**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form 10-K**


**ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES AND EXCHANGE ACT OF 1934**


**FOR
      THE FISCAL YEAR ENDED MARCH 31, 2006**


**Commission
      File Number 119698**





**COSMO
      COMMUNICATIONS CORPORATON********


*(Exact
      name of Registrant as Specified in Its Charter)*


**FLORIDA**
              
              **59-2268025***(State
                  or Other Jurisdiction of**Incorporation
                  or Organization)*
              
              *(IRS
                  Employer**Identification
                  No.)*


**Unit
      2 - 55 Travail Road**


**Markham,
      Ontario, Canada**


**(905) 209-0488**


*(Address
      and Telephone Number of Principal Executive Offices)*







**Securities
      Registered Pursuant to Section 12(b) of the Act:**


**Common
      Stock ($.05 Par Value)**





**Securities
      Registered Pursuant to Section 12(g) of the Act:**


**None**





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities
      Act.     Yes o No þ





Indicate
      by check mark if the registrant is not required to file reports pursuant of
      Section 13 or 15(d) of the
      Act.     Yes o No þ





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past
      90 days.     Yes þ No o





Indicate
      by check mark if the disclosure of delinquent filers pursuant to Item 405
      of Regulation S-K is not contained herein, and will not be contained, to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-K or
      any amendment to this Form 10-K.     þ





Indicate
      by check mark whether the Registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer (as defined in Exchange Act
      Rule 12b-2).


Large
      accelerated filler o          Accelerated
      filer o Non-accelerated
      filer þ





Indicate
      by check mark whether the Registrant is a shell company (as defined in Exchange
      Act Rule 12b-2)     Yes o No þ




The
      aggregate market value of the Registrant's voting stock held by non-affiliates
      was undetermined as there have been no quotes on the bid and ask price of the
      registrant’s common stock. There were 29,104,000 shares of Common Stock
      issued and outstanding as of August 4, 2006.












**COSMO
      COMMUNICATIONS CORPORATION**


**FORM 10-K**


**MARCH
      31, 2006**


**TABLE
      OF CONTENTS**


**Securities
                and Exchange Commission****Item
                Number and Description****Page**PART IItem 1.
            
            Business
            
            
            3Item 1A
            
            Risk
                Factors
            
            
            12Item 2.
            
            Properties
            
            
            16Item 3.
            
            Legal
                Proceedings
            
            
            17Item 4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            
            17PART IIItem 5.
            
            Market
                for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
                Purchases of Equity Securities
            
            
            17Item 6.
            
            Selected
                Financial Data
            
            
            18Item 7.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of Continuing
                Operations
            
            
            19Item 7A
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            
            26Item 8.
            
            Financial
                Statements and Supplementary Data
            
            
            27Item 9.
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            
            
            46Item 9A.
            
            Controls
                and Procedures
            
            
            46Item 9B.
            
            Other
                Information
            
            
            47PART IIIItem 10.
            
            Directors
                and Executive Officers of the Registrant
            
            
            47Item 11.
            
            Executive
                Compensation
            
            
            49Item 12.
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            
            
            50Item 13.
            
            Certain
                Relationships and Related Transactions
            
            
            50Item 14.
            
            Principal
                Accountant Fees and Services
            
            
            51PART IVItem 15.
            
            Exhibits,
                Financial Statement Schedules and Reports on
                Form 8-K
            
            
            52Signatures
            
            
            54





1
 *Table
          of Contents*





**Forward-Looking
      Statements And Risk Factors**


*We
      make forward-looking statements in this report including, without limitation,
      statements concerning the future of our industry, product development, business
      strategy, continued acceptance and growth of our products, dependence on
      significant customers and suppliers, and the adequacy of our available cash
      resources. Statements may contain projections of results of operations or of
      financial condition. These statements may be identified by the use of
      forward-looking terminology such as “may,” “will,” “believe,” “expect,”
“anticipate,” “estimate,” “continue” or other similar words.*




*Forward-looking
      statements are subject to many risks and uncertainties. We caution you not
      to
      place undue reliance on these forward-looking statements, which speak only
      as at
      the date on which they are made. Actual results may differ materially from
      those
      described in these forward-looking statements. We disclaim any obligation or
      undertaking to update these forward-looking statements to reflect changes in
      our
      expectations or changes in events, conditions, or circumstances on which our
      expectations are based.*




***When
      considering our forward-looking statements, you should keep in mind the risk
      factors and other cautionary statements identified in this report. The risk
      factors noted throughout this report, particularly in the discussion in
      Item 1A, and other risk factors that Cosmo has not anticipated or
      discussed, could cause our actual results to differ significantly from those
      anticipated in our forward-looking statements.***


2
 *Table
          of Contents*




**PART I**





**Item
              1.**
            ***Business***





**Overview**





Cosmo
      Communications Corporation (the “Company”, "Cosmo" "we," "us" or "our") was
      incorporated in the state of Florida in 1983.





The
      Company is engaged in the development, production, distribution, marketing
      and
      sale of consumer electronic audio and video equipment, accessories and clocks.
      We contract for the manufacture of all electronic equipment products with
      factories located in China. We market certain lines of our products under labels
      that we have distribution agreements with. We also sell products under private
      labels for our major clients.





During
      our early years of operations, the products we sold were principally that of
      quartz and digital clocks, and radio cassette players. In the 90’s, we began
      marketing CD equipment, cordless telephones and small screen televisions.





In
      April
      2000, we entered into a Stock Purchase Agreement pursuant to which we offered
      shares of common stock representing 84.89% of the outstanding common stock
      to
      Master Light Enterprise Limited. (“Master Light”), a subsidiary of Starlight
      International Limited (“Starlight”), a publicly held company traded on the Hong
      Kong Stock Exchange, for $1 million. Pursuant to an amendment to the Stock
      Purchase Agreement, in January 2001, the transactions contemplated by the Stock
      Purchase Agreement, as amended, were consummated and, after rescinding the
      purchase of 1,347,420 shares, Master Light acquired 26,585,008 of our common
      stock shares, representing 91.3% of our currently issued and outstanding common
      stock. In September, 2001, additional financing from Starlight allowed us to
      discharge all our obligations to our financial institution lenders. Starlight
      owns and operates a number of subsidiaries globally. Its principal activity
      is
      in the manufacture, sale and distribution of consumer electronic products.





Since
      joining Starlight, we have phased out our operation in United States and focused
      our business in Canada. Our principal executive office is located in Ontario,
      Canada. Since 2001, our common stock shares have traded on the OTC Bulletin
      Board under the symbol “CSMO”. As used herein, the “Company”, "Cosmo," "we," us"
      and similar terms include Cosmo Communications Corporation, and its
      subsidiaries, Cosmo Communications Corporation of Canada and Cosmo
      Communications Corporation of Hong Kong, unless the context indicates
      otherwise.


3
 *Table
          of Contents*




**Product
      Lines**




We
      currently have a product line of 20 different models of clocks which retail
      from
      $5 to $20. We have 20 models of clock radio which retail from $9 to $20.





We
      sell
      23 different models of compact CD players with retail price between $12 and
      $60.





We
      market
      and sell five models of television including flat screen models. Retail price
      of
      these range between $59 and $399. We sell five models of DVD players and two
      models of combination television / DVD players. Retail price range from $129
      to
      $199.


**Cosmo’s
      Brands**





Cosmo
      marketing and product development efforts are designed to enhance its brand
      images and generate increased loyalty among its consumers in each market segment
      and among the retailers who sell Cosmo products. Cosmo markets its products
      under the following primary brands:




·
            *Cosmo*.
                Initially, we established Cosmo brand name for clocks and digital
                alarm
                clocks. We will keep this brand name for this product category to
                capitalize on brand recognition. This category represents 5% of our
                total
                sales.




·
            *Audiologic*.
                The Audiologic brand offers a range of radios, CD players, telephones,
                clock radios, portable boom boxes and multiple CD music systems.
                These
                items represent 20% of total sales during the
                year.




·
            *Diamond
                Brand.*Cosmo introduced Diamond Vision and Diamond Sound as a new brand
                at the
                end of the 2005 fiscal year with DVD players. We have since added
                to this
                line Televisions, portable DVD players and MP3 Players. These items
                represent 60% of the total sales of the
                group.




·
            *Audiovox.*This is a licensed brand name that offers television, portable CD
                players,
                personal CD players, clock radios, radios, multi CD players and
                telephones. This line represents 15% of our total sales.


4
 *Table
          of Contents*




**Strategy
      for Cosmo’s Brands**




Cosmo’s
      goal is to develop, distribute, market and sell consumer electronic audio and
      video equipment, accessories and clocks of well recognized and respected brands
      to customers around the world. Cosmo’s strategy is intended to enhance and
      reinforce Cosmo’s global brand images among consumers and retailers. Key
      elements of Cosmo’s strategy are to:


•
            Continue
                to introduce new and technologically innovative products that embody
                distinctive Cosmo qualities; style: new features;•
            Expand
                the current product lines by introducing LCD and Plasma
                TV’s;•
            Expand
                Cosmo’s distribution with new and existing customers;•
            Introduce
                licensed Hyundai brand power tools and lawn and garden products,
                such as
                cordless drills, saws, blowers, edge trimmers and lawn
                mowers;•
            Continue
                the penetration into the US market and expand focus into available
                international markets.




As
      a
      result of Cosmo’s brands and strategy, Cosmo believes it can expand its business
      and become a more significant participant in the worldwide consumer electronic
      market.




**Cosmo
      Products**





***Percent
      of Sales by Product Class***




Cosmo
      sales since 2004 were divided among Cosmo’s principal product classes as shown
      in the following table:


**Year
                  Ended March 31,****2006**
              
              **2005**
              
              **2004**Product
                  Class:
              
              %
              
              %
              
              %MP3
                  Players
              
              
              7
              
              
              -
              
              
              -Other
                  Audio
              
              
              29
              
              
              55
              
              
              73Video
              
              
              62
              
              
              40
              
              
              20Clocks
              
              
              2
              
              
              5
              
              
              7Total
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %






Financial
      information about geographic segments may be found at Note 11 of the Notes
      to Consolidated Financial Statements of this Form 10-K.


5
 *Table
          of Contents*




***New
      Products***





Cosmo
      introduces new products and enhances its existing products on a regular basis.
      During fiscal 2007, Cosmo plans to introduce the Hyundai brand of home
      improvement products and begin selling cordless weed cutters and edge trimmers.
      We expect to develop and introduce further product lines in the future as we
      continue to expand our relationships with key suppliers and identify new
      markets.





**Sales,
      Marketing and Distribution**





Cosmo
      endeavors to have its brands project an image that appeals to consumers who
      appreciate quality and value. Cosmo products are promoted with advertisements
      in
      the various flyers of the companies that sell its products including Wal-Mart,
      Home Hardware, Best Buy, Loblaws, Hart Department Stores, Bargain Shop
      etc.




We
      also
      market our products at various trade shows each year. We regularly attend the
      following trade shows and conventions: the Consumer Electronics Show each
      January in Las Vegas; the Hardware Shop in Los Angeles and the Hong Kong
      Electronics Show each October in Hong Kong.





Our
      products are sold in Canada and to selective customers in United Kingdom,
      Mexico, Argentina and Brazil, primarily through mass merchandisers, department
      stores, electronic stores, chains, and specialty stores. Our products are
      currently sold in such stores as Wal-Mart, Super-Stores, Home Hardware, Bargain
      Shop, and Best Buy/Future Shop.





In
      fiscal
      2006, approximately 98% of our sales were to the customers within Canada. Sales
      outside made up less than 2% of our sales revenue. Sales are handled by our
      in-house sales team and our independent sales representatives. Our independent
      sales representatives are paid a commission based upon sales in their respective
      territories. The sales representative agreements are generally one year
      agreements, which automatically renew on an annual basis, unless terminated
      by
      either party on 30 days' notice. During the fiscal year March 31, 2006, we
      worked with two independent sales representatives in Canada.





***Sales***





As
      a
      percentage of total revenues, our net sales in the aggregate to our five largest
      customers during the fiscal years ended March 31, 2006, and 2005 were
      approximately 95% and 96% respectively.





Although
      we have long-established relationships with all of our customers, we do not
      have
      contractual arrangements with any of them. A decrease in business from any
      of
      our major customers could have a material adverse effect on our results of
      operations and financial condition.


6
 *Table
            of Contents*




***Geographic
      Distribution of Sales***





Cosmo’s
      sales to external customers by geographic region were as follows:


**Year
                    Ended March 31,****%****Region**
                
                **2004**
                
                **2005**
                
                **2006**
                
                **2006****(In
                    thousands)**Canada
                
                $
                30,934
                
                $
                34,179
                
                $
                49,743
                
                
                97.5
                %Europe
                
                
                1,225
                
                
                1,273
                
                
                920
                
                
                1.9
                %Others
                
                
                -
                
                
                -
                
                
                348
                
                
                0.6
                %Total
                    sales
                
                $
                32,159
                
                $
                35,452
                
                $
                51,011
                
                
                100.0
                %





***Returns***





Returns
      of electronic products by our customers are generally not permitted except
      in
      approved situations involving quality defects, damaged goods, or goods shipped
      in error. Our policy is to give credit to our customers for the returns. Our
      total returns represented 6% and 10% of our net sales in fiscal 2006 and 2005,
      respectively.





We
      have
      ongoing arrangement with Starlight to refurbish our defective products, which
      are manufactured by Starlight’s factory. We do not have return privilege with
      the other 11 factories we work with. We have a workshop within our warehouse
      facility to refurbish minor defective products. Refurbished products are
      packaged to be resold in the secondary markets by secondary market dealers.
      We
      expect to recover at least 35% of the costs from the refurbishment.





***Distribution***





We
      distribute our products to retailers and wholesale distributors through two
      methods: shipment of products from inventory held at our warehouse facility
      in
      Canada (domestic sales), and shipments directly through our Hong Kong subsidiary
      (direct sales). Domestic sales are made to customers located throughout Canada
      from inventories maintained at our warehouse facility. In the fiscal year ended
      March 31, 2006, approximately 10% of our sales were sales from our domestic
      warehouses ("Domestic Sales") and 90% were sales shipped directly from China
      ("Direct Sales").




7
 *Table
          of Contents*




*Domestic
      Sales* .
      Our
      strategy of selling products from a domestic warehouse enables us to provide
      timely delivery and serve as a domestic supplier of imported goods. We purchase
      products overseas from certain factories in China for our own account, and
      warehouse the products in leased facility in Canada. We are responsible for
      costs of shipping, insurance, customs clearance, duties, storage and
      distribution related to such products and, therefore, domestic sales command
      higher sales prices than direct sales. We generally sell from our own inventory
      in less than container-sized lots.





*Direct
      Sales.* We ship
      some of our products directly to customers from China through our subsidiary
      in
      Hong Kong. Sales made through our subsidiary are completed by either delivering
      products to the customers' common carriers at the shipping point or by shipping
      the products to the customers' distribution centers, warehouses, or stores.
      Direct sales are made in larger quantities (generally container sized lots),
      who
      pay our subsidiary pursuant to irrevocable, transferable letters of credit
      or on
      open account.





**Manufacturing
      and Production**





Our
      products are manufactured and assembled by third parties pursuant to design
      specifications provided by us. Currently, substantially all of our CD products
      are manufactured by Starlight’s factory located in Guangdong Province in the
      People’s Republic of China (PRC). We also have ongoing relationships with 11
      factories, located in the southern provinces of the PRC. For fiscal 2007, we
      anticipate that our products will be produced in the same current arrangement.
      We believe that the manufacturing capacity of our factories is adequate to
      meet
      the demands for our products in fiscal year 2007. However, if Starlight’s
      primary factory in China was prevented from manufacturing and delivering our
      products, our operation would be severely disrupted (see Item 1A - Risk
      Factors). Our products are manufactured using molds and certain other tooling
      owned by Starlight and ourselves. Our products contain electronic components
      manufactured by other companies such as Sanyo, Toshiba, Hitachi and National
      Semiconductor. Our manufacturers purchase and install these electronic
      components in our products under our specifications.





While
      our
      equipment manufacturers purchase our supplies from a small number of large
      suppliers, all of the electronic components and raw materials used by us are
      available from several sources of supply, and we do not anticipate that the
      loss
      of any single supplier would have a material long-term adverse effect on our
      business, operations, or financial condition. To ensure that our high standards
      of product quality and factories meet our shipping schedules, we utilize
      independent contractors as our representatives. These contractors include
      product inspectors who are knowledgeable about product specifications and work
      closely with the factories to verify that such specifications are met.
      Additionally, our key personnel frequently visit our factories for quality
      assurance and to maintain good working relationships.





All
      of
      the electronic equipment sold by us is warranted to the end user against
      manufacturing defects for a period of ninety (90) days for labor and parts.
      During the fiscal years ended March 31, 2006 and 2005, warranty claims have
      not
      been material to our results of operations.


8
 *Table
            of Contents*




Cosmo
      believes that its sources and supplies of finished goods, components and other
      materials are adequate for its needs. Cosmo has not experienced a significant
      inability to obtain necessary finished goods, components or other
      materials.





**Reverse
      Logistic Operation**





We
      have
      an arrangement with a certain manufacturer that distributes television sets
      in
      Canada to handle customer returns for them. Our warehouse facility in Canada
      has
      the capacity to handle a high volume of defective products. We charge the
      manufacturer a fee on a per piece basis and reported this as commission and
      other income. Our agreement with this TV manufacturer to handle the returns
      is
      on an on-going and mutually agreed basis with no expiration date.





**Commission**





With
      our
      close relationship with Starlight, we have developed a good knowledge of their
      manufacturing capability and facility. Starlight pays us a commission based
      on
      sales made between Starlight and our customers at a percentage of sales. We
      report income on our consolidated income statement from this category under
      “Commission income”.





**License
      Agreements**





We
      entered into a licensing agreement with Audiovox in April, 2003. This license
      agreement expired in March, 2006. The agreement provides for an automatic
      rollover to extend unless notice is given to terminate. As of July 26, 2006,
      we
      have not received notice from Audiovox to terminate the agreement. We do not
      guarantee Audiovox any minimum payments but we pay an agreed percentage on
      the
      sales of the licensed products. Sales generated under the Audiovox License
      represent 18% of our sales revenue in fiscal 2006 and 34% in fiscal
      2005.





**Competition**





Our
      business is highly competitive. Our major competitors of our CD category are
      Citizens, Philips and GE. Competitors of our TV and DVD category are Apex,
      Cyberhome and Philips. We believe that competition for our products is based
      primarily on price, product features, reputation, delivery times, and customer
      support. We believe that our brand names are recognized in the industry and
      help
      us to compete in these categories. Our financial position depends, among other
      things, on our ability to keep pace with changes and developments in the
      household entertainment industry and to respond to the requirements of our
      customers. Many of our competitors have significantly greater financial,
      marketing, and operating resources and broader product lines than we
      do.


9
 *Table
          of Contents*




**Intellectual
      Property**





We
      have
      registered “Audiologic”, “Diamond Vision” and “Diamond Sound” as our trade marks
      in United States and in Canada.





We
      believe our intellectual property is adequately protected, but there are no
      assurances that these rights can be successfully asserted in the future or
      will
      not be invalidated or challenged.





**Government
      Regulation**





Our
      products must meet the safety standards imposed in various national, state,
      local and provincial jurisdictions. Our products sold in Canada are designed,
      manufactured and tested to meet the safety standards of Underwriters
      Laboratories, Inc. ("ULE") or Electronic Testing Laboratories ("ETL"). In Europe
      and other foreign countries, our products are manufactured to meet the CE
      marking requirements. CE marking is a mandatory European product marking and
      certification system for certain designated products. When affixed to a product
      and product packaging, CE marking indicates that a particular product complies
      with all applicable European product safety, health and environmental
      requirements within the CE marking system. Products complying with CE marking
      are now accepted to be safe in 28 European countries.





The
      manufacturing operations of our foreign suppliers in China are subject to
      foreign regulation. China has permanent "normal trade relations" ("NTR") status
      under Canadian tariff laws, which provides a favorable category of Canadian
      import duties. China's NTR status became permanent on January 1, 2002. This
      substantially reduces the possibility of China losing its NTR status, which
      would result in increasing costs for us.





**Seasonality
      and Seasonal Financing**





Our
      business is highly seasonal, with consumers making a large percentage of
      purchases of our products around the traditional holiday season in our second
      and third quarter. These seasonal purchasing patterns and requisite production
      lead times cause risk to our business associated with the underproduction or
      overproduction of products that do not match consumer demand. Retailers also
      attempt to manage their inventories more tightly, requiring that we ship
      products closer to the time that retailers expect to sell the products to
      consumers. These factors increase the risk that we may not be able to meet
      demand for certain products at peak demand times, or that our own inventory
      levels may be adversely impacted by the need to pre-build products before orders
      are placed. As of March 31, 2006, we had inventory of $4.1 million (net of
      reserves totaling $251,000) compared to inventory of $5 million as of March
      31,
      2005 (net of reserves totaling $85,000).


10
 *Table
          of Contents*




Our
      financing of seasonal working capital during fiscal 2006 was from selling of
      the
      inventory carried over from prior year. We rely on credit terms from our
      manufacturers to finance the purchase of new inventory. We also have
      understanding from Starlight to provide short term working funds to purchase
      inventory should we require them.





For
      fiscal 2007, we plan on financing our inventory purchases by the current
      arrangement.





**Information
      Systems**





Cosmo’s
      information systems are designed to respond quickly to inquiries from managers,
      employees, suppliers and customers. Cosmo has implemented internet-based systems
      to provide accurate and timely information and allow Cosmo’s representatives,
      dealers and distributors to check the status of their orders at a secure
      Internet site. Cosmo has also implemented internet systems to provide accurate
      and timely information to its suppliers in support of just-in-time delivery
      of
      components to Cosmo’s manufacturing facilities. These systems help Cosmo reduce
      costs by reducing inventory requirements and for a more
      timely and accurate exchange
      of information with our suppliers.





**Backlog**





We
      ship
      our products in accordance with delivery schedules specified by our customers,
      which usually request delivery within 3 months of the date of the order. In
      the
      consumer electronics industry, orders are subject to cancellation or change
      at
      any time prior to shipment. In recent years, a trend toward just-in-time
      inventory practices in the consumer electronics industry has resulted in fewer
      advance orders and therefore less backlog of orders for us. We believe that
      backlog orders at any given time may not accurately indicate future sales.
      As of
      July 26, 2006, we had no backlog of orders and none in the same period in fiscal
      2005. Backlog orders do not take into account of any sales ordered by customers
      directly from our domestic inventory with order turnaround time of one to two
      weeks. We normally have to keep the minimum inventory in our domestic warehouses
      for this type of sales.





**Employees**





As
      of
      March 31, 2006, we employed 35 people, all of whom are full-time employees,
      including two executive officers. One of our employees is located at our
      subsidiary in Hong Kong. The remaining employees are based in Canada, 20 engaged
      in warehousing and technical support, and 12 in accounting, marketing, sales
      and
      administrative functions. Cosmo has never had a work stoppage and none of its
      employees are unionized. Cosmo believes they have good employee
      relations.


11
 *Table
          of Contents*




**Item
                1A.**
              ***Risk
                  Factors***




**RISK
      FACTORS THAT MAY AFFECT COSMO’S OPERATING RESULTS, BUSINESS PROSPECTS AND STOCK
      PRICE**




*Before
      you buy or sell Cosmo stock, you should be aware that there are risks, including
      those described below and others Cosmo has not anticipated or discussed. You
      should consider carefully these and other risk factors, together with all of
      the
      other information included in Cosmo’s filings with the SEC and Cosmo’s periodic
      press releases, before you decide to buy or sell shares of Cosmo’s common
      stock.*




*As
      you consider these risk factors, Cosmo also calls your attention to Cosmo’s
      statements about Forward Looking Statements and Risk Factors in Part I of
      this Annual Report.*





***We
      have significant working capital needs and if we are unable to obtain additional
      financing when needed, we may not have sufficient cash flow to continue
      operations.***




As
      of
      July 26, 2006, our cash on hand is limited. We will finance our working capital
      needs from the collection of accounts receivable, and sales of existing
      inventory. See "Liquidity" beginning on page 22. As of March 31, 2006, our
      inventory was valued at $4 million. If these sources do not provide us with
      adequate financing, we will be seeking financing from our factories. If we
      are
      not able to obtain adequate financing from our factories when needed, it will
      have a material adverse effect on our cash flow and our ability to continue
      operations.





A
      small
      number of our customers account for a substantial portion of our revenues,
      and
      the loss of one or more of these key customers could significantly reduce our
      revenues and cash flow.





We
      rely
      on a small number of customers to provide a substantial portion of our revenues.
      As a percentage of total revenues, our net sales to our 5 largest customers
      during the fiscal period ended March 31, 2006 and 2005 were approximately 95%
      and 96% respectively. We do not have long-term contractual arrangements with
      any
      of our customers and they can cancel their orders at any time prior to delivery.
      A substantial reduction in or termination of orders from our largest customers
      would decrease our revenues and cash flow significantly.





***We
      rely on Starlight to manufacture and produce the majority of our CD players,
      DVD
      players and television sets and if Starlight does not support our delivery
      schedule, it would affect our revenues and
      profitability.***




We
      believe that because Starlight has a substantial investment in our operation
      they will support us unconditionally. In the event of disruption in its factory,
      Starlight will source outside factories to manufacture our products but we
      risk
      losing sales and goodwill to our customers.


12
 *Table
          of Contents*




***We
      are subject to pressure from our customers relating to price reduction and
      financial incentive and if we are pressured to make these concessions to our
      customers, it will reduce our revenues and
      profitability.***




Because
      there is intense competition in the consumer electronic market, we are subject
      to pricing pressure from our customers. Many of our customers have demanded
      that
      we lower our prices or they will purchase from our competitor's products. If
      we
      do not meet our customer's demands for lower prices, we will not sell as many
      products. We are also subject to pressure from our customers regarding certain
      financial incentives, such as return credits or advertising allowances, which
      effectively reduce our profit. We gave advertising allowances in the amount
      of
      $233,000 during fiscal 2006 and $303,000 during fiscal 2005. We have
      historically offered advertising allowances to our customers because it is
      standard practice in the retail industry.





***We
      experience difficulty forecasting the demand for our products and if we do
      not
      accurately forecast demand, our revenues, net income and cash flow may be
      affected.***




Because
      of our reliance on manufacturers in China for our products, our production
      lead
      times range from one to four months. Therefore, we must commit to production
      in
      advance of customers orders. It is difficult to forecast customer demand because
      we do not have any scientific or quantitative method to predict this demand.
      Our
      forecasting is based on management's general expectations about customer demand,
      the general strength of the retail market and management's historical
      experiences. In the past, our experienced management team has been able to
      plan
      our production and inventory requirements without building excessively high
      inventory.





***Our
      gross profit margins have decreased over the past year and we expect a continued
      competitive market in the future.***




Over
      the
      past year, our gross profit margins have generally decreased due to price
      competition. We expect that our gross profit margin might decrease under
      downward pressure in fiscal 2007 but we are also putting pressure on our
      manufacturers to lower their production costs. Based on past experience, we
      expect that we can pass on the price pressure to our manufacturers.





***Our
      business is seasonal and therefore our annual operating results will depend,
      in
      large part, on our sales during the relatively brief holiday
      season.***




Sales
      of
      consumer electronics in the retail channel are highly seasonal, with a majority
      of retail sales occurring during the period from September through December
      in
      anticipation of the holiday season, which includes Christmas. A substantial
      majority of our sales occur during the second quarter ended September 30 and
      the
      third quarter ended December 31. Sales in our second and third quarter,
      combined, accounted for approximately 89% and 73% of total sales in fiscal
      2006
      and 2005 respectively.


13
 *Table
          of Contents*




***If
      Cosmo does not continue to develop, introduce and achieve market acceptance
      of
      new and enhanced products, sales may decrease.***




The
      consumer electronic industry is characterized by rapid technological change,
      frequent new product introductions and enhancements and ongoing customer demands
      for greater performance. In addition, the average selling price of an electronic
      product has historically decreased over its life cycle, and we expect that
      trend
      to continue. As a result, our products may not be competitive if we fail to
      introduce new products or product enhancements that meet evolving customer
      demands. The development of new products is complex, and we may not be able
      to
      complete development in a timely manner. To introduce products on a timely
      basis, we must:





·
            accurately
                define and design new products to meet market
                needs;


·
            design
                features that continue to differentiate our products from those of
                our
                competitors;


·
            update
                our manufacturing process
                technologies;


·
            identify
                emerging technological trends in our target
                markets;


·
            anticipate
                changes in end-user preferences with respect to our customers'
                products;


·
            introduce
                products to market on a timely basis at competitive prices;
                and


·
            respond
                effectively to technological changes or product announcements by
                our
                competitors.





We
      believe that we will need to continue to enhance our products and develop new
      merchandise to keep pace with competition, technological developments, and
      to
      achieve market acceptance for our products. At the same time, we are identifying
      other products which may be different from audio and video
      equipment.





***Our
      products are shipped from China and any disruption of shipping could prevent
      or
      delay our customers’ receipt of inventory.***




We
      rely
      principally on independent ocean carriers to ship virtually all of the products
      that we import to our warehouse facility in Toronto, Canada. Retailers that
      take
      delivery of our products in China rely on a variety of carriers to import those
      products. Any disruptions in shipping, whether in Toronto or China, caused
      by
      labor strikes, other labor disputes, terrorism, and international incidents
      may
      prevent or delay our customers' receipt of inventory. If our customers do not
      receive their inventory on a timely basis, they may cancel their orders or
      return products to us. Consequently, our revenues and net income would be
      affected.


14
 *Table
          of Contents*




***Our
      manufacturing operations are located in the People’s Republic of China,
      subjecting us to risks common in international operations. If there is any
      problem with the manufacturing process, our revenues and net profitability
      may
      be affected.***




We
      are
      using 12 factories in the People's Republic of China to manufacture the majority
      of our products. These factories will be producing all of our products in fiscal
      2007. Our arrangements with these factories are subject to the risks of running
      business abroad, such as import duties, trade restrictions, work stoppages,
      and
      foreign currency fluctuations, limitations on the repatriation of earnings
      and
      political instability, which could have an adverse impact on our business.
      Furthermore, we have limited control over the manufacturing processes
      themselves. As a result, any difficulties encountered by our third-party
      manufacturers that result in product defects, production delays, cost overruns
      or the inability to fulfill orders on a timely basis could adversely affect
      our
      revenues, profitability and cash flow. Also, since we do not have written
      agreements with any of these factories, we are subject to additional uncertainty
      if the factories do not deliver products to us on a timely basis.





***We
      depend on third party suppliers for parts for our products, and if we cannot
      obtain supplies as needed, our operations will be severely
      damaged.***




Our
      growth and ability to meet customer demand depends in part on our ability to
      obtain timely deliveries of our electronic products. We rely on third party
      suppliers to produce the parts and materials we use to manufacture and produce
      these products. If our suppliers are unable to provide our factories with the
      parts and supplies, we will be unable to produce our products. We cannot
      guarantee that we will be able to purchase the parts we need at reasonable
      prices or in a timely fashion. In the last several years, there have been
      shortages of certain components that we use in our DVD players. If we are unable
      to anticipate any shortages of parts and materials in the future, we may
      experience severe production problems, which would impact our
      sales.





***We
      are exposed to the credit risk of our customers who are experiencing financial
      difficulties, and if these customers are unable to pay us, our revenues and
      profitability will be reduced.***




We
      sell
      products to retailers, including department stores, hardware stores and
      specialty stores. In the past, we have been diligent to screen credit worthiness
      of our customers and experience of bad debts has been insignificant.
      Deterioration in the financial condition of our customers could have a material
      adverse effect on our revenues and future profitability.





***Our
      common stock currently is not actively traded on the OTC bulletin
      board.***




Our
      common stock is inactive and has no bid and ask price. We believe that if we
      can
      establish a pattern of profitability in the near future, our common stock may
      be
      more actively traded.


15
 *Table
          of Contents*




***The
      loss of their largest customer or significant reductions in their purchases
      of
      Cosmo’s products would reduce sales.***




This
      significant customer accounts for 91%, 88% and 92% of Cosmo’s sales in 2006,
      2005 and 2004. Cosmo anticipates that this customer will continue to account
      for
      a significant portion of Cosmo’s sales for the foreseeable future, but is not
      obligated to any long-term purchases. They have considerable discretion to
      reduce, change or terminate purchases of Cosmo’s products. Cosmo cannot be
      certain that it will retain this customer or maintain a favorable relationship.





***If
      Cosmo fails to manage its inventory effectively, Cosmo could incur additional
      costs or lose sales.***


Cosmo
      customers have many brands to choose from when they decide to order products.
      If
      Cosmo cannot deliver products quickly and reliably, customers will order from
      a
      competitor. Cosmo must stock enough inventories to fill orders promptly, which
      increases Cosmo’s financing requirements and the risk of inventory obsolescence.
      Because competition has forced Cosmo to shorten its product life cycles and
      more
      rapidly introduce new and enhanced products, while simultaneously sourcing
      more
      products overseas and carrying larger inventories, there is a significant risk
      that Cosmo’s inventory could become obsolete.





***Currency
      fluctuations may reduce the profitability of Cosmo’s foreign
      sales.***


Cosmo
      currently makes sales to Canadian and certain European dealers and distributors
      in their respective currencies. However, as part of the transition to local
      distributors, an increasing portion of Cosmo’s sales are denominated in
      U.S. dollars. If Cosmo is unsuccessful in its transition to distributors,
      Cosmo’s exposure to gains and losses on foreign currency transactions will
      continue. Cosmo does not trade in derivatives or other financial instruments
      to
      reduce currency risks. In some instances this will subject Cosmo’s earnings to
      fluctuations because Cosmo is not protected against substantial currency
      fluctuations.





**Item
              2.**
            ***Properties***




Our
      corporate headquarters are located in Markham, Ontario, Canada in a 35,000
      sq.
      ft. office and warehouse facility.





Our
      subsidiary in Hong Kong shares office space with Starlight in Hong Kong from
      which we oversee China based manufacturing operations. There is no lease
      agreement with Starlight and we do not pay rent to Starlight for the
      facility.





We
      believe that our facility is well maintained, in substantial compliance with
      environmental laws and regulations, and adequately covered by insurance. We
      also
      believe that our leased facility is not unique and could be replaced, if
      necessary, at the end of the term of the existing lease.


16
 *Table
            of Contents*




**Item
              3.**
            ***Legal
                Proceedings***




We
      are
      from time to time involved in routine litigation incidental to our business,
      most of which is adequately covered by insurance and none of which is expected
      to have a material adverse affect on our business, financial condition or
      results of operation.





**Item
              4.**
            ***Submission
                of Matters to a Vote of Security
                Holders***




No
      matters were submitted to a vote of security holders during fiscal 2006.




**PART II**


**Item 5.**
            ***Market
                for Registrant’s Common Equity and Related Stockholder Matters and Issuer
                Purchases of Equity
                Securities***




Since
      2001, our common stock shares have been traded on the OTC Bulletin Board. There
      were no quotes of high and low during fiscal 2006. We have 166 record holders
      of
      our common stock on July 26, 2006. However, those shares being held by Cede
      & Company have not been broken down. Our policy is to retain earnings and we
      have not declared any dividends in the past. Any payment of cash dividends
      in
      the future will be dependent upon the financial condition, capital requirements,
      earnings, contractual restrictions and other factors considered relevant by
      our
      Board of Directors.


17
 *Table
            of Contents*




**Item
              6.**
            ***Selected
                Financial Data***




The
      following selected consolidated financial data should be read in conjunction
      with Item 7, “Management’s Discussion and Analysis of Financial Condition
      and Results of Continuing Operations” and Item 8, “Financial Statements and
      Supplementary Data.” The table contains selected consolidated financial data for
      the five years ended March 31, 2006 derived from Cosmo’s audited consolidated
      financial statements. Due to a change in the fiscal year end of the Company
      resulting from a reorganization, the 2002 comparative is for a three month
      period. Prior period amounts have been reclassified to conform to the 2006
      presentation.





**Years
                Ended March 31,****2006**
            
            **2005**
              **Restated**
            
            **2004**
            
            **2003**
            
            **2002****(In
                thousands, except per share data)**Consolidated
                Statements of Operations:Net
                sales
            
            $
            51,011
            
            $
            35,452
            
            $
            32,159
            
            $
            19,753
            
            $
            2,750Cost
                of products sold
            
            
            48,157
            
            
            32,846
            
            
            29,476
            
            
            17,686
            
            
            2,387Gross
                profit
            
            
            2,854
            
            
            2,606
            
            
            2,683
            
            
            2,067
            
            
            363Other
                income
            
            
            1,509
            
            
            1,854
            
            
            1,283
            
            
            460
            
            
            160Operating
                expenses:Selling
                and delivery
            
            
            1,033
            
            
            1,382
            
            
            1,616
            
            
            937
            
            
            134General
                and administrative
            
            
            2,684
            
            
            1,921
            
            
            1,382
            
            
            876
            
            
            333Depreciation
                and amortization
            
            
            23
            
            
            32
            
            
            21
            
            
            12
            
            
            2Total
                operating expenses
            
            
            3,740
            
            
            3,335
            
            
            3,019
            
            
            1,825
            
            
            469Operating
                income
            
            
            623
            
            
            1,125
            
            
            947
            
            
            702
            
            
            54Interest
                and other expense
            
            
            304
            
            
            232
            
            
            257
            
            
            79
            
            
            22Taxes
                - current and deferred
            
            
            189
            
            
            697
            
            
            (29
            )
            
            33
            
            
            -Net
                income (loss)
            
            $
            130
            
            $
            196
            
            $
            719
            
            $
            590
            
            $
            32Income
                (loss) per common share:Income
                (loss) from operationsBasic
                and diluted
            
            $
            0.00
            
            $
            0.01
            
            $
            0.02
            
            $
            0.02
            
            $
            0.00Weighted
                average shares:Basic
                and diluted
            
            
            29,104
            
            
            29,104
            
            
            29,104
            
            
            29,104
            
            
            29,104


18
 *Table
            of Contents*




**As
                of March 31**
              **(in
                thousands)****2006**
            
            **2005**
              **Restated**
            
            **2004**
            
            **2003**
            
            **2002****Balance
                Sheet Data**:Cash
            
            $
            549
            
            $
            629
            
            $
            770
            
            $
            815
            
            $
            295Total
                assets
            
            
            8,249
            
            
            7,616
            
            
            7,642
            
            
            5,645
            
            
            3,161Total
                current liabilities
            
            
            6,006
            
            
            5,772
            
            
            6,485
            
            
            5,460
            
            
            3,947Total
                long-term liabilities
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0Stockholders’
                equity (deficit)
            
            
            2,243
            
            
            1,844
            
            
            1,157
            
            
            185
            
            
            (786
            )




**Item 7.**
            ***Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations***


This
      Analysis should be read in conjunction with the other sections of this Annual
      Report on Form 10-K, including “Item 1: Business,” “Item 6:
      Selected Financial Data,” and “Item 8: Financial Statements and
      Supplementary Data.” This Analysis does not reflect the potential impact of any
      divestitures, mergers, acquisitions or other business combinations that had
      not
      been completed as of the date of this report.




**Results
      of Operations**





***Overview***




Our
      primary objectives for fiscal 2006 were to expand our sales and build solid
      relationships with our major customers. We consider these factors necessary
      to
      position us for further growth and to compete in the industry. Our major focus
      in sales in fiscal 2006 was in television and DVD players. Our net sales in
      the
      video category increased by $14.4 million in fiscal 2006 and accounted for
      almost all the growth in sales in 2006. Retail prices of our video products
      are
      highly competitive. We worked within a smaller gross profit margin in order
      to
      compete with other suppliers. Because of the change in product mix in our sales,
      our overall gross profit margin in fiscal 2006 decreased to 5.5% from 7.6%
      in
      fiscal 2005.





Our
      operating expenses (compensation, selling, general and administrative expenses)
      in fiscal 2006 increased to $3.7 million from $3.3 million in the prior year.
      The increase in operating expenses was mainly due to higher salary and wages
      as
      a result of increased sales and warehouse activities.





***Restatement
      of 2005 Results***




During
      the preparation of the March 31, 2006 corporate tax return for Cosmo
      Communications Canada Inc. the Company discovered that it had previously
      understated its taxable income. This error related to the incorrect exclusion
      of
      certain realized exchange gains which had been deducted from taxable income
      in
      the prior year. In addition, due to the incorrect translation of the accounts
      from their home currency to the reported currency, the Company determined that
      there were unrealized exchange gains, which were not taxable to Cosmo
      Communications Canada Inc. until subsequent years and therefore created a timing
      difference and a related deferred tax liability.




The
      Company restated its consolidated financial statements for the year ended March
      31, 2005 to reflect the adjusted taxes. This restatement had no impact on
      previously reported net cash flows of the Company.


19
 *Table
          of Contents*




**Fiscal
      Year Ended March 31, 2006 Compared with Fiscal Year Ended March 31,
      2005**





***Sales***




Net
      sales
      for the fiscal year ended March 31, 2006 increased to $51 million compared
      to
      revenues of $35.5 million in the fiscal year ended March 31, 2005. The increase
      in net sales was a result of both increases in unit volume as well as price
      per
      unit. The increase in sales is primarily attributed to:





·
            focusing
                on the products which are popular among the younger consumers such
                as
                small flat screen TV and DVD players and MP3
                Players;


·
            competing
                aggressively by providing advertising allowances to our retail customers
                to promote our products; and


·
            quickly
                introducing new styles and shapes that would be sought after by both
                youths and older customers.





The
      decrease in sales occurred in our CD players/audio product line category. Our
      total CD player sales decreased to $2.65 million in fiscal 2006 compared to
      total sales of $3.03 million in fiscal 2005.





Video
      sales increased to $27.7 million, or 54% of net sales, in fiscal 2006, compared
      to $13.4 million, or 37.7% of net sales, in fiscal 2005. Video sales consist
      of
      primarily mid size TV, flat screen TV and DVD Players and combination units
      of
      TV with a built-in DVD player.





In
      fiscal
      2006, 90% of our sales were direct sales, which represent sales made by our
      subsidiary in Hong Kong, and 10% were domestic sales, which represent sales
      made
      from our warehouse in Canada. In fiscal 2005, 88% of our sales were direct
      sales, and 12% were domestic sales.





In
      fiscal
      2006, sales in Canada represent 98% of our total sales; the remaining 2% were
      sales to Europe and other countries. In fiscal 2005, 96% of our sales were
      made
      to Canada, 4% to Europe and other countries.





***Gross
      Profit***




Gross
      profit for fiscal 2006 was $2.9 million or 5.5% of total revenues compared
      to
      $2.6 million or 7.6% of sales for fiscal 2005. The decrease in gross margin,
      compared to the prior year, was primarily due to change in our product mix
      with
      major focus in the video product lines, which have on average a smaller gross
      profit margin than the other categories. Our future expansion will be targeting
      a product mix that will improve our gross profit margin. We are planning to
      market new products in fiscal 2007 to include other MP3 Players, LCD TV, and
      Home improvement products. It is uncertain if these new products will provide
      a
      higher gross profit margin to us because we cannot predict if our competitors
      will cut their prices to compete with us.





Our
      gross
      profit may not be comparable to those of other entities, since some entities
      include the costs of warehousing, inspection, freight charges and other
      distribution costs in their cost of sales. We account for the above expenses
      as
      operating expenses and classify them under selling, general and administrative
      expenses.


20
 *Table
          of Contents*




***Commission
      Income***




Our
      commission and other income which consist of commissions earned on brokering
      sales and handling return products for Starlight and another manufacturer.
      Total
      income was $1.5 million in fiscal 2006 compared with $1.9 million in fiscal
      2005. The decrease was attributable to us processing a smaller amount of returns
      than in the prior year. Our customers choose how many of their returns we are
      to
      process, therefore we have no control over how many returns are
      received.





***Operating
      Expenses***




Operating
      expenses for the fiscal year ended March 31, 2006 increased to $3.7 million
      from
      $3.3 million in fiscal 2005. The increase in operating expenses consists of
      an
      increase in variable expenses and fixed expenses. The variable expenses
      (advertising, commission, freight and royalty expenses) increased proportionally
      as revenues increased. The fixed expense increase of $0.3 million was primarily
      due to the following factors:





·
            consultancy
                fees to provide valuation and projections to explore the options
                of
                raising capital from private third
                parties;


·
            insurance
                costs in our business package; and


·
            graphic
                design to provide improved packaging artwork and translation in other
                languages for markets outside North
                America.








***Income
      Tax Expenses***




Significant
      management judgment is required in developing our provisions for income taxes,
      including the determination of foreign tax liabilities, deferred tax assets
      and
      liabilities and any valuation allowances that might be required against deferred
      tax assets. Management evaluates its ability to realize its deferred tax assets
      on a quarterly basis and adjusts its valuation allowance when it believes that
      it is not likely to be realized.





For
      the
      fiscal year ended March 31, 2006, we recorded income tax expense of $312,903
      and
      a prior year reassessment of taxes of $27,918. Current year taxes were high
      due
      to the realization of foreign exchange gains which had been deducted from
      taxable income in prior years, as they were unrealized at that time. The Company
      does not anticipate future changes in rates that were as significant as in
      2003
      to 2005 and as such does not anticipate such variances in its current or
      deferred taxes in subsequent years.





We
      operate within multiple taxing jurisdictions and are subject to audit in those
      jurisdictions. Because of the complex issues involved, any claims can require
      an
      extended period to resolve. In management's opinion, adequate provisions for
      income taxes have been made.


21
 *Table
          of Contents*




**Liquidity
      and Capital Resources**




On
      March
      31, 2006, we had cash on hand of $548,506 compared to cash on hand of $628,561
      on March 31, 2005. The decrease of cash on hand was primarily due to decreases
      in cash provided by operating activities, partially offset by increases in
      cash
      provided in financing activities.





Cash
      flows used in operating activities were $440,406 for the twelve months ended
      March 31, 2006. We carried a higher receivable balance in 2006 due to an
      increase in sales activities. The majority of our receivables are due from
      our
      direct sales and we do not foresee any collection problems as these sales are
      backed by letters of credit from our customers.





We
      reduced our inventory level at fiscal 2006 year end by $929,490 and increased
      our prepaid expenses and others by $369,457.





Cash
      used
      in investing activities for the twelve months ended March 31, 2006 was $7,604.
      Cash used in investing activities was for the purchase of office
      equipment.





Cash
      flows provided by financing activities were $98,805 for the fiscal year ended
      March 31, 2006. Financing was provided by Starlight by extending credits in
      trade payables and permitting a deferral of interest payment on the loan
      advance.





As
      of
      March 31, 2006, our working capital was $2.2 million. Our current liabilities
      of
      $6 million include:





·
            amount
                due to Starlight resulting from normal course of the business for
                $2.8
                million;


·
            current
                liabilities resulting from normal course of the business with other
                factories for $1 million;


·
            advance
                from Starlight for $1.7 million;
                and


·
            current
                and deferred taxes of $0.5 million





As
      of
      July 26, 2006, our cash on hand is sufficient to cover approximately two months
      of operation. We expect our factories will continue to provide credits to us
      and
      that Starlight will provide financing to us if we require additional short
      term
      working capital.




**Off
      Balance Sheet Arrangements**




Cosmo
      does not participate in transactions that generate relationships with
      unconsolidated entities or financial partnerships, such as entities referred
      to
      as structured finance or variable interest entities (VIE’s), which would be
      established for the purpose of facilitating off-balance sheet arrangements.
      As
      of March 31, 2006, Cosmo did not have in any unconsolidated VIE’s.


22
 *Table
            of Contents*




**Contractual
      Obligations as of March 31, 2006**




Cosmo
      had
      contractual obligations at March 31, 2006 as follows:


**Payments
                  Due by Period****Less
                  Than**
              
              
              
              **More
                  Than****Contractual
                  Obligations**
              
              **Total**
              
              **1 Year**
              
              **1-3 Years**
              
              **3-5 Years**
              
              **5 Years**Loan
                  from related party
              
              $
              1,716,107
              
              $
              1,716,107
              
              $
              —
              
              
              —
              
              
              —Operating
                  leases
              
              $
              738,230
              
              $
              289,644
              
              $
              448,586
              
              $
              —
              
              
              —




**Working
      Capital Requirements for the Short and Long Term**




During
      the next twelve month period, we plan on financing our working capital needs
      from:





·
            The
                collection of accounts receivable;


·
            Sales
                of existing inventory; and


·
            The
                Continued support of factories in China that finance our purchases
                of
                goods for fiscal 2007.





Our
      sources of cash for working capital in the long term are the same as our sources
      for the short term. If we need additional financing for the long term use,
      one
      of the options that we may explore in the near future is by private offerings.
      However, we cannot guarantee that our financing plan will succeed. If we need
      to
      obtain additional financing and fail to do so, it may have a material adverse
      effect on our ability to meet our financial obligations and continue our
      operations.





During
      fiscal 2007, we will institute steps to control our operating costs. We intend
      to generate a similar portion of our total sales through direct sales to reduce
      our need to maintain inventory in our warehouse.





Except
      for the foregoing, we do not have any present commitment that is likely to
      cause
      our liquidity to increase or decrease in any material way. In addition, except
      for the Company's need for additional capital to finance inventory purchases,
      the Company is not aware of any trend, additional demand, event or uncertainty
      that will result in, or that is reasonably likely to result in, the Company's
      liquidity increasing or decreasing in any material way.


23
 *Table
          of Contents*




**Exchange
      Rates**




For
      direct sales, we sell our products in U.S. dollars and pay for all of our
      manufacturing costs in either U.S. or Hong Kong dollars. Operating expenses
      of
      the Hong Kong office are paid in Hong Kong dollars. The exchange rate of the
      Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong government
      since 1983 at HK$7.80 to U.S. $1.00 and, accordingly, has not represented a
      currency exchange risk to the U.S. dollar. Operating expenses of our Canada
      office is paid in Canadian dollar, and domestic sales are received in Canadian
      dollar. The exchange rate between the Canadian dollar and US dollar can
      represent an exchange risk to us. Therefore any adverse fluctuation in this
      exchange rate may have a material effect on our business, financial condition
      or
      results of operation. The overall percentage of domestic sales in Canadian
      dollar is relatively small at approximately 10% of total sales. We have not
      taken any steps to hedge the exchange risk. In the event that domestic sales
      will increase to a higher level, we will be considering entering into hedging
      transactions to insure currency risk is minimized.





**Seasonal
      and Quarterly Results**




Historically,
      our operations have been seasonal, with the highest net sales occurring in
      the
      second and third quarters (reflecting increased orders for electronic audio
      and
      video equipment during the Christmas selling months) and to a lesser extent
      the
      first and fourth quarters of the fiscal year. Sales in our fiscal second and
      third quarter, combined, accounted for approximately 89% and 73% of net sales
      in
      fiscal 2006, and 2005, respectively.





Our
      results of operations may also fluctuate from quarter to quarter as a result
      of
      the amount and timing of orders placed and shipped to customers, as well as
      other factors. The fulfillment of orders can therefore significantly affect
      results of operations on a quarter-to-quarter basis.





**Inflation**




Inflation
      has not had a significant impact on the Company's operations. The Company has
      historically passed any price increases on to its customers since prices charged
      by the Company are generally not fixed by long-term contracts.





**Critical
      Accounting Policies and Estimates**




The
      methods, estimates and judgments Cosmo uses in applying its accounting policies
      have a significant impact on the results reported in its consolidated financial
      statements. Cosmo evaluates its estimates and judgments on an on-going basis.
      Cosmo bases its estimates on historical experience and assumptions that Cosmo
      believes to be reasonable under the circumstances. Cosmo’s experience and
      assumptions form the basis for its judgments about the carrying value of assets
      and liabilities that are not readily apparent from other sources. Actual results
      may vary from what Cosmo anticipates and different assumptions or estimates
      about the future could change its reported results.




Cosmo
      believes the following accounting policies are the most critical to Cosmo,
      in
      that they are important to the portrayal of Cosmo’s consolidated financial
      statements and they require Cosmo’s most difficult, subjective or complex
      judgments in the preparation of its consolidated financial statements:


24
 *Table
          of Contents*


***Use
      of Estimates***




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      the disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual results could differ from those estimates. These
      estimates are reviewed periodically, and, as adjustments become necessary,
      they
      are reported in earnings in the period in which they become known.





***Revenue
      Recognition***




Sales,
      net of estimated sales returns, are recognized upon passage of title to the
      customer. This occurs upon shipment or upon receipt by the customer depending
      on
      the country of the sale and the agreement with the customer. Revenue is
      recognized if persuasive evidence of an agreement exists, the sales price is
      fixed or determinable, and collectability is reasonably assured.





Commission
      income is derived from reverse logistic services that consist of handling other
      distributor companies returned goods. In providing these services, the Company
      acts as an agent or broker without assuming the risks and rewards of ownership
      of the goods and therefore reports the commissions on a net basis. Revenue
      is
      recognized based on the completion of the contracted services.





***Inventories***




Inventories
      are valued at the lower of cost or net realizable value. Cost is determined
      on a
      first-in, first-out basis. Inventory is comprised of finished products that
      the
      Company intends to sell to its customers. The Company periodically makes
      judgments and estimates regarding the future utility and carrying value of
      its
      inventory. The carrying value of inventory is periodically reviewed and
      impairments, if any, are recognized when the expected future benefit from the
      inventory is less than its carrying value. The Company has inventory reserves
      for estimated obsolescence or unmarketable inventory which is equal to the
      difference between the cost of inventory and the estimated market value based
      upon assumptions about future demand and market conditions.





***Foreign
      Translation Adjustment***




The
      accounts of the foreign subsidiaries were translated into U.S. dollars in
      accordance with the provisions of SFAS No. 52, Foreign Currency Translation.
      Management has determined that the Hong Kong dollar is the functional currency
      of the Hong Kong subsidiaries and the Canadian dollar is the functional currency
      of the Canadian subsidiary. Certain current assets and liabilities of these
      foreign entities are denominated in U.S. dollars. In accordance with the
      provisions of SFAS 52, transaction gains and losses on these assets and
      liabilities are included in the determination of income for the relevant
      periods. Adjustments resulting from the translation of the financial statements
      from their functional currencies to United States dollars are accumulated as
      a
      separate component of accumulated other comprehensive income and have not been
      included in the determination of income for the relevant
      periods.


25
 *Table
          of Contents*




***Income
      Taxes***




The
      Company accounts for income taxes pursuant to SFAS No. 109, Accounting for
      Income Taxes. Deferred tax assets and liabilities are recorded for differences
      between the financial statement and tax basis of the assets and liabilities
      that
      will result in taxable or deductible amounts in the future based on enacted
      tax
      laws and rates. Valuation allowances are established when necessary to reduce
      deferred tax assets to the amount expected to be realized. Income tax expense
      is
      recorded for the amount of income tax payable or refundable for the period
      increased or decreased by the change in deferred tax assets and liabilities
      during the period.





***Fair
      Value of Financial Instruments***




The
      Company's financial instruments include cash and cash equivalents, receivables,
      payables, and advances from the parent company.





The
      estimated fair value of financial instruments has been determined by the Company
      using available market information and valuation methodologies. Considerable
      judgment is required in estimating fair value. Accordingly, the estimates may
      not be indicative of the amounts the Company could realize in a current market
      exchange.


**Item 7A.**
            ***Quantitative
                and Qualitative Disclosures About Market
                Risk***




Market
      risk represents the risk of loss that may impact our financial position, results
      of operations or cash flows due to adverse changes in financial and commodity
      market prices and interest rates. We are exposed to market risk in the areas
      of
      changes in Canada and International borrowing rates and changes in foreign
      currency exchange rates. In addition, we are exposed to market risk in certain
      geographic areas that have experienced or remain vulnerable to an economic
      downturn, such as China. We purchase substantially all our inventory from
      companies in China and, therefore, we are subject to the risk that such
      manufacturers will be unable to provide inventory at competitive prices.




While
      we
      believe that, if such an event were to occur we would be able to find
      alternative sources of inventory at competitive prices, we cannot assure you
      that we would be able to do so. These exposures are directly related to our
      normal operating and funding activities. Historically and as of March 31, 2006,
      we have not used derivative instruments or engaged in hedging activities to
      minimize market risk.





**Interest
      Rate Risk**




As
      of
      March 31, 2006, we have borrowed from Starlight and discounted our trade bills
      to obtain cash advance on our direct sales. If prime rate goes up, our costs
      of
      borrowing will be increased accordingly.


26
 *Table
            of Contents*




**Foreign
      Currency Risk**




We
      have a
      wholly-owned subsidiary in Canada and a wholly-owned subsidiary in Hong Kong.
      Sales by the Canadian operations made in Canada are denominated in Canadian
      dollar; purchases of inventory are denominated in US or Hong Kong dollar, and
      operating expenses in Canadian dollar. The Hong Kong operating expenses are
      denominated in Hong Kong dollar, sales are denominated in U.S. dollar, and
      purchases of inventory are denominated in U.S. or Hong Kong dollar. These
      transactions create exposures to changes in exchange rates. Changes in the
      Hong
      Kong dollar exchange rate and Canadian dollar exchange rate with the U.S. dollar
      may positively or negatively affect our gross margins, operating income and
      retained earnings. We do not believe that near-term changes in the exchange
      rates, if any, will result in a material effect on our future earnings, fair
      values or cash flows, and therefore, we have chosen not to enter into foreign
      currency hedging transactions. We cannot assure you that this approach will
      be
      successful, especially in the event of a significant and sudden change in the
      value of the Canadian and Hong Kong dollar.


**Item 8.**
            ***Financial
                Statements and Supplementary
                Data***




**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




Consolidated
                Financial Statements of Cosmo Communications Corporation and
                SubsidiariesReports
                of Independent Registered Public Accounting Firms
            
            
            28Consolidated
                Balance Sheets as at March 31, 2006 and 2005
            
            
            30Consolidated
                Statements of Income and Comprehensive Income for the years ended
                March 31, 2006, 2005 and 2004
            
            
            31Consolidated
                Statements of Stockholders’ Equity for the years ended March 31,
                2006, 2005 and 2004
            
            
            32Consolidated
                Statements of Cash Flows for the years ended March 31, 2006, 2005 and
                2004
            
            
            33Notes
                to the Consolidated Financial Statements
            
            
            34


27
 *Table
            of Contents*




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




Board
      of
      Directors and Stockholders


Cosmo
      Communications Corporation





We
      have
      audited the accompanying consolidated balance sheet of Cosmo Communications
      Corporation as of March 31, 2006 and the related consolidated statement of
      income, stockholders' equity and cash flows for the year ended March 31, 2006.
      These consolidated financial statements are the responsibility of the Company's
      management. Our responsibility is to express an opinion on these consolidated
      financial statements based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance whether the consolidated
      financial statements are free of material misstatement. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the consolidated financial statements. An audit also includes assessing the
      accounting principles used and significant estimates made by management, as
      well
      as evaluating the overall consolidated financial statement presentation. We
      believe that our audit provides a reasonable basis for our opinion.





In
      our
      opinion, based on our audit, such consolidated financial statements present
      fairly, in all material respects, the financial position of Cosmo Communications
      Corporation as of March 31, 2006 and the related consolidated statements of
      income, stockholders' equity and cash flows for the year ended March 31, 2006
      in
      accordance with accounting principles generally accepted in the United States
      of
      America.





As
      described in note 3, the 2005 consolidated financial statements have been
      restated.







/s/
                Walker & Company Chartered Accountants Professional
                Corporation


Markham,
      Canada


June
      26,
      2006




28
 *Table
          of Contents*




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





Board
      of
      Directors and Stockholders


Cosmo
      Communications Corporation





We
      have
      audited the accompanying consolidated balance sheets of Cosmo Communications
      Corporation as of March 31, 2005 and the related consolidated statements of
      income, stockholders' equity and cash flows for the year ended March 31, 2005
      and 2004. These consolidated financial statements are the responsibility of
      the
      Company's management. Our responsibility is to express an opinion on these
      consolidated financial statements based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance whether the consolidated
      financial statements are free of material misstatement. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the consolidated financial statements. An audit also includes assessing the
      accounting principles used and significant estimates made by management, as
      well
      as evaluating the overall consolidated financial statement presentation. We
      believe that our audits provide a reasonable basis for our opinion.





In
      our
      opinion, based on our audit, such consolidated financial statements present
      fairly, in all material respects, the financial position of Cosmo Communications
      Corporation as of March 31, 2006 and the related consolidated statements of
      income, stockholders' equity and cash flows for the year ended March 31, 2005
      and 2004 in accordance with accounting principles generally accepted in the
      United States of America.





As
      discussed in Note 3 to the financial statements, certain errors resulting from
      the incorrect exclusion of previously reported realized exchange gains
      which had been deducted from taxable income for the year ended March 31, 2005
      were discovered by the Company's management during the current year. 
Accordingly, the 2005 financial statements have been restated and an adjustment
      has been made to accumulated deficit as of April 1, 2005 to correct
      the errors.




/s/
                SF Partnership, LLP Chartered
                Accountants


Toronto,
      Canada


June
      3,
      2005


except
      for note 3, as to which the date is June 26, 2006


29
 *Table
          of Contents*




**COSMO
      COMMUNICATIONS CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**March
                31,****2006**
            
            **2005**
              **Restated****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            548,506
            
            $
            628,561Accounts
                receivable, less allowances of $14,040 and $4,401 at March 31, 2006
                and
                2005, respectively
            
            
            3,122,195
            
            
            1,833,167Inventories
            
            
            4,136,341
            
            
            5,065,831Prepaid
                expenses and other
            
            
            372,021
            
            
            2,564Total
                current assets
            
            
            8,179,063
            
            
            7,530,123Equipment,
                net
            
            
            64,716
            
            
            73,118Intangibles
            
            
            5,403
            
            
            12,579Total
                assets
            
            $
            8,249,182
            
            $
            7,615,820**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable and accrued liabilities
            
            $
            1,011,499
            
            $
            906,669Accounts
                payable to parent company
            
            
            2,818,144
            
            
            2,776,628Taxes
                payable
            
            
            276,745
            
            
            152,924Advances
                from parent company
            
            
            1,716,107
            
            
            1,617,302Deferred
                taxes
            
            
            166,336
            
            
            318,074Total
                liabilities
            
            
            5,988,831
            
            
            5,771,597Stockholders’
                equityCapital
                stock
            
            
            1,455,200
            
            
            1,455,200Additional
                paid-in capital
            
            
            26,272,774
            
            
            26,272,774Accumulated
                deficit
            
            
            (25,160,748
            )
            
            (25,307,726
            )Accumulated
                other comprehensive loss
            
            
            (306,875
            )
            
            (576,025
            )Total
                stockholders’ equity
            
            
            2,260,351
            
            
            1,844,223Total
                liabilities and stockholders’ equity
            
            $
            8,249,182
            
            $
            7,615,820


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


30
 *Table
          of Contents*




**COSMO
      COMMUNICATIONS CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**


**Year
                Ended March 31,****2006**
            
            **2005**
              **Restated**
            
            **2004**Sales
            
            $
            51,010,554
            
            $
            35,452,041
            
            $
            32,158,910Cost
                of products sold
            
            
            48,156,516
            
            
            32,846,284
            
            
            29,476,310Gross
                profit
            
            
            2,854,038
            
            
            2,605,757
            
            
            2,682,600Commission
                income
            
            
            1,508,990
            
            
            1,853,534
            
            
            1,317,872Operating
                expenses:Salaries
                and wages
            
            
            1,641,781
            
            
            1,185,443
            
            
            1,053,412Selling
                and delivery
            
            
            1,033,210
            
            
            1,381,924
            
            
            1,351,502General
                and administrative
            
            
            1,042,343
            
            
            735,014
            
            
            580,516Amortization
            
            
            23,183
            
            
            32,345
            
            
            20,982Total
                operating expenses
            
            
            3,740,517
            
            
            3,334,726
            
            
            3,006,412Income
                from operations
            
            
            622,511
            
            
            1,124,565
            
            
            994,060Interest
            
            
            266,644
            
            
            221,679
            
            
            222,731Loss
                on foreign exchange
            
            
            36,696
            
            
            10,536
            
            
            79,917Income
                before income taxes
            
            
            319,171
            
            
            892,350
            
            
            691,412Income
                tax expense - current
            
            
            323,931
            
            
            251,598
            
            
            98,407Income
                tax expense - deferred
            
            
            (151,738
            )
            
            444,525
            
            
            (126,448
            )Net
                income
            
            $
            146,978
            
            $
            196,227
            
            $
            719,453Foreign
                currency translation adjustment
            
            
            269,150
            
            
            459,009
            
            
            283,284Comprehensive
                income
            
            $
            416,128
            
            $
            655,236
            
            $
            1,002,737Earnings
                per common share:Net
                income:Basic
                and diluted
            
            $
            0.01
            
            $
            0.01
            
            $
            0.02Weighted
                average shares:Basic
                and diluted
            
            
            29,104,000
            
            
            29,104,000
            
            
            29,104,000


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


31
 *Table
          of Contents*




**COSMO
      COMMUNICATIONS CORPORATION AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**Accumulated****Capital
                Stock**
            
            **Additional**
            
            
            
            **Other****Paid-In**
            
            **Accumulated**
            
            **Comprehensive****Shares**
            
            **Amount**
            
            **Capital**
            
            **Deficit**
            
            **Income
                (Loss)**
            
            **Total**Balance
                at April 1, 2003
            
            
            29,104,000
            
            $
            1,455,200
            
            $
            26,272,774
            
            $
            (26,223,406
            )
            $
            (1,318,318
            )
            $
            186,250Currency
                translation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            283,284
            
            
            283,284Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            719,453
            
            
            —
            
            
            719,453Balance
                at March 31, 2004
            
            
            29,104,000
            
            
            1,455,200
            
            
            26,272,774
            
            
            (25,503,953
            )
            
            (1,035,034
            )
            
            1,188,987Currency
                translation restated
            
            
            —
            
            
            —
            
            
            —
            
            
            
            
            
            459,009
            
            
            459,009Net
                income restated
            
            
            —
            
            
            —
            
            
            —
            
            
            196,227
            
            
            —
            
            
            196,227Balance
                at March 31, 2005 Restated
            
            
            29,104,000
            
            
            1,455,200
            
            
            26,272,774
            
            
            (25,307,726
            )
            
            (576,025
            )
            
            1,844,223Currency
                translation
            
            
            —
            
            
            —
            
            
            —
            
            
            
            
            
            269,150
            
            
            269,150Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            146,978
            
            
            —
            
            
            146,978Balance
                at March 31, 2006
            
            
            29,104,000
            
            $
            1,455,200
            
            $
            26,272,774
            
            $
            (25,160,748
            )
            $
            (306,875
            )
            $
            2,260,351


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


32
 *Table
          of Contents*




**COSMO
      COMMUNICATIONS CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**Year
                Ended March 31,****2006**
            
            **2005**
              **Restated**
            
            **2004****Cash
                flows from operating activities:**Net
                income
            
            $
            146,978
            
            $
            196,227
            
            $
            719,453Adjustments
                to reconcile net income to net cash used in operating
                activities:Depreciation
            
            
            23,183
            
            
            32,345
            
            
            20,983Deferred
                income taxes
            
            
            (151,738
            )
            
            444,525
            
            
            (126,448
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (1,289,028
            )
            
            2,294,551
            
            
            (1,398,137
            )Inventories
            
            
            929,490
            
            
            (2,532,197
            )
            
            (516,878
            )Prepaid
                expenses and other
            
            
            (369,457
            )
            
            -
            
            
            36,135Accounts
                payable and accrued liabilities
            
            
            104,828
            
            
            225,924
            
            
            (104,692
            )Taxes
                payable
            
            
            123,821
            
            
            106,139
            
            
            46,784Accounts
                payable to parent company
            
            
            41,517
            
            
            (1,451,861
            )
            
            996,168Net
                cash used in operating activities
            
            
            (440,406
            )
            
            (684,347
            )
            
            (326,632
            )**Cash
                flows from investing activities:**Purchases
                of equipment
            
            
            (7,604
            )
            
            (8,516
            )
            
            (88,433
            )Net
                cash used in investing activities
            
            
            (7,604
            )
            
            (8,516
            )
            
            (88,433
            )**Cash
                flows from financing activities:**Advances
                from parent company
            
            
            98,805
            
            
            92,518
            
            
            87,061Net
                cash provided by financing activities
            
            
            98,805
            
            
            92,518
            
            
            87,061Effect
                of exchange rate changes on cash
            
            
            269,150
            
            
            459,009
            
            
            283,284Net
                decrease in cash and cash equivalents
            
            
            (80,055
            )
            
            (141,336
            )
            
            (44,720
            )Cash
                and cash equivalents at beginning of year
            
            
            628,561
            
            
            769,897
            
            
            814,617Cash
                and cash equivalents at end of year
            
            $
            548,506
            
            $
            628,561
            
            $
            769,897




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


33
 *Table
          of Contents*




**COSMO
      COMMUNICATIONS CORPORATIONAND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**





**1.**
            **Nature
                of Operations**





Cosmo
      Communications Corporation and subsidiaries (the "Company" or "Cosmo") market
      and distribute consumer electronic products. The Company has operations in
      Hong
      Kong and Canada.


**2.**
            **Summary
                of Significant Accounting Policies*****Basis
                of Presentation***




The
      accounting policies of the Company are in accordance with accounting principles
      generally accepted in the United States of America. Presented below are those
      policies considered particularly significant:


***Principles
                of Consolidation***


The
      Company includes, in consolidation, its wholly owned subsidiaries, Cosmo
      Communications Canada Inc. and Cosmo Communications (H.K.) Limited. All
      significant intercompany transactions and balances have been eliminated upon
      consolidation.


***Use
                of Estimates***




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      the disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual results could differ from those estimates. These
      estimates are reviewed periodically, and, as adjustments become necessary,
      they
      are reported in earnings in the period in which they become known.


***Revenue
                Recognition***




Sales,
      net of estimated sales returns, are recognized upon passage of title to the
      customer. This occurs upon shipment or upon receipt by the customer depending
      on
      the country of the sale and the agreement with the customer. Revenue is
      recognized if persuasive evidence of an agreement exists, the sales price is
      fixed or determinable, and collectability is reasonably assured.





Commission
      income is derived from reverse logistic services that consist of handling other
      distributor companies returned goods. In providing these services, the Company
      acts as an agent or broker without assuming the risks and rewards of ownership
      of the goods and therefore reports the commissions on a net basis. Revenue
      is
      recognized based on the completion of the contracted services.


34
 *Table
            of Contents*




**COSMO
      COMMUNICATIONS CORPORATIONAND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**





***Advertising
                Allowances***




Effective
      January 1, 2002, the Company adopted Emerging Issues Task Force Issue No. 01-9, *Accounting
      for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s
      Products* (“EITF
      01-9”). Upon adoption of EITF 01-9, the Company is required to classify certain
      payments to its customers as a reduction of sales. The Company grants
      advertising allowances to its major customers as contributions to promote the
      Company's products. Management has determined that the Company meets the
      requirements of EITF 01-9 in order to characterize these contributions as a
      cost
      as opposed to a reduction in revenue and accordingly these costs are included
      in
      selling and delivery expenses.


***Consolidated
                Statements of Income
                Classifications***




The
      Company calculates its gross profit as the difference between its revenue and
      the associated cost of products sold. Cost of products sold includes direct
      product costs, inbound freight, excise taxes, casualty insurance, import duties
      and broker fees, vendor allowances, and increases or decreases to the Company’s
      FIFO reserve. The Company’s gross profit may not be comparable to other entities
      whose shipping and handling expenses are a component of cost of sales. Instead
      the Company includes these costs in selling and delivery expenses which amounted
      to $580,676 (2005 - $835,814).





The
      Company classifies the following expense categories separately on its statement
      of operations: salaries and wages; selling and delivery; and general and
      administrative. The Company’s labor costs of the warehouse and office staff are
      included in the salaries and wages expense category. The Company’s selling
      expenses primarily include shipping and handling costs, sales commissions,
      travel, entertainment, and product promotional costs. General and administrative
      expenses of the Company primarily include legal costs, insurance, rent, repairs,
      and general office expenses.


***Cash
                and Cash Equivalents***




Cash
      and
      cash equivalents consist of commercial accounts and interest-bearing bank
      deposits and are carried at cost, which approximates current value. Items are
      considered to be cash equivalents if the original maturity is three months
      or
      less.


***Inventories***




Inventories
      are valued at the lower of cost or net realizable value. Cost is determined
      on a
      first-in, first-out basis. Inventory is comprised of finished products that
      the
      Company intends to sell to its customers. The Company periodically makes
      judgments and estimates regarding the future utility and carrying value of
      its
      inventory. The carrying value of inventory is periodically reviewed and
      impairments, if any, are recognized when the expected future benefit from the
      inventory is less than its carrying value. The Company has inventory reserves
      for estimated obsolescence or unmarketable inventory which is equal to the
      difference between the cost of inventory and the estimated market value based
      upon assumptions about future demand and market conditions. For the year ended
      March 31, 2006, the Company increased its inventory reserve to
      $250,639.


35
 *Table
          of Contents*




**COSMO
      COMMUNICATIONS CORPORATIONAND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**




***Equipment***




Equipment
      is stated at historical cost less accumulated depreciation. Depreciation, based
      on the estimated useful lives of the assets, is provided using the under noted
      annual rates and methods:


Furniture
                  and fixtures
              20%
                  declining balanceEquipment
              20%
                  declining balanceComputer
              25%
                  declining balanceWarehouse
                  equipment
              20%
                  declining balance
 ***Intangible
          Assets***


Intangible
      assets with finite lives are amortized by the straight-line method (which,
      for
      loan acquisition costs, also approximates the yield method) over the terms
      of
      the agreements or their estimated useful lives of five years.


***Foreign
                Translation
                Adjustment***




The
      accounts of the foreign subsidiaries were translated into U.S. dollars in
      accordance with the provisions of SFAS No. 52, *Foreign
      Currency Translation* .
      Management has determined that the Hong Kong dollar is the functional currency
      of the Hong Kong subsidiaries and the Canadian dollar is the functional currency
      of the Canadian subsidiary. Certain current assets and liabilities of these
      foreign entities are denominated in U.S. dollars. In accordance with the
      provisions of SFAS 52, transaction gains and losses on these assets and
      liabilities are included in the determination of income for the relevant
      periods. Adjustments resulting from the translation of the financial statements
      from their functional currencies to United States dollars are accumulated as
      a
      separate component of accumulated other comprehensive income and have not been
      included in the determination of income for the relevant periods.


***Income
                Taxes***




The
      Company accounts for income taxes pursuant to SFAS No. 109, *Accounting
      for Income Taxes* .
      Deferred tax assets and liabilities are recorded for differences between the
      financial statement and tax basis of the assets and liabilities that will result
      in taxable or deductible amounts in the future based on enacted tax laws and
      rates. Valuation allowances are established when necessary to reduce deferred
      tax assets to the amount expected to be realized. Income tax expense is recorded
      for the amount of income tax payable or refundable for the period increased
      or
      decreased by the change in deferred tax assets and liabilities during the
      period.


36
 *Table
          of Contents*




**COSMO
      COMMUNICATIONS CORPORATIONAND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**





***Fair
                Value of Financial
                Instruments***




The
      Company's financial instruments include cash and cash equivalents, receivables,
      payables, and advances from the parent company.





The
      estimated fair value of financial instruments has been determined by the Company
      using available market information and valuation methodologies. Considerable
      judgment is required in estimating fair value. Accordingly, the estimates may
      not be indicative of the amounts the Company could realize in a current market
      exchange. At March 31, 2006 and 2005, the carrying amounts of cash, accounts
      receivable, accounts payable and accrued liabilities, and loans payable
      approximate their fair values due to the short-term maturities of these
      instruments.


***Comprehensive
                Income***




The
      Company adopted SFAS No. 130, *Reporting
      Comprehensive Income* that
      establishes standards for reporting and presentation of comprehensive income
      and
      its components in a full set of financial statements. Comprehensive income
      is
      presented in the statements of changes in stockholders' equity, and consists
      of
      net income (loss) and unrealized gains (losses) on available for sale marketable
      securities, foreign currency translation adjustments and changes in market
      value
      of future contracts that qualify as a hedge; and negative equity adjustments
      recognized in accordance with SFAS 87, Employers' Accounting for Pensions.
      SFAS
      No. 130 requires only additional disclosures in the financial statements and
      does not affect the Company's financial position or results of
      operations.


***Earnings
                or Loss Per Share***




The
      Company accounts for earnings per share pursuant to SFAS No. 128, *Earnings
      per Share* ,
      which
      requires disclosure on the financial statements of "basic" and "diluted"
      earnings (loss) per share. Basic earnings (loss) per share is computed by
      dividing net income (loss) by the weighted average number of common shares
      outstanding for the year. Diluted earnings (loss) per share is computed by
      dividing net income (loss) by the weighted average number of common shares
      outstanding plus common stock equivalents (if dilutive) related to stock options
      and warrants for each year.







There
      were no dilutive financial instruments for the years ended March 31, 2006 and
      2005.


37
 *Table
          of Contents*




**COSMO
      COMMUNICATIONS CORPORATIONAND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**





***Valuation
                of Long-Lived Assets***




In
      accordance with SFAS No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ,
      long-lived assets to be held and used are analyzed for impairment whenever
      events or changes in circumstances indicate that the related carrying amounts
      may not be recoverable. The Company evaluates at each balance sheet date whether
      events and circumstances have occurred that indicate possible impairment. If
      there are indications of impairment, the Company uses future undiscounted cash
      flows of the related asset or asset grouping over the remaining life in
      measuring whether the assets are recoverable. In the event such cash flows
      are
      not expected to be sufficient to recover the recorded asset values, the assets
      are written down to their estimated fair value. Long-lived assets to be disposed
      of are reported at the lower of carrying amount or fair value of the asset
      less
      cost to sell.


***Concentration
                of Credit Risks***




SFAS
      No.
      105, *Disclosure
      of Information about Financial Instruments with Off-Balance Sheet Risk and
      Financial Instruments with Concentration of Credit Risk,* requires
      disclosure of any significant off-balance sheet risk and credit risk
      concentration. The Company is exposed to credit risk on accounts receivable
      from
      its customers. In order to reduce its credit risk, the Company has adopted
      credit policies which include the analysis of the financial position of its
      customers and the regular review of their credit terms.


***Recent
                Accounting
                Pronouncements***




In
      May
      2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, *Accounting
      for Certain Financial Instruments With Characteristics of Both Liabilities
      and
      Equity.* This
      standard requires issuers to classify as liabilities the following three types
      of freestanding financial instruments: (1) mandatory redeemable financial
      instruments, (2) obligations to repurchase the issuer's equity shares by
      transferring assets; and (3) certain obligations to issue a variable number
      of
      shares. The Company adopted SFAS No. 150 during the year ended March 31, 2004.
      The adoption of SFAS No. 150 did not have a material impact on the financial
      position or results of operations of the Company.


38
 *Table
          of Contents*




**COSMO
      COMMUNICATIONS CORPORATIONAND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**





***Recent
                Accounting Pronouncements
                (Continued)***




In
      November 2004, the FASB issued SFAS No. 151, *Inventory
      Costs* ,
      an
      amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, Inventory
      Pricing. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4 to clarify
      the accounting for abnormal amounts of idle facility expense, freight, handling
      costs, and spoilage. This statement requires that those items be recognized
      as
      current period charges regardless of whether they meet the criterion of “so
      abnormal” which was the criterion specified in ARB No. 43. In addition, this
      statement requires that allocation of fixed production overheads to the cost
      of
      production be based on normal capacity of the production facilities. The Company
      adopted this pronouncement on 1 April 2005 and does not expect the adoption
      to
      have a material impact on the financial condition or results of operations
      for
      current or future periods.





In
      December 2004, the FASB issued SFAS 123(R), *Share-Based
      Payment.* SFAS
      123(R) amends SFAS 123 and APB No. 25. SFAS 123(R) requires that the cost of
      share-based payment transactions (including those with employees and
      non-employees) be recognized in the financial statements. SFAS 123(R) applies
      to
      all share-based payment transactions in which an entity acquires goods or
      services by issuing (or offering to issue) its shares, share options, or other
      equity instruments or by incurring liabilities (1) in amounts based (even in
      part) on the price of the entity’s shares or other equity instruments, or (2)
      that require (or may require) settlement by the issuance of an entity’s shares
      or other equity instruments. This statement is effective (1) for public
      companies qualifying as SEC small business issuers, as of the first interim
      period or fiscal year beginning after December 15, 2005, or (2) for all other
      public companies, as of the first interim period or fiscal year beginning after
      June 15, 2005, or (3) for all nonpublic entities, as of the first fiscal year
      beginning after December 15, 2005. Management does not expect the adoption
      of
      this new standard to have a significant impact on the results of operations
      or
      financial position.





In
      December 2004, the FASB issued SFAS 153, *Exchanges
      of Non Monetary Assets* ,
      an
      amendment to Opinion No. 29, *Accounting
      for Non Monetary Transactions* .
      Statement 153 eliminates certain differences in the guidance in Opinion No.
      29
      as compared to the guidance contained in standards issued by the International
      Accounting Standards Board. The amendment to Opinion No. 29 eliminates the
      fair
      value exception for non monetary exchanges of similar productive assets and
      replaces it with a general exception for exchanges of non monetary assets that
      do not have commercial substance. Such an exchange has commercial substance
      if
      the future cash flows of the entity are expected to change significantly as
      a
      result of the exchange. SFAS 153 is effective for non monetary asset exchanges
      occurring in periods beginning after June 15, 2005. Earlier application is
      permitted. Management does not expect adoption of SFAS 153 to have a material
      impact on the Company’s financial statements.


39
 *Table
            of Contents*





**COSMO
      COMMUNICATIONS CORPORATIONAND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**





***Recent
                Accounting Pronouncements
                (Continued)***




In
      March
      2005, the FASB issued FASB Interpretation (FIN) No. 47, *Accounting
      for Conditional Assets Retirement Obligations—An Interpretation of FASB
      Statement No. 143* .
      FIN 47
      requires an entity to recognize a liability for the fair value of a conditional
      asset retirement obligation when incurred if the liability's fair value can
      be
      reasonably estimated. FIN 47 is effective no later than the end of fiscal years
      ending after December 15, 2005 and therefore is applicable to the year ended
      March 31, 2006. The adoption of FIN 47 did not have a material impact on the
      Company's consolidated results of operations or financial
      condition.





In
      June
      2005, the FASB issued SFAS No. 154, *Accounting
      Changes and Error Corrections* which
      changes the requirements for the accounting for and reporting of voluntary
      changes in accounting principle. SFAS 154 requires retrospective application
      to
      prior periods’ financial statements of changes in accounting principle, unless
      impracticable. SFAS 154 supersedes Accounting Principles Board Opinion No.
      20, *Accounting
      Change* (APB
      20),
      which previously required that most voluntary changes in accounting principles
      be recognized by including in the current period’s net income the cumulative
      effect of changing to the new accounting principle. SFAS 154 also makes a
      distinction between retrospective application of an accounting principle and
      the
      restatement of financial statements to reflect correction of an error. SFAS
      154
      carries forward without changing the guidance contained in APB 20 for reporting
      the correction of an error in previously issued financial statements and a
      change in accounting estimate. SFAS 154 applies to voluntary changes in
      accounting principle that are made in fiscal years beginning after December
      15,
      2005. We do not expect that the adoption of SFAS 154 will have a significant
      impact on our financial condition or results of operations.


**3.**
            **Restatement
                of 2005 Results**




During
      the preparation of the March 31, 2006 corporate tax return for Cosmo
      Communications Canada Inc., the Company discovered that it had previously
      understated its taxable income. This error related to the incorrect exclusion
      of
      certain realized exchange gains which had been deducted from taxable income
      in
      the prior year. In addition, due to the incorrect translation of the accounts
      from their home currency to the reported currency, the Company determined that
      there were unrealized exchange gains, which were not taxable to Cosmo
      Communications Canada Inc. until subsequent years and therefore created a timing
      difference and a related deferred tax liability.




The
      Company restated its consolidated financial statements for the year ended March
      31, 2005 to reflect the adjusted taxes.


40
 *Table
          of Contents*




**COSMO
      COMMUNICATIONS CORPORATIONAND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**




**3.**
            **Restatement
                of 2005 Results
                (Continued)**




The
      following table shows the effect of the restatement:


As
                of March 31, 2005As
                Reported
            
            As
                Restated**Changes
                to Consolidated Balance Sheet**Accounts
                payable to parent company
            
            $
            2,711,964
            
            $
            2,776,628Taxes
                payable
            
            
            40,235
            
            
            152,924Deferred
                tax liability
            
            
            (22,657
            )
            
            318,074Accumulated
                other comprehensive loss
            
            
            (486,476
            )
            
            (576,025
            )Accumulated
                deficit
            
            
            (24,879,339
            )
            
            (25,307,726
            )


Year
                  Ended March 31, 2005As
                  Reported
              
              As
                  Restated**Changes
                  to Consolidated Statement of Operations**Loss
                  on foreign exchange
              
              $
              35,575
              
              $
              10,536Income
                  taxes
              
              
              137,060
              
              
              251,598Deferred
                  income taxes
              
              
              103,786
              
              
              444,525Net
                  Income
              
              
              624,614
              
              
              196,227Basic
                  and diluted net income per share
              
              
              0.02
              
              
              0.01**Changes
                  to Consolidated Statement of Stockholders Equity**Currency
                  translation
              
              $
              548,558
              
              $
              459,009Net
                  Income
              
              
              624,614
              
              
              196,227**Changes
                  to Consolidated Statement of Cash Flows**Net
                  Income
              
              $
              624,614
              
              $
              196,227Deferred
                  income taxes
              
              
              103,786
              
              
              444,525Taxes
                  payable
              
              
              (6,549
              )
              
              106,139Accounts
                  payable to parent company
              
              
              (1,516,525
              )
              
              (1,451,861
              )Net
                  cash used in operating activities
              
              
              (774,046
              )
              
              (684,347
              )Effect
                  of exchange rate changes on cash
              
              
              548,708
              
              
              459,009





The
      Company has restated the segment information in note 12 to reflect the
      adjustments to its Canadian operating segment. In addition, the Company had
      previously classified the US segment as domestic and the Hong Kong and Canadian
      segments as foreign.


41
 *Table
          of Contents*




**COSMO
      COMMUNICATIONS CORPORATIONAND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**




**3.**
            **Restatement
                of 2005 Results
                (Continued)**




The
      Company has restated the deferred tax liability reported in note 10. Previously
      the Company did not report any liability resulting from u nrealized
      foreign exchange transaction gains. As previously mentioned, the Company has
      subsequently determined that there was a deferred tax liability in the amount
      of
      $340,731 related to the timing difference in u nrealized
      foreign exchange transaction gains and note 10 has been restated to reflect
      this
      change.




The
      Company has restated the calculation for the provision for income taxes reported
      in note 10 for 2005. Previously the Company had reported the computed expected
      tax on accounting income as approximately $220,000. These amounts have been
      restated as $471,958. Previously the Company had reported unrealized gains
      as
      approximately $11,000. These amounts have been restated as unrealized foreign
      exchange gains deducted of $237,761 and recognition of previously unrealized
      foreign exchange gains of $109,378.





The
      Company had previously reported in none 11 that the accounts receivable from
      the
      customer that the Company is economically dependent on, amounted to
      approximately $239,000. This amount was incorrect and has been restated as
      $570,597.


**4.**
            **Equipment**





The
      components of equipment are as follows:


**March
                31,****2006**
            
            **2005**Furniture
                and fixtures
            
            $
            42,071
            
            $
            42,071Equipment
            
            
            31,858
            
            
            31,858Computer
            
            
            46,839
            
            
            39,343Warehouse
                equipment
            
            
            67,602
            
            
            67,494Leasehold
                improvements
            
            
            -
            
            
            13,032188,370
            
            
            193,798Less
                accumulated depreciation
            
            
            (123,654
            )
            
            (120,680
            )$
            64,716
            
            $
            73,118


**5.**
            **Accounts
                Payable to Parent Company**




As
      of
      March 31, 2006, the Company owed $4,534,251 (2005 - $4,393,930) to the parent
      company, the principal corporate shareholder of the Company. Of this amount
      $1,716,107 (2005 - $1,617,302) was owed in the form of trade payable and the
      remainder was in the form of advances, see note 6.


42
 *Table
          of Contents*




**COSMO
      COMMUNICATIONS CORPORATIONAND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**





**6.**
            **Advances
                from Parent Company**




The
      advances from The Starlight Group of Companies (“Starlight”) bear interest at
      Hong Kong prime rate plus 1% and is payable on demand. Interest accrued as
      of
      March 31, 2006 was $505,475 (2005 - $455,000).


**7.**
            **Commitments**




The
      Company leases premises under an operating lease with a five year term in Canada
      and shares the facilities for its Hong Kong operation. Minimum lease commitments
      under the leases at March 31, 2006 were:


**Operating
                  Leases**2007
              
              $
              289,6442008
              
              
              297,7122009
              
              
              150,874Total
                  minimum lease payments
              
              $
              738,230




**8.**
            **Capital
                Stock**




Authorized:30,000
            
            preferred
                stock, cumulative, convertible at $0.01 par value9,970,000
            
            preferred
                stock, at $0.01 par value50,000,000
            
            common
                stock at $0.05 par value, voting, participating




**March
                  31,****2006**
              
              **2005**Issued:29,104,000
                  common stock
              
              $
              1,570,950
              
              $
              1,570,9502,314,567
                  treasury stock
              
              
              (115,750
              )
              
              (115,750
              )$
              1,455,200
              
              $
              1,455,200


43
 *Table
            of Contents*




**COSMO
      COMMUNICATIONS CORPORATIONAND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**




**9.**
            **Related
                Party Transactions**




Apart
      from those as disclosed in note 6, the Company's transactions with related
      parties were, in the opinion of the directors, carried out on normal commercial
      terms and in the ordinary course of the Company's business.





During
      the year ended March 31, 2006, the Company purchased $36,339,662 (2005 -
      $21,703,000) of goods from Starlight and received $610,540 (2005 - $344,000)
      in
      commissions.





**10.**
            **Income
                Taxes**




The
      Company accounts for income taxes in accordance with SFAS No. 109. SFAS No.
      109
      prescribes the use of the liability method whereby deferred tax asset and
      liability account balances are determined based on differences between the
      financial reporting and tax bases of assets and liabilities and are measured
      using the enacted tax rates. The effects of future changes in tax laws or rates
      are not anticipated. Under SFAS No. 109 income taxes are recognized for the
      following: a) amount of tax payable for the current year, and b) deferred tax
      liabilities and assets for future tax consequences of events that have been
      recognized differently in the financial statements than for tax
      purposes.




The
      provision for income taxes reconciles to the amount obtained by applying the
      statutory income tax rates of 36.12% (2005 - 35.42%, 2004 - 36.6%) in Canada,
      17.5% (2005 - 17.5%, 2004 - 15.5%) in Hong Kong and 15.5% (2005 - 15.5%, 2004
      -
      20.5%) in US to income before provision for taxes as follows:




**March
                31,****2006**
            
            **2005**
              **Restated**
            
            **2004**Computed
                expected tax
            
            $
            130,392
            
            $
            471,958
            
            $
            150,407Expenses
                not deductible for tax purposes
            
            
            1,543
            
            
            9,398
            
            
            12,000Equipment
            
            
            (7,270
            )
            
            (6,517
            )
            
            (30,000
            )Unrealized
                foreign exchange gains
            
            
            (13,386
            )
            
            (237,761
            )
            
            (11,000
            )Recognition
                of previously unrealized foreign exchange gains
            
            
            189,495
            
            
            109,378
            
            
            -Utilization
                of tax losses carried forward
            
            
            (4,761
            )
            
            (94,858
            )
            
            (23,000
            )Provision
                for income taxes
            
            $
            296,013
            
            $
            251,598
            
            $
            98,407




The
      components of deferred income taxes have been determined at the combined
      Canadian federal and provincial statutory rate of 36.12% as
      follows:





**March
                31,****2006**
            
            **2005**
              **Restated**Deferred
                tax assets (liabilities):Book
                over tax depreciation
            
            $
            14,441
            
            $
            22,657Unrealized
                foreign exchange transaction gains
            
            
            (180,777
            )
            
            (340,731
            )Deferred
                income taxes
            
            $
            (166,336
            )
            $
            (318,074
            )


44
 *Table
            of Contents*




**COSMO
      COMMUNICATIONS CORPORATIONAND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**





**11.**
            **Economic
                Dependence**




The
      Company is economically dependent on its parent company for the supply of
      inventory products to its customers. A Canadian mass-market merchandiser and
      chain store is the Company's largest customer, which accounted for approximately
      90% of sales in 2006 and in 2005. Economic dependence exists with this
      identified customer. Loss of the customer may have significant adverse results
      to the financial position of the Company.





As
      of
      March 31, 2006, the accounts receivable from this customer amounted to
      approximately $2,033,346 (2005 - $570,597).


**12.**
            **Segment
                Information**




The
      Company operated in one business segment and all of its sales are consumer
      electronic products. The Company's customers are principally in Canada.
      Borrowings are principally in the United States.




**2006**
            
            **Canada**
            
            **Hong
                Kong**
            
            **United
                States**
            
            **Total**Assets
            
            $
            5,081,785
            
            $
            3,161,016
            
            $
            6,381
            
            $
            8,249,182Sales
            
            
            5,373,562
            
            
            45,636,992
            
            
            -
            
            
            51,010,554Gross
                margin
            
            
            910,226
            
            
            1,943,812
            
            
            -
            
            
            2,854,038Net
                income (loss)
            
            
            (333,696
            )
            
            579,481
            
            
            (98,806
            )
            
            (146,979
            )**2005
                Restated**Assets
            
            
            6,080,784
            
            
            1,522,458
            
            
            12,579
            
            
            7,615,821Sales
            
            
            3,769,979
            
            
            31,682,062
            
            
            -
            
            
            35,452,041Gross
                margin
            
            
            201,369
            
            
            2,404,388
            
            
            -
            
            
            2,605,757Net
                income (loss)
            
            
            (186,363
            )
            
            451,391
            
            
            (68,800
            )
            
            196,228





**13.**
            **Comparative
                Figures**




Certain
      figures in the 2005 and 2004 financial statements have been reclassified to
      conform with the basis of presentation used in 2006.




45
 *Table
            of Contents*




**Item 9.**
            ***Changes
                In and Disagreements with Accountants on Accounting and Financial
                Disclosure***




On
      September 16, 2005, SF Partnership, LLP (the "Former Accountant") resigned
      as
      auditor. On September 16, 2005 we engaged Walker & Company, (the "New
      Accountant"), as our independent certified public accountant. Our decision
      to
      engage the New Accountant was approved by the Board of Directors on September
      15, 2005.





The
      reports of the Former Accountant on the financial statements of the Company
      for
      each of the two most recent fiscal years did not contain an adverse opinion
      or
      disclaimer of opinion and was not qualified or modified as to uncertainty,
      audit
      scope or accounting principles for the two most recent fiscal years and all
      subsequent interim periods.





During
      the Company's two most recent fiscal years and the subsequent interim period
      through the date of resignation, there were no reportable events as the term
      described in Item 304(a)(1)(v) of Regulation S-K.





During
      the Company's two most recent fiscal years and the subsequent interim period
      through the date of resignation, there were no disagreements with the Former
      Accountant on any matters of accounting principles or practices, financial
      statement disclosure or auditing scope or procedure, which, if not resolved
      to
      the satisfaction of the Former Accountant would have caused it to make reference
      to the subject matter of the disagreements in connection with its reports on
      these financial statements for those periods.





The
      Company did not consult with the New Accountant regarding the application of
      accounting principles to a specific transaction, either completed or proposed,
      or the type of audit opinion that might be rendered on the Company's financial
      statements, and no written or oral advice was provided by the New Accountant
      that was a factor considered by the Company in reaching a decision as to the
      accounting, auditing or financial reporting issues.


**Item 9A.**
            ***Controls
                and Procedures***





***Evaluation
                of Disclosure Controls and
                Procedures***




Cosmo’s
      principal executive officer (“CEO”) and principal financial officer (“CFO”) are
      responsible for establishing and maintaining adequate internal control over
      its
      financial reporting. They have reviewed Cosmo’s disclosure controls and
      procedures as at March 31, 2006 in order to comply with the SEC’s requirements
      for certification of this Form 10-K. Cosmo is a non-accelerated filer and,
      accordingly, it is required to comply with the SEC’s enhanced requirements for
      certification and attestation of internal control over financial reporting
      for
      its Form 10-K for its fiscal year ending March 31, 2007.




Cosmo
      is
      currently evaluating what changes will be needed to meet the enhanced reporting
      relating to internal controls required by the Sarbanes Oxley Act and subsequent
      SEC regulations. Cosmo is currently in the process of establishing an enhanced
      internal control process. Cosmo did not make any substantial changes in its
      internal review of Cosmo’s financial reporting during 2005.


46
 *Table
          of Contents*




Based
      on
      their review of Cosmo’s disclosure controls and policies, Cosmo’s CEO and CFO
      concluded that its disclosure controls and procedures were effective to ensure
      that information required to be disclosed by Cosmo in the reports filed or
      submitted by it under the Securities Exchange Act of 1934, as amended, is
      recorded, processed, summarized and reported within the time periods specified
      in the rules and forms of the SEC, and included controls and procedures designed
      to ensure that information required to be disclosed by Cosmo in such reports
      is
      accumulated and communicated to management, including the CEO and CFO, as
      appropriate to allow timely decisions regarding required disclosures for 2006.


***Changes
                in Internal Controls***




Cosmo
      has
      not made any changes to their internal controls, and is not aware of changes
      in
      any other factors that could affect these controls since the review of those
      controls as of March 31, 2006.


**Item 9B.**
            ***Other
                Information***




None.


**PART III**


**Item 10.**
            ***Directors
                and Executive Officers of the
                Registrant***




The
      following table sets forth information concerning the directors and executive
      officers of Cosmo as of July 26, 2006:




**Name**
            
            **Age**
            
            **Position**Philip
                Lau
            
            58
            
            Chairman
                of the Board of Directors and PresidentPeter
                Horak
            
            65
            
            Chief
                Executive Officer and DirectorCarol
                Atkinson
            
            57
            
            Chief
                Financial Officer and DirectorYu
                Wing King
            
            54
            
            Vice
                President, Hong Kong operationJacky
                Lau
            
            47
            
            DirectorJeff
                Horak
            
            48
            
            Vice
                President -Sales and Marketing - Canada
                Operations


47
 *Table
            of Contents*


**Philip
      Lau** - *Chairman
      and President*





Mr.
      Philip Lau, Chairman of the Board of Directors, was appointed in January 2001
      after Starlight International Limited acquired 49% of the voting shares of
      the
      Company. Since 1987, Mr. Lau has been the Chairman of Starlight International,
      an electronics company the shares of which are listed on the Hong Kong Stock
      Exchange, and has extensive experience in the consumer electronics
      business.





**Peter
      Horak** - *Chief
      Executive Officer, Canada*





Mr.
      Peter
      Horak, President of Cosmo Canada, was appointed as the Chief Executive Officer
      in January 2001. Mr. Horak was the co-founder of Cosmo's Canadian subsidiary
      and
      has been its chief executive officer since 1988. Mr. Horak is the Company's
      chief sales, marketing, and sourcing executive.





**Carol
      Atkinson** - *Director*





Ms.
      Atkinson has served as a director of the Company since January 2001 after
      Starlight International Limited acquired its shares. Ms Atkinson is a licensed
      public accountant.





**Yu
      Wing Kin** - *Vice
      President, Administration, Hong Kong*





Mr.
      Kin
      has served as Vice President of Administration of Cosmo Hong Kong since joining
      the Company in August 1978.





**Jacky
      Lau** - *Director*





Mr.
      Jacky
      Lau has served as a director of the Company since January 2001 after Starlight
      International Limited acquired its shares. He joined Starlight International
      in
      1987 as the Director of Material Sourcing.





Mr.
      Philip Lau, Mr. Jacky Lau and Ms. Atkinson are siblings. Directors are elected
      annually by the shareholders and hold office until the next annual meeting
      and
      until their respective successors are elected and qualified. There are no other
      family relationships among any of the Company's directors and executive
      officers.





***Compliance
                with Section 16(A) of the Exchange
                Act.***





To
      our
      knowledge, based solely on a review of the copies of such reports furnished
      to
      the Company and written representations that no other reports were required, the
      Company believes that during the year ended March 31, 2006, its officers,
      directors and 10% shareholders complied with all Section 16(a)
      filing.


48
 *Table
          of Contents*




**Item 11.**
            ***Executive
                Compensation******Compensation
                of Directors***




Board
      Directors generally receive meeting attendance fees of $300. However, each
      such
      director waived his/her rights to receive such fees during fiscal 2006. Annual
      retainers are not currently provided to directors; however, such retainers
      may
      be re-instituted in the future.


***Executive
                Compensation***





The
      following table sets forth certain compensation information for the fiscal
      years
      ended March 31, 2006, 2005 with regard to (i) Peter Horak, our Chief Executive
      Officer, and to each of the four most highly compensated executive officers
      of
      Cosmo for fiscal 2006, 2005 and 2004:




**Summary
      Compensation Table**


**Annual
                  Compensation****Name
                  and Principal Position**
              
              **Year**
              
              **Salary**
              
              **Bonus**
              
              **Other
                  Annual**
                **Compensation****(1)**
              
              **All
                  Other**
                **Compensation**Peter
                  Horak
              
              
              2006
              
              $
              138,000
              
              $
              -
              
              $
              3,000
              
              $
              -Chief
                  Executive Officer
              
              
              2005
              
              
              138,000
              
              
              -
              
              
              4,000
              
              
              -and
                  Director
              
              
              2004
              
              
              138,000
              
              
              -
              
              
              2,950
              
              
              -Jeff
                  Horak
              
              
              2006
              
              $
              138,000
              
              $
              -
              
              $
              22,000
              
              $
              -Vice
                  President - Canada
              
              
              2005
              
              
              138,000
              
              
              -
              
              
              17,500
              
              
              -2004
              
              
              138,000
              
              
              -
              
              
              21,066
              
              
              -Yu
                  Wing King
              
              
              2006
              
              $
              47,114
              
              $
              4,017
              
              
              
              
              $
              -Vice
                  President - Hong Kong
              
              
              2005
              
              
              45,796
              
              
              2,290
              
              
              
              
              
              -2004
              
              
              45,246
              
              
              2,262
              
              
              
              
              
              -E.J
                  Colin
              
              
              2006
              
              $
              64,200
              
              $
              -
              
              $
              12,600
              
              $
              -National
                  Sales Manager - Canada
              
              
              2005
              
              
              64,200
              
              
              -
              
              
              12,400
              
              
              -2004
              
              
              51,724
              
              
              -
              
              
              9,807
              
              
              -





(1)
            Includes
                automobile expense allowances and other employee benefits


49
 *Table
            of Contents*




***Employment
                Agreements***




The
      Company did not have any employment agreements with any executive officers
      during fiscal 2006 and 2005.


***Long-term
                Compensation - Stock Option Grants and 401K Plan***




The
      Company does not have any stock option plan or 401K plan as long-term
      compensation.


**Item 12.**
            ***Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters***




The
      following table sets forth the name, address, number of shares beneficially
      owned, and the percentage of the Registrant’s total outstanding common stock
      shares owned by: (i) each of the Registrant’s Officers and Directors; (ii) the
      Registrant’s Officers and Directors as a group; and (iii) other shareholders of
      5% or more of the Registrant’s total outstanding common stock shares. The
      percentages have been calculated by taking into account all Shares owned on
      the
      record date as well as all such Shares with respect to which such person has
      the
      right to acquire beneficial ownership at such date or within 60 days thereafter.
      Unless otherwise indicated, all persons listed below have sole voting and sole
      investment power over the Shares owned.





**Title
                of Class**
            
            **Name
                and Address of**
              **Beneficial
                Owner**
            
            **Amount
                and**
              **Nature
                of**
              **Beneficial**
              **Ownership**
            
            **Percent**
              **of
                Class**Common
                Stock
            
            Starlight
                International,
              5/F,
                232 Aberdeen Road
              Hong
                Kong
            
            26,585,008
            
            91.3%Common
                Stock
            
            Peter
                Horak
              Unit
                2 - 55 Travail Road
              Markham,
                Ontario, Canada
            
            257,500
            
            039%Common
                Stock
            
            All
                Officers and Directors,
              as
                a Group
            
            26,842,508
            
            92.2%




**Item 13.**
            ***Certain
                Relationships and Related
                Transactions***




During
      the year ended March 31, 2006, we purchased $36,339,662 (2005 - $21,703,000)
      of
      goods from our parent company, Starlight and received $610,540 (2005 - $344,000)
      in commissions.


50
 *Table
          of Contents*


**Item 14.**
            ***Principal
                Accountant Fees and
                Services***




The
      following is a summary of the fees billed to the Company by Walker & Company
      Chartered Accounts Professional Corporation, SF Partnership LLP, Chartered
      Accountants and Chan & Watt Company for professional services rendered for
      the fiscal years ended March 31, 2006 and 2005:




**2006**
            
            **2005**Audit
                Fees (a)
            
            $
            29,247
            
            $
            24,231Audit
                Related Fees
            
            
            5,670
            
            
            1,500Tax
                Fees (b)
            
            
            3,000
            
            
            2,500All
                Other Fees
            
            
            -
            
            
            -





(a)
            
            Consists
                of fees billed for professional services rendered for the audit of
                the
                Company's consolidated financial statements and review of the interim
                consolidated financial statements included in quarterly
                reports.(b)
            
            Consists
                primarily of fees paid for tax compliance and tax planning services.
                This
                category includes services regarding tax return assistance, assistance
                with tax return filings in certain foreign jurisdictions, assistance
                with
                tax audits and appeals, and general U.S. and foreign tax
                advice.


***Policy
                on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
                Services of Independent Registered Public Accounting
                Firm***





The
      Company currently does not have a designated Audit Committee, and accordingly,
      the Company's Board of Directors' policy is to pre-approve all audit and
      permissible non-audit services provided by the independent auditors. These
      services may include audit services, audit-related services, tax services and
      other services. Pre-approval is generally provided for up to one year and any
      pre-approval is detailed as to the particular service or category of services
      and is generally subject to a specific budget. The independent auditors and
      management are required to periodically report to the Company's Board of
      Directors regarding the extent of services provided by the independent auditors
      in accordance with this pre-approval, and the fees for the services performed
      to
      date. The Board of Directors may also pre-approve particular services on a
      case-by-case basis.


51
 *Table
          of Contents*


**PART IV**


**Item 15.**
            ***Exhibits,
                Financial Statement Schedules and Reports on
                Form 8-K***




**Consolidated
      Financial Statements**




See
      Index
      to Consolidated Financial Statements on page 23 of this report.




**Financial
      Statement Schedule**




**SCHEDULE II —
      VALUATION AND QUALIFYING ACCOUNTS AND RESERVES**


**COSMO
      COMMUNICATIONS CORPORATION**




**Description**
              
              **Balance
                  at**
                **Beginning**
                **of
                  Year**
              
              **Additions**
                **(Reductions)**
                **Charged
                  to**
                **Costs
                  and**
                **Expenses**
              
              **Deductions**
              
              **Balance
                  at**
                **End of Period**Year
                  ended March 31, 2006Deducted
                  from asset account:Allowance
                  for doubtful accounts
              
              $
              4,401
              
              $
              10,855
              
              $
              1,216
              
              $
              14,040Sales
                  return and allowance reserve
              
              
              81,017
              
              
              3,756,254
              
              
              3,591,501
              
              
              245,770Total
              
              $
              85,418
              
              $
              3,767,109
              
              $
              3,592,717
              
              $
              259,810Year
                  ended March 31, 2005Deducted
                  from asset account:Allowance
                  for doubtful accounts
              
              $
              11,070
              
              $
              5,475
              
              $
              12,144
              
              $
              4,401Sales
                  return and allowance reserve
              
              
              32,409
              
              
              4,280,160
              
              
              4,231,552
              
              
              81,017Total
              
              $
              43,479
              
              $
              4,285,635
              
              $
              4,243,696
              
              $
              85,418Year
                  ended March 31, 2004Deducted
                  from asset account:Allowance
                  for doubtful accounts
              
              $
              16,149
              
              $
              28,193
              
              $
              33,272
              
              $
              11,070Sales
                  return and allowance reserve
              
              
              56,916
              
              
              3,671,513
              
              
              3,696,020
              
              
              32,409Total
              
              $
              73,065
              
              $
              3,699,706
              
              $
              3,729,292
              
              $
              43,479





Other
      financial statement schedules have not been presented, as they are not
      applicable.


52
 *Table
          of Contents*




**Exhibits**


**Exhibit****Number**
              
              **Description
                  of Document**3.1
              
              
              Articles
                  of Incorporationas
                  amended +3.2
              
              
              Registrant's
                  Bylaws ++16
              
              
              Letter
                  on Change in Accountant +++21.1
              
              
              List
                  of Subsidiaries of Cosmo Communications Corporation *23.1
              
              
              Consent
                  of Independent Registered Public Accounting Firm *31.1
              
              
              Certification
                  pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
                  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Peter
                  Horak *31.2
              
              
              Certification
                  pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
                  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Carol
                  Atkinson *32.1
              
              
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002 *+
              Previously
                  filed with Cosmo’s Annual Report on Form 10-K for the year ended
                  March 31, 1992, as amended.++
              Previously
                  filed with Registration Statement No. 2-83088.+++
              Previously
                  filed on September 28, 2005 with Cosmo’s Current Report on
                  Form 8-K.*
              Filed
                  herewith.


53
 *Table
            of Contents*




**SIGNATURES**




Pursuant
      to the requirements of the Section 13 or 15(d), as amended, the registrant
      has duly caused this report to be signed on its behalf by the undersigned,
      thereunto duly authorized, in the City of Markham, Ontario, Canada on August
      4,
      2006.




COSMO
              COMMUNICATIONS CORPORATIONBy:
            /s/
                PETER HORAKPeter
              HorakPresident
              and Chief Executive Officer




Pursuant
      to the requirements of the Securities Exchange Act of 1934, as amended, this
      Report has been signed by the following persons in the capacities and on the
      dates indicated:


**Name**
              
              **Title**
              
              **Date**/s/PETER
                  HORAK
              
              President,
                  Chief Executive Officer and
              
              August
                  4, 2006Peter
                  Horak
              
              Director
                  (Principal Executive Officer)/s/CAROL
                  ATKINSON
              
              Chief
                  Financial Officer and
              
              August
                  4, 2006Carol
                  Atkinson
              
              Director
                  (Principal Financial Officer)






54