(inthousands)*

 
| ** **                                                               | ** ** | **Six Months Ended  December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                                          | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                   |       |                                              |       |   |   |
| Net income  (loss)                                                       |       | $                                                 | (429       | ) | $ | 37 |   |
| Adjustments to  reconcile net loss to cash used in operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                            |       | 102                                               |       | 123 |   |
| Loss on disposal of property and equipment                               |       | —                                            |       | (11 | ) |
| Discontinued operations                                                  |       | —                                            |       | 4 |   |
| Changes in  operating assets and liabilities:                            |       |                                              |       |   |   |
| Accounts receivable, net                                                 |       | 411                                               |       | (908 | ) |
| Inventories                                                              |       | 88                                                |       | 47 |   |
| Royalty advances                                                         |       | 33                                                |       | 13 |   |
| Prepaid expenses                                                         |       | (25                                               | )          | 43 |   |
| Accounts payable                                                         |       | (481                                              | )          | 99 |   |
| Accrued royalties                                                        |       | 161                                               |       | 164 |   |
| Reserve for returns                                                      |       | 34                                                |       | 18 |   |
| Cash used in operating activities                                        |       | (106                                              | )          | (371 | ) |
|                                                                     |       |                                              |       |   |   |
| Cash flows from  Investing Activities:                                   |       |                                              |       |   |   |
| Purchases of property and equipment                                      |       | —                                            |       | (55 | ) |
| Other                                                                    |       | —                                            |       | (13 | ) |
| Cash used in investing activities                                        |       | —                                            |       | (68 | ) |
|                                                                     |       |                                              |       |   |   |
| Cash flows from  financing activities:                                   |       |                                              |       |   |   |
| Borrowings on notes payable                                              |       | 1,978                                             |       | 2,320 |   |
| Payments on notes payable                                                |       | (1,806                                            | )          | (1,958 | ) |
| Cash provided by financing activities                                    |       | 172                                               |       | 362 |   |
|                                                                     |       |                                              |       |   |   |
| Effect of  exchange rates on cash                                        |       | (40                                               | )          | 56 |   |
|                                                                     |       |                                              |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                    |       | 26                                                |       | (21 | ) |
|                                                                     |       |                                              |       |   |   |
| Cash and cash  equivalents at beginning of period                        |       | 1,272                                             |       | 147 |   |
|                                                                     |       |                                              |       |   |   |
| Cash and cash  equivalents at end of period                              |       | $                                                 | 1,298      |   | $ | 126 |   |

 

The accompanyingnotes are an integral part of these financial statements.

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**K-TEL INTERNATIONAL, INC. ANDSUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

## **1.**                                      **BUSINESS AND LIQUIDITY**

K-telInternational, Inc. (the “Company”, “K-tel” or the “registrant”) wasincorporated in 1968 and currently has its corporate offices located inPlymouth, Minnesota. Through its operating subsidiaries, K-tel licenses itsmusic catalog internationally and markets entertainment products mainly derivedfrom its catalog through retail and direct response marketing channels in theUnited States and Europe. The Company has a focused method of distribution thattargets the strengths of selected individual retailers and supplies productssuited to each retailer’s needs. These products are derived mainly from theCompany’s master recordings music catalog with the objective of realizing morecompetitive profit margins. K-tel seeks to license its name and trademarks toother companies. Licenses are granted for a royalty or fee, with no cost to theCompany.

On October 10,2005, the Company, through a wholly owned subsidiary, entered into a trademarklicense agreement with BCI Eclipse Company, LLC (“BCI”) and, effective October16, 2005, entered into a phonograph record license agreement with BCI.

DiscontinuedOperations

The Company’s consumerproducts business, which was concentrated in Europe, consisted primarily ofhousewares, consumer convenience items and exercise equipment. The Companydiscontinued its consumer products operations in Germany, the United Kingdomand the United States in June 2000, November 2000 and January 2001,respectively. Accordingly, these activities have been presented in theaccompanying financial statements as discontinued operations. The accompanyingcondensed consolidated financial statements have been prepared to reflect theconsumer products division as a discontinued operation. The net liabilities ofdiscontinued operations at December 31, 2005 and June 30, 2005, and losses fromdiscontinued operations for the three and six months ended December 31, 2005 and2004, relate primarily to legal matters and completion of statutory reportingrequirements for the former operations in Germany.

Liquidity

During the sixmonths ended December 31, 2005 and 2004, the Company incurred net losses fromcontinuing operations of $426,000 and $174,000, respectively. Operatingactivities used $106,000 and $371,000 of cash during the six months endedDecember 31, 2005 and 2004, respectively. Additionally, the Company had aworking capital deficit of $11,526,000 at December 31, 2005.

TheCompany’s ability to continue its present operations and implement futureexpansion plans successfully is contingent mainly upon its ability to maintainits line of credit arrangements with K-5 Leisure Products, Inc. (See Note 3),increase its revenues and profit margins, and ultimately attain and sustainprofitable operations. Without increased revenues and sustained profitability,the Company’s current operations will likely not generate cash sufficient tofund operations and service its indebtedness on an ongoing basis. Management isfocusing its efforts on music licensing, music downloads and limited musicdistribution. However, there can be no assurance that the Company will achieveprofitable operations through these efforts. The financial statements do notinclude any adjustments that might result from the outcome of theseuncertainties.

**2.             BASIS OF PRESENTATION AND SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

Basis ofPresentation —The accompanying condensed consolidated unaudited financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States of America (“US GAAP”) for interim financial information andwith the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby US GAAP for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring adjustments) considered necessaryfor a fair presentation have been included. Operating results for the six monthperiods ended December 31, 2005 are not necessarily indicative of the resultsthat may be expected for the year as a whole. The unaudited condensedconsolidated balance sheet for June 30, 2005 has been derived from auditedconsolidated financial 

6

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statements as ofthat date. For further information, refer to the consolidated financialstatements and footnotes thereto included in the Company’s annual report onForm 10-K for the year ended June 30, 2005.

Principles ofConsolidation - The accompanying condensed consolidatedfinancial statements include the accounts of K-tel International, Inc. and itsdomestic and foreign subsidiaries, all of which are wholly owned. Allsignificant intercompany accounts and transactions have been eliminated.

RevenueRecognition — The Company derives its revenue mainly from twosources: the sale of music compilations (predominately compact discs) producedby the Company, and license revenue from the licensing of Company-ownedmasters. Revenue from music sales is recognized at the time of shipment to thecustomer, while license revenue is recognized when payment is received fromcustomers or when known amounts are receivable, as prior to that datecollection is not considered probable. Most music sales are made with a rightof return of unsold goods. Estimated reserves for returns are established bymanagement based upon historical experience and product mix and are subject toongoing review and adjustment by the Company. These reserves are recorded atthe time of sale and are reflected as a reduction in revenue. The Company’sreserve for returns was $256,000 at December 31, 2005 and $221,000 at June 30,2005.

Cost of Goods Sold— The Company expenses all product manufacturing, distribution and royaltycosts associated with music sales as cost of goods sold. The Company alsoexpenses royalties, commissions and amortization of its owned master recordingsassociated with its license revenue as cost of goods sold.

Shipping andHandling Costs — The Company expenses within cost of goodssold all shipping and handling costs incurred in the shipment of goods.

Cash and CashEquivalents — Cash and cash equivalents consist principallyof cash and short-term, highly liquid investments with original maturities ofless than ninety days.

AccountsReceivable - Accounts receivable balances are presented netof allowances. The Company determines its allowances by considering a number offactors, including the length of time trade receivables are past due, the Company’sprevious history, and the customer’s current ability to pay obligations to theCompany. The Company writes off accounts receivables when they becomeuncollectible.

Inventories— Inventories, which consists of finished goods that include all direct productcosts, are valued at the lower of cost, determined on a first-in, first-outbasis, or net realizable value.

Owned CatalogMasters — The Company capitalizes the costs to purchase ownedmaster recordings at the time of acquisition. These costs are amortized overthe estimated useful life of these master recordings, which is generally sevenyears, and represents management’s best estimate of the average period ofvalue.

Rights to UseMusic Product - Certain of the Company’s compilation productsare master recordings under license from record companies and publishers. Inmost instances, minimum guarantees or non-refundable advances are required toobtain the licenses and are realized through future sales of the product. Theamounts paid for minimum guarantees or non-refundable advances arecapitalized and charged to expense as sales are made. The unrealized portion ofguarantees and advances is included in royalty advances in the accompanyingconsolidated balance sheets. Licenses are subject to audit by licensors. Whenanticipated sales appear to be insufficient to fully recover the minimumguarantees or non-refundable advances, a provision against currentoperations is made for anticipated losses.

Property andEquipment - Property and equipment are stated at cost.Depreciation and amortization is provided using straight line or decliningbalance methods over the estimated useful lives of the assets, which range fromthree to nine years.

Long Lived-Assets— The Company evaluates its long-lived assets quarterly, or earlier if atriggering event occurs, to determine potential impairment by comparing thecarrying value of those assets to the related undiscounted future cash flows ofthe assets. If an asset is determined to be impaired, it is written down to itsestimated fair value.

Royalties- The Company has entered into license agreements with various record companiesand publishers under which it pays royalties on units sold. The Company accruesroyalties using contractual rates and certain estimated 

7

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rates onapplicable units sold. The contractual royalty liability is computed quarterlyand the accrued royalty balance is adjusted accordingly. The royalty agreementsare subject to audit by licensors.

Advertising- The Company expenses the costs of advertising when the advertising takesplace, except for direct response advertising, which is capitalized andamortized over its expected period of future benefits (usually the periodremaining under a related contract, which is generally less than one year). Directresponse advertising consists primarily of television advertising wherebycustomers respond specifically to the advertising and where the Company canidentify the advertising that elicited the response. Advertising expenses were$88,000 and $67,000 for the six month periods ended December 31, 2005 and 2004,respectively.

Foreign Currency- The operations of foreign subsidiaries are measured in local currencies.Assets and liabilities are translated into U.S. dollars at period-end exchangerates. Revenue and expenses are translated at the average exchange ratesprevailing during the period. Adjustments resulting from translating thefinancial statements of foreign entities into U.S. dollars are recorded as acomponent of accumulated other comprehensive income or loss.

Stock-basedCompensation — The Company accounts for stock-based awards toemployees using the intrinsic value method prescribed in APB No. 25, “Accountingfor Stock Issued to Employees,” whereby the options are granted at marketprice, and therefore no compensation costs are recognized. The Company haselected to retain its current method of accounting as described above and hasadopted the SFAS Nos. 123 and 148 disclosure requirements. If compensationexpense for the Company’s various stock option plans had been determined basedupon the projected fair values at the grant dates for awards under those plansin accordance with SFAS No. 123, the Company’s pro-forma net earnings, andbasic and diluted earnings per common share would have been unchanged from asreported.

Income Taxes- Deferred income taxes are provided for temporary differences between thefinancial reporting basis and tax basis of the Company’s assets and liabilitiesat currently enacted tax rates. A valuation allowance equal to the aggregateamount of deferred tax assets is established when realization is not likely.

Net Income (Loss) Per Share - Basicand diluted net income (loss) per share have been computed by dividing netincome (loss) by the weighted average number of shares outstanding during theperiod. For all periods presented, common stock equivalents were excluded fromthe per share calculation as the net effect would be antidilutive. For the sixmonth periods ended December 31, 2005 and 2004, weighted average options to purchase2,228,939 and 2,564,839 shares of common stock, with weighted average exerciseprices of $.19 and $.36, respectively, were excluded from the computation ofcommon share equivalents for the respective periods as they were antidilutive.   For the three month periods ended December31, 2005 and 2004, weighted average options to purchase 2,228,939 and 2,564,839shares of common stock, with weighted average exercise prices of $.19 and $.36,respectively, were excluded from the computation of common share equivalentsfor the respective periods as they were antidilutive.

Use of Estimates- Preparing consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America (US GAAP)requires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting period. Principal estimates includeallowances for bad debt, inventory valuation, return reserves, royaltyobligations, purchase commitments and product replacement costs. Actual resultscould differ from those estimates used by management.

**3.             LOANS PAYABLE TO AFFILIATE**

K-tel has a Line of Credit Agreement with K-5 Leisure Products, Inc. (“K-5”),the Company’s largest shareholder and an entity controlled by Philip Kives, theChairman of the Board, President and Chief Executive Officer of K-tel. Underthe terms of the agreement (the “K-5 Facility”), K-5 has agreed to makeavailable up to $8,000,000 to K-tel on a revolving basis. The loan bearsinterest at a variable rate based upon the “base rate” of a nationallyrecognized lending institution (7.0% at December 31, 2005), expires July 20,2008, and is subordinated to the Foothill loan (see below). The K-5 Facilitycontains the same covenants as the Foothill loan agreement. K-tel has pledgedthe stock of its foreign subsidiaries as collateral for the loan, and the loancarries a subordinated position to the Foothill loan on all other assets of theCompany. K-tel had outstanding balances of $7,690,000 and $7,518,000 as ofDecember 31, 2005 and June 30, 2005, respectively, under the K-5 Facility. AtDecember 31, 2005, K-tel obtained a waiver from K-5 for its non-complianceunder the covenants, limitations and restrictions of the credit agreement.

In addition, K-telhas a second loan agreement with K-5, under which K-5 assumed rights andobligations under a loan from the Company’s former banker (Foothill CapitalCorporation) pursuant to an Assignment and Acceptance 

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Agreement datedFebruary 27, 2001. This Foothill loan, which has been extended through July 20,2008, provides for a $10,000,000 credit facility consisting of a $4,000,000term loan due upon expiration, and a $6,000,000 revolving facility under whichborrowings are limited to a percent of eligible receivables. Borrowings underthe facility bear interest at a variable rate based on a “base rate” of a nationallyrecognized lending institution plus 1% (8.0% at December 31, 2005) and arecollateralized by the assets of certain Company subsidiaries in the UnitedStates, including accounts receivable, inventories, equipment, music libraryand general intangibles. The loan agreement contains certain financial andother covenants or restrictions, including the maintenance of a minimumshareholders’ equity by K-tel, limitations on capital expenditures,restrictions on music library acquisitions, limitations on other indebtednessand restrictions on dividends paid by K-tel. As of December 31, 2005 and June30, 2005, K-tel had $4,000,000 outstanding under the term loan and there wereno borrowings under the revolving facility. At December 31, 2005, K-telobtained a waiver from K-5 for its non-compliance under the covenants,limitations and restrictions of the credit agreement.

**4.**             **COMMITMENTSAND CONTINGENCIES**

K-telInternational, Inc. vs. Tristar Products, Inc. 

On March 14, 2000,K-tel and its subsidiary in Germany commenced an action for breach of expressand implied warranties against Defendant Tristar Products, Inc. This actionarose out of Tristar’s sale to K-tel of a defective home exercise productcalled the “BunBlaster” for resale in Germany, Austria and Switzerland. Bywritten contract, Tristar had agreed to indemnify K-tel for injuries anddamages arising out of the resale of those goods.

On April 30, 2001,Tristar asserted a patent and trademark/ trade-dress counterclaim against K-telfor allegedly passing off a product called the “K-tel Hook and Hang” whileallegedly a distributor of the original patented Tristar Hook and Hang product.The Company denied the allegation because it never was a distributor of this orany similar product.

On December 30, 2004, aMutual General Release and Settlement Agreement was signed by K-tel andTristar,  whereby both Companies agreedto mutual releases and Tristar agreed to pay K-tel $350,000. The payment of$350,000 was received February 18, 2005.

#### Other Litigation and Disputes

K-tel and itssubsidiaries are also involved in other legal proceedings in the ordinarycourse of their business. With all litigation matters, management considers thelikelihood of loss based on the facts and circumstances. If managementdetermines that a loss is probable and the amount of loss can be reasonablyestimated, such amount is recorded as a liability. Although the outcome of anysuch legal proceedings cannot be predicted, in the opinion of management thereis currently no legal proceeding pending or asserted against or involving K-telfor which the outcome is likely to have a material adverse effect upon theconsolidated financial position or results of operations of K-tel.

Subsidiary’sLiquidation

TheCompany discontinued its United States subsidiary, K-tel Consumer Products,Inc., in February 2001. This closing represented the discontinuation of theCompany’s consumer products division and has been presented in the accompanyingfinancial statements as discontinued operations. In addition, in March 2001,the Company’s music distribution subsidiary in the United States, K-telInternational (USA), Inc. ceased operations and filed for protection underChapter 7 of the United States Bankruptcy Code.

**5.             BUSINESSSEGMENT AND GEOGRAPHIC AREA DATA**

The Companymarkets and distributes entertainment products internationally and through itsoperating subsidiaries. K-tel’s businesses are organized, managed andinternally reported as two segments: retail music sales and music licensing.These segments are based on differences in products, customer type and salesand distribution methods. The Company’s consumer product operations have beendiscontinued and is presented in the accompanying financial statements asdiscontinued operations and are therefore not included in the segmentinformation.

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The retail musicsegment consists primarily of the sales of pre-recorded music from theCompany’s music master catalog.  TheCompany sells compact discs and DVDs directly to retailers, wholesalers andrack service distributors which stock and manage inventory within musicdepartments for retail stores.

In the licensingsegment, the Company licenses the rights to its master music catalog,consisting of original recordings and re-recordings of music from the1950’s through today, to third parties world-wide for use in albums,films, television programs, commercials, and for electronic down loads tovarious media formats, for either a flat fee or a royalty based on the numberof units sold.

Operating profitsor losses of these segments include an allocation of general corporateexpenses. Depreciation and amortization and capital additions are notsignificant and have therefore been excluded from the presentation.

Certainfinancial information on the Company’s continuing operating segments is asfollows:

BUSINESS SEGMENTINFORMATION *(in thousands)*
| Six Months Ended  December 31, | ** ** | **Music** | ** ** | **Licensing** | ** ** | **Other** | ** ** | **Total  Company** | ** ** |
|-----------------------------------------------|------------|-----------|------------|---------------|------------|-----------|------------|--------------------|------------|
| * *                                      |       |      |       |          |       |      |       |               |       |
| Net sales                                     | 2005       |      | $          | 1,166         |       | $         | 1,332      |               | $          | — |   | $ | 2,498 |   |
|                                               | 2004       |      | 2,881      |          | 650        |      | —     |               | 3,531      |   |
|                                          |       |      |       |          |       |      |       |               |       |   |
| Operating income  (loss)                      | 2005       |      | $          | (595          | )          | $         | 589        |               | $          | — |   | $ | (6 | ) |
|                                          | 2004       |      | (12        | )             | (7         | )         | —     |               | (19        | ) |
|                                          |       |      |       |          |       |      |       |               |       |   |
| Assets                                        | 2005       |      | $          | 3,543         |       | $         | 434        |               | $          | 73 |   | $ | 4,050 |   |
|                                               | 2004       |      | 4,213      |          | 587        |      | 563        |               | 5,363      |   |

 
| Three Months Ended  December 31, | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
|                                            |       |       |       |       |       |       |       |       |       |
| Net sales                                       | 2005       |       | $          | 485        |       | $          | 817        |       | $          | — |   | $ | 1,302 |   |
|                                                 | 2004       |       | 1,350      |       | 345        |       | —     |       | 1,695      |   |
|                                            |       |       |       |       |       |       |       |       |       |   |
| Operating income  (loss)                        | 2005       |       | $          | (359       | )          | $          | 425        |       | $          | — |   | $ | 66 |   |
|                                            | 2004       |       | (67        | )          | 77         |       | —     |       | 10         |   |

 

GEOGRAPHICINFORMATION *(in thousands)*
| Six Months Ended  December 31, | ** ** | **United States** | ** ** | **Europe** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|------------|------------|-----------|------------|
| * *                                      | * *   | * *               | * *   | * *   | * *   | * *  | * *   |
| Net sales                                     | 2005       |                   | $          | 1,408      |       | $         | 1,090      |   | $ | 2,498 |   |
|                                               | 2004       |                   | 1,909      |       | 1,622      |      | 3,531      |   |
|                                          |       |                   |       |       |       |      |       |   |
| Assets                                        | 2005       |                   | $          | 1,709      |       | $         | 2,341      |   | $ | 4,050 |   |
|                                          | 2004       |                   | 2,503      |       | 2,860      |      | 5,363      |   |

 
| Three Months Ended  December 31, | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                            |       |       |       |       |       |       |       |
| Net sales                                       | 2005       |       | $          | 636        |       | $          | 666        |   | $ | 1,302 |   |
|                                                 | 2004       |       | 893        |       | 802        |       | 1,695      |   |
|                                                 |            |            |            |            |            |            |            |  |  |  |  |

 

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**ITEM 2: MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**General**

Throughits operating subsidiaries, K-tel licenses its music catalog internationallyand markets entertainment products mainly derived from its catalog in theUnited States and Europe through retail and direct response marketing channels.

Througha subsidiary, K-tel Entertainment, Inc., K-tel has a focused method ofdistribution that targets the strengths of selected individual retailers andsupplies products suited to each retailer’s specific needs. These products areprimarily derived from the Company’s master recordings music catalog with theobjective of realizing more competitive profit margins. As well, the Companyseeks to license its name and marks to other businesses for a royalty or fee.

**A.            RESULTS OF OPERATIONS**

#### **THREE MONTHS ENDED DECEMBER 31, 2005 VERSUSDECEMBER 31, 2004**

Netsales for the three month period ended December 31, 2005 were $1,302,000 adecrease of 23.2% from net sales of $1,695,000 for the three month period endedDecember 31, 2004. This net decrease resulted from decreased music sales thatwere partially offset by an increase in licensing revenue during the quarterended December 31, 2005. The net loss for the three month period ended December31, 2005 was $165,000, or $.01 per share, compared to net income of $190,000,or $.01 per share, for the three month period ended December 31, 2004.

Generalcorporate expenses of $108,000 and $170,000 for the three month periods endedDecember 31, 2005 and 2004, respectively, have been allocated to the segments.

Thefollowing sections discuss the results of continuing operations by businesssegment.

#### **BUSINESS SEGMENT RESULTS**

#### **Music**

Sales in the musicsegment were $485,000 for the three month period ended December 31, 2005compared to $1,350,000 for the three month period ended December 31, 2004, adecrease of $865,000, or 64.1%. The decrease was due to the decrease indomestic music sales related to the Company’s transition from a primarilydistribution business to a licensing business.

Costof goods sold in the music segment decreased to $458,000, or 94.4% of sales forthe three month period ended December 31, 2005 compared to $773,000, or 57.3%of sales for the three month period ended December 31, 2004, reflective of thereduced music sales during the three month period ended December 31, 2005.  The segments advertising expenses, whichconsist primarily of co-operative advertising payments, trade advertising andpromotions, increased to $68,000 for the three month period ended December 31,2005 compared to $40,000 for the three month period ended December 31, 2004.

Selling,general and administrative expenses were $318,000, or 65.6% of sales for thethree month period ended December 31, 2005 compared to $597,000, or 44.3% ofsales for the three month period ended December 31, 2004. The primary reasonfor the decrease was the staff and cost reductions at the Company’s U.S.office.

Themusic segment incurred an operating loss of $359,000 for the three month periodended December 31, 2005 compared to an operating loss of $67,000 for the threemonth period ended December 31, 2004.

**Licensing**

Licensingrevenue was $817,000 for the three month period ended December 31, 2005compared to $345,000 for the three month period ended December 31, 2004, anincrease of $472,000. This increase reflected an increase in activity relatedto licensing the Company’s master music catalog to BCI. The licensing segmenthad operating

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income of $425,000 for the three month period endedDecember 31, 2005 compared to $77,000 for the three month period ended December31, 2004, an increase of $348,000.

#### **SIX MONTHS ENDED DECEMBER 31, 2005 VERSUSDECEMBER 31, 2004**

Net sales for the six month period ended December 31,2005 were $2,498,000 compared to $3,531,000 for the six month period endedDecember 31, 2004. This net decrease resulted from decreased music sales thatwere partially offset by an increase in licensing sales. The net loss for the sixmonth period ended December 31, 2005 was $429,000, or $.03 per share, comparedto net income of $37,000, or $.01 per share, for the six month period endedDecember 31, 2004.

General corporate expenses of $213,000 and $343,000for the six month periods ended December 31, 2005 and 2004, respectively, havebeen allocated to the segments.

The following sections discuss the results ofcontinuing operations by business segment.

#### **BUSINESS SEGMENT RESULTS**

#### **Music**

Sales in the music segment were $1,166,000 for the sixmonth period ended December 31, 2005 compared to $2,881,000 for the six monthperiod ended December 31, 2004, a decrease of $1,715,000, or 59.5%.  The decrease was due to a decrease indomestic music sales related to the Company’s transition from a primarilydistribution business to a licensing business.

Cost of goods sold in the music segment were $855,000,or 73.3% of sales for the six month period ended December 31, 2005 compared to$1,597,000, or 55.4% of sales for the six month period ended December 31, 2004,a decrease of $742,000 reflective of the decreased music sales in the six monthperiod ended December 31, 2005.­­­ The segment’s advertising expenses, whichconsist primarily of co-operative advertising payments, trade advertising andpromotions, increased to $88,000 for the six month period ended December 31,2005 compared to $67,000 for the six month period ended December 31, 2004.

Selling, general and administrative expenses were$818,000, or 70.2% of sales for the six month period ended December 31, 2005compared to $1,213,000, or 42.1% of sales for the six month period endedDecember 31, 2004, a decrease of $395,000 relating to the staff and costreductions at the Company’s offices in the United States and the UnitedKingdom.

The music segment incurred an operating loss of$595,000 for the six month period ended December 31, 2005 compared to anoperating loss of $12,000 for the six month period ended December 31, 2004.

**Licensing**

Licensing revenue was $1,332,000 for the six monthperiod ended December 31, 2005 compared to $650,000 for the six month periodended December 31, 2004, an increase of $682,000.  This increase reflected an increase indomestic licensing activity related to the Company’s agreements with BCI.  The Company continues its efforts on buildinglicensing arrangements in several other segments of the entertainment industryand continues to license its master music catalog to several companies thatoffer electronic downloads via their internet sites.

Royalty expense within the segment increased to$230,000 for the six month period ended December 31, 2005 compared to $81,000for the six month period ended December 31, 2004, due to the increase inlicensing revenue.

Selling, general and administrative expenses decreasedto $514,000 for the six month period ended December 31, 2005 compared to$576,000 for the six month period ended December 31, 2004, a decrease of10.8%.   The primary reason for thedecrease in general and administrative expenses was the effort to reduceoverhead cost at the company’s offices in the United States and the UnitedKingdom.

Operating income in the licensing segment was $589,000for the six month period ended December 31, 2005 compared to an operating lossof $7,000 for the six month period ended December 31, 2004, an increase of$596,000.

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**B.            LIQUIDITY AND CAPITAL RESOURCES**

K-tel has a Line ofCredit Agreement with K-5 Leisure Products, Inc. (“K-5”), the Company’s largestshareholder  and an entity controlled byPhilip Kives, the Chairman of the Board, President and Chief Executive Officerof K-tel. Under the terms of the agreement (the “K-5 Facility”), K-5 has agreedto make available up to $8,000,000 to K-tel on a revolving basis. The loanbears interest at a variable rate based upon the “base rate” of a nationallyrecognized lending institution (7.0% at December 31, 2005), expires July 20,2008, and is subordinated to the Foothill loan (see below). The K-5 Facilitycontains the same covenants as the Foothill loan agreement. K-tel has pledgedthe stock of its foreign subsidiaries as collateral for the loan, and the loancarries a subordinated position to the Foothill loan on all other assets of theCompany. K-tel had outstanding balances of $7,690,000 and $7,518,000 as ofDecember 31, 2005 and June 30, 2005, respectively, under the K-5 Facility. AtDecember 31, 2005, K-tel obtained a waiver from K-5 for its non-complianceunder the covenants, limitations and restrictions of the credit agreement.

In addition, K-tel has a second loan agreement with K-5, under which K-5assumed rights and obligations under a loan from the Company’s former banker(Foothill Capital Corporation) pursuant to an Assignment and AcceptanceAgreement dated February 27, 2001. This Foothill loan, which has beenextended through July 20, 2008, provides for a $10,000,000 credit facilityconsisting of a $4,000,000 term loan due upon expiration, and a $6,000,000revolving facility under which borrowings are limited to a percent of eligiblereceivables. Borrowings under the facility bear interest at a variable ratebased on a “base rate” of anationally recognized lending institution plus 1% (8.0% at December 31,2005) and are collateralized by the assets of certain Company subsidiaries inthe United States, including accounts receivable, inventories, equipment, musiclibrary and general intangibles. The loan agreement contains certain financialand other covenants or restrictions, including the maintenance of a minimumshareholders’ equity by K-tel, limitations on capital expenditures, restrictionson music library acquisitions, limitations on other indebtedness andrestrictions on dividends paid by K-tel. As of December 31, 2005 and June 30,2004, K-tel had $4,000,000 outstanding under the term loan and there were noborrowings under the revolving facility. At December 31, 2005, K-tel obtained awaiver from K-5 for its non-compliance under the covenants, limitations andrestrictions of the credit agreement.

K-tel has been funding its operations in recent years throughinternally generated capital and secured loans from K-5. Assuming K-5 continuesto advance funds sufficient to meet the Company’s needs, management currentlybelieves that K-tel has sufficient cash and borrowing capacity to ensure theCompany will continue operations for the foreseeable future. Although K-5continues to advance funds sufficient to meet the Company’s needs at this time,there can be no assurance that this will be adequate or continue in the futureor that K-tel will be able to obtain additional financing upon favorable termswhen required.

The Company’s ability to continue its presentoperations is contingent mainly upon its ability to maintain its line of creditarrangements with K-5, increase its revenues and profit margins, and ultimatelyattain and sustain profitable operations. Without increased revenues andsustained profitability, the Company’s current operations will likely notgenerate cash sufficient to fund operations and service its indebtedness on anongoing basis. Management is focusing its efforts on music licensing andlimited music distribution. However, there can be no assurance that the Companywill achieve profitable operations through these efforts. In the event theCompany is unable to fund its operations and implement its current businessplan properly, it may be unable to continue operations. The financialstatements do not include any adjustments that might result from the outcome ofthese uncertainties.

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

There have been no material changes in the Company’smarket risk during the six month period ended December 31, 2005. For additionalinformation, refer to the Company’s annual report on Form 10-K for the fiscalyear ended June 30, 2005.

**ITEM4.  CONTROLS AND PROCEDURES**

Under the supervision andwith the participation of the Company’s management, including the Company’sChief Executive Officer and Chief Financial Officer, the Company evaluated theeffectiveness of the design and operation of its disclosure controls andprocedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act).Based on that evaluation, the Chief Executive Officer and Chief FinancialOfficer concluded that, as of the end of the period covered by this report, theCompany’s disclosure controls and procedures were not effective because of thefollowing material weaknesses in internal control over financial reporting.

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The Company did not maintain effective controls over cash disbursementsand payroll transactions at its UK subsidiary. In September 2004, the Companydiscovered that the former Chief Financial Officer of its UK subsidiarymisappropriated funds from the subsidiary and one of its customers. Adjustmentsrelated to the reversal of overstated expenses and recovery of amountsmisappropriated were included in the restatement of the Company’s consolidatedfinancial statements for periods prior to June 30, 2004 and for the years endedJune 30, 2005 and 2004.

*In response to the material weakness above, the Companyterminated the employee, undertook a full-scale investigation of the matter,retained a forensic auditing firm and dismissed the accounting firm in the UKthat audited the UK subsidiary’s financial books and records. In addition theCompany hired a new Financial Controller and stringent internal controlprocedures were created and implemented for the Company’s purchasing, accountspayable, check signing, payroll, petty cash and financial reporting policies.Management believes that these procedures, implemented upon the discovery ofthe misappropriation of funds, have allowed the Company to reestablisheffective internal control over financial reporting.*

*In fiscal 2005 and 2004, it was determined that thesegregation of duties in the U.S. office was limited due to the small number ofemployees. This segregation of duties became further limited by vacancies thatoccurred in the Company’s finance department.  In particular, customer orders were recorded by the same person whoinitiated shipments, checks were deposited by the accounts receivable clerk,and employee payroll and changes were entered by the Operations Manager, whoalso distributed the payroll checks.*

*In response to the material weakness in the U.S. office, theformer Controller was rehired and duties and responsibilities were revised toallow for improved segregation of duties and to increase the level of approvalsand reviews.*

Other than as setforth above, during the fiscal quarter ended December 31, 2005, there was nochange in the Company’s internal control over financial reporting (as definedin Rule 13a-15(f) or 15d-15(f) under the Exchange Act) that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

**PART II**

#### **ITEM1. LEGAL PROCEEDINGS**

K-telInternational, Inc. vs. Tristar Products, Inc. 

On March 14, 2000,K-tel and its subsidiary in Germany commenced an action for breach of expressand implied warranties against Defendant Tristar Products, Inc. This actionarose out of Tristar’s sale to K-tel of a defective home exercise productcalled the “BunBlaster” for resale in Germany, Austria and Switzerland. Bywritten contract, Tristar had agreed to indemnify K-tel for injuries anddamages arising out of the resale of those goods.

On April 30, 2001,Tristar asserted a patent and trademark/ trade-dress counterclaim against K-telfor allegedly passing off a product called the “K-tel Hook and Hang” whileallegedly a distributor of the original patented Tristar Hook and Hang product.The Company denied the allegation because it never was a distributor of this orany similar product.

On December 30, 2004, aMutual General Release and Settlement Agreement was signed by K-tel andTristar,  whereby both Companies agreedto mutual releases and Tristar agreed to pay K-tel $350,000.  The payment of $350,000 was received February18, 2005.

#### Other Litigation and Disputes

K-tel and itssubsidiaries are also involved in other legal proceedings in the ordinarycourse of their business. With all litigation matters, management considers thelikelihood of loss based on the facts and circumstances. If managementdetermines that a loss is probable and the amount of loss can be reasonablyestimated, such amount is recorded as a liability. Although the outcome of anysuch legal proceedings cannot be predicted, in the opinion of management thereis currently no legal proceeding pending or asserted against or involving K-telfor which the outcome is likely to have a material adverse effect upon theconsolidated financial position or results of operations of K-tel.

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***ITEM 6.  EXHIBITS***

See “Index toExhibits.”

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|                           | K-TEL INTERNATIONAL, INC.             |
|---------------------------|---------------------------------------|
|                      | REGISTRANT                            |
|                      |                                  |
|                      |                                  |
|                      |                                  |
|                      |                                  |
| Dated: November  22, 2006 | /S/ PHILIP KIVES                      |
|                      | PHILIP KIVES                          |
|                      | CHAIRMAN AND  CHIEF EXECUTIVE OFFICER |
|                      |                                  |
|                      |                                  |
|                      |                                  |
| Dated: November  22, 2006 | /s/ KIMMY LOCKWOOD                    |
|                      | KIMMY LOCKWOOD                        |
|                      | PRINCIPAL  FINANCIAL OFFICER          |

 

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**INDEX TO EXHIBITS**
| Exhibit No. | ** ** | **Description  of Exhibit**                                                                                                                                                                                                                            |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1        |       | Trademark license agreement dated effective October  10, 2005, between Dominion Entertainment, Inc. and BCI Eclipse Company, LLC  (incorporated by reference to the Company’s Report on Form 8-K filed on  August 29, 2006 (File No. 1-07115)).   |
|        |       |                                                                                                                                                                                                                                                   |
| 10.2        |       | Phonograph record license agreement between Dominion  Entertainment, Inc. and BCI Eclipse Company, LLC, effective October 16, 2005  (incorporated by reference to the Company’s Report on Form 8-K filed on  August 29, 2006 (File No. 1-07115)). |
|        |       |                                                                                                                                                                                                                                                   |
| 10.3        |       | Digital music download sales agreement dated October  10, 2003, between Dominion Entertainment, Inc. and Apple Computer, Inc. (incorporated  by reference to the Company’s Report on Form 8-K filed on August 29, 2006  (File No. 1-07115)). *    |
|        |       |                                                                                                                                                                                                                                                   |
| 31.1        |       | Certification by Chief Executive Officer pursuant to  Rule 13a-14(a).                                                                                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                   |
| 31.2        |       | Certification by Principal Financial Officer  pursuant to Rule 13a-14(a).                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                   |
| 32.1        |       | Certification by Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sabanes-Oxley Act of 2002.                                                                                                    |
|        |       |                                                                                                                                                                                                                                                   |
| 32.2        |       | Certification by Principal Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sabanes-Oxley Act of 2002.                                                                                                |

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|  |   | * Confidential treatment has been requested by the  registrant for portions of this exhibit. |
|--|--------|----------------------------------------------------------------------------------------------|

 

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