**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**Form
      10-KSB**




**For
      Annual and Transition Reports**


**Pursuant
      to Sections 13 or 15(D) of the**


**Securities
      Exchange Act of 1934**





x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**
              
              FOR
                THE FISCAL
                YEAR ENDED JUNE 30, 2006




or




o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**
              
              FOR
                THE
                TRANSITION PERIOD FROM ________________ TO
                __________________




COMMISSION
      FILE NUMBER: **333-87968**




**CENTERSTAGING
      CORP.**


(Exact
      name of Registrant as Specified in its Charter)





**DELAWARE**
            **45-0476087**(State
                or Other Jurisdiction of
            (I.R.S.
                Employer Identification No.)Incorporation
                or Organization)





**3407
      WINONA AVENUE**


**BURBANK,
      CA 91504**


(Address
      of Principal Executive Offices, including ZIP Code)




**(818)
      559-4333**


Registrant's
      Telephone Number, Including Area Code




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




**Title
                of Each Class**
            **Name
                of Each Exchange on Which Registered****None**




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


**Common
      Stock, $.0001 Par Value**




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 x No o




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulations 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-KSB or any amendment
      to
      this Form 10-KSB o




Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Act). Yes o No x




Issuer’s
      revenues for the fiscal year 2006 were $5.7 million




On
      September 15, 2006, the Registrant had 60,620,626 outstanding shares of Common
      Stock, $0.0001 par value.




**Documents
      Incorporated by Reference.**Portions of Registrant’s Proxy Statement to
      be filed in connection with its 2006 Annual Meeting of Shareholders are
      incorporated by reference into Part III of this Form 10-KSB.




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










**Safe
      Harbor Statement**





We
      desire
      to take advantage of the “safe harbor” provisions of the Private Securities
      Litigation Reform Act of 1995. This Report on Form 10-KSB contains a number
      of
      forward-looking statements that reflect management’s current views and
      expectations with respect to our business, strategies, products, future results
      and events and financial performance. All statements made in this Report other
      than statements of historical fact, including statements that address operating
      performance, events or developments that management expects or anticipates
      will
      or may occur in the future, including statements related to distributor
      channels, volume growth, revenues, profitability, new products, adequacy of
      funds from operations, statements expressing general optimism about future
      operating results and non-historical information, are forward-looking
      statements. In particular, the words “believe,” “expect,” “intend,” “
anticipate,” “estimate,” “may,” “will,” variations of such words, and similar
      expressions, identify forward-looking statements, but are not the exclusive
      means of identifying such statements, and their absence does not mean that
      the
      statement is not forward-looking. These forward-looking statements are subject
      to certain risks and uncertainties, including those discussed below. Our actual
      results, performance or achievements could differ materially from historical
      results as well as those expressed in, anticipated or implied by these
      forward-looking statements. We do not undertake any obligation to revise these
      forward-looking statements to reflect any future events or circumstances.




Readers
      should not place undue reliance on these forward-looking statements, which
      are
      based on management’s current expectations and projections about future events,
      are not guarantees of future performance, are subject to risks, uncertainties
      and assumptions (including those described below) and apply only as of the
      date
      of this Report. Our actual results, performance or achievements could differ
      materially from the results expressed in, or implied by, these forward-looking
      statements. We undertake no obligation to publicly update or revise any
      forward-looking statements, whether as a result of new information, future
      events or otherwise.




**Use
      of Certain Terms**





In
      this
      Form 10-KSB, the terms “we,” “us,” “our,” and “our company” refer to
      CenterStaging Corp. (“CenterStaging”), a Delaware corporation (formerly known as
“Knight Fuller, Inc.”), and, unless the context indicates otherwise, also
      include our subsidiary, CenterStaging Musical Productions, Inc. (“CMPI”), a
      California corporation.




2




**PART
      I**




**Item
      1 — Description of Business**




**Overview**




We
      engage
      primarily in: (i) providing musical production support and services, renting
      studios, and renting musical instruments and related equipment; and (ii) through
      our rehearsals.com division, producing and distributing original high-definition
      audio/video content of musicians and recording artists at our studios as they
      rehearse, give clinics and record. We formed our rehearsals.com division in
      2004, and we have devoted considerable resources during the past two years
      to
      increasing our staffing and production capabilities for the division. Each
      of
      our segments is related to and supports the other segment.




We
      believe that for more than the past several years we have provided the
      production support and services for the live musical performances at most if
      not
      all major televised awards shows produced in the United States. These have
      included the Academy Awards, the GRAMMY Awards, the Academy of Country Music
      Awards and the Golden Globe Awards. We also provide these services for other
      televised events, such as the Super Bowl halftime show, presidential
      inaugurations, the Jerry Lewis Telethon and television shows, including in
      fiscal year 2006 American Idol, the David Letterman Show, the Today Show, the
      Tonight Show and the Conan O’Brien Show.




We
      rent
      musical instruments and technical and production equipment to musicians,
      production companies, record companies, broadcast companies, managers and
      touring companies. The equipment is used for rehearsals in-house at our studios
      as well as for performances at concerts or other live events, such as award
      and
      television shows. We maintain an inventory of over 10,000 musical instruments
      and related items, which we believe is one of the largest selections available
      for rental to professional musicians and recording artists in the United
      States.




Through
      our rehearsals.com division, we are creating a library of high-definition
      audio/video content featuring well known recording artists as they rehearse
      or
      perform at our studio facilities. This original digital content provides a
      behind-the-scenes perspective of the recording artists, capturing candid,
      unscripted interactions among those artists and their music. As of June 30,
      2006, we had more than 400 hours of original content from over 50 recording
      artists.




Our
      plan
      is to generate revenues from rehearsals.com through the distribution and
      licensing of our high-definition audio/video content and through sponsorships
      on
      our rehearsals.com website. We launched this website in March 2006, and as
      of
      June 30, 2006, more than 15 hours of content was available on the website,
      including performances/rehearsals with Earth Wind & Fire, the New Cars,
      Pussycat Dolls and Mick Fleetwood. We have a binding letter of intent with
      MLB
      Advance Media, L.P., or BAM, for the exclusive exploitation of our audio/visual
      content in interactive media, including PC-based Internet, wireless/mobile,
      satellite and IPTV.




Our
      plan
      is to expand the distribution of our content worldwide through third-party
      distributors such as Internet service providers (ISPs), mobile carriers,
      handheld device makers, cable, satellite and broadcast providers, digital
      exhibitors, digital radio operators, and distributors of physical formats such
      as DVD. We are also in the process of negotiations with various third-party
      distribution channels for the distribution of the content. As of this date,
      we
      have none of these other agreements in place.




Our
      principal facility, which we call “CenterStaging Burbank,” is located near the
      Bob Hope Airport in Burbank, California. The facility is comprised of our
      executive and administrative offices, warehouse space for our inventory of
      musical instruments and equipment, one soundstage, eleven studios, editing
      rooms
      and our state-of-the-art high-definition broadcast center. The broadcast center
      serves as a hub to view, edit and produce the recorded material for
      rehearsals.com. Four of our studios are equipped with high-definition
      audio/video recording equipment for rehearsals.com.




3




We
      operate a secondary facility, which we call “CenterStaging East,” that is
      strategically located midway between New York City and Philadelphia, in
      Bensalem, Pennsylvania. This facility includes one studio and services primarily
      the East Coast.




**Business
      History**




Johnny
      Caswell and Jan Parent founded CMPI in 1980, and incorporated the business
      in
      1993. They were the sole owners, directors and executive officers until 2004,
      when Roger Paglia and Howard Livingston joined CMPI and became directors,
      executive officers and shareholders.




Initially,
      CMPI’s business consisted of musical equipment rental. As it accumulated an
      inventory of musical equipment, it leased a warehouse in Burbank, California
      to
      store the equipment, and then leased adjoining property to construct several
      professional music studios to rent to musicians for rehearsal and recording
      purposes. As the business expanded, CMPI used its existing contacts and growing
      expertise to provide production support and services for televised musical
      performances on some of the most widely watched television award shows and
      the
      most popular musical performers and personalities. These services included
      renting the musical equipment for the musicians performing during the award
      show, renting studios as rehearsal space for those musicians, and providing
      on-set expertise in preparing and staging the musical numbers during the shows.
      CMPI established its prominence in this field over the past 20 years by
      providing state-of-the-art rehearsal facilities, including soundstages,
      professional and technical support, production support and services and
      equipment and live-event expertise.




On
      August
      17, 2005, CenterStaging acquired CMPI through a reverse triangular merger (the
      “Merger”) of a subsidiary we formed for this purpose. CMPI was the surviving
      corporation in the Merger and became our wholly owned subsidiary. As a result
      of
      the Merger, the shareholders of CMPI acquired control of CenterStaging, and
      for
      financial reporting purposes, CMPI has been deemed to be the acquirer in the
      Merger. We have not continued any of CenterStaging’s business operations that
      existed prior to the Merger. All of our present business operations are
      conducted through CMPI.




**Musical
      Production Service and Rentals**




*Production
      Support and Services*




We
      provide production support and services for the staging of musical performances
      that are performed or recorded “live,” such as performances in televised award
      shows, concerts and other television appearances. We believe we are the dominant
      company in this business for major televised award shows in the United States,
      as we have provided the production support and services for the live musical
      performances at most major televised award shows produced in the United States
      in recent years. Our production services include planning the staging of the
      musical performances, determining the placement of the equipment, preparing
      the
      stage for performance and physically changing and restructuring the stage in
      between musical acts to accommodate each separate live musical number. We
      arrange and set up all musical equipment so that the musicians need only walk
      on
      stage to perform.




4




The
      following list sets forth some of the award shows, events and television shows
      for which we have provided our musical production support and services:




**Award
                Shows**
            
            **Since**Academy
                Awards
            
            1980Academy
                of Country Music Awards
            
            1980American
                Music Awards
            
            1980Billboard
                Awards
            
            1997EMMYs
            
            1993GRAMMY
                Awards
            
            1998MTV
                Music Awards
            
            1998**Events**
            
            **Since**Super
                Bowl pre-game and/or halftime show
            
            2001Presidential
                Inauguration
            
            1997Jerry
                Lewis Telethon
            
            1980**Television
                Shows (in fiscal year 2006)**David
                Letterman ShowTonight
                ShowToday
                ShowConan
                O’Brien ShowGood
                Morning AmericaAmerican
                IdolEllen
                Degeneres ShowTyra
                Banks ShowSaturday
                Night Live





We
      are
      engaged by the producers of the shows or events and are paid either on an hourly
      basis for time expended by personnel involved, or on a negotiated fixed-fee
      basis. The musical equipment used for the shows we support is usually rented
      from us, and the artists frequently use our studios to rehearse for these
      shows.




For
      example, we provided the production and support services for the 14 live music
      performances at the 2006 48 th Annual
      Grammy Awards at the Staples Center in Los Angeles, California on February
      8,
      2006. We commenced planning for the show in early January 2006, took a team
      of
      10 employees to the Staples Center six days before the show to set up our
      equipment and prepare the stage. We provided substantially all of the musical
      equipment and instruments used by the performers, some of whom rehearsed for
      the
      show in our Burbank studios.




*Studio
      Facilities Rental*




We
      maintain and operate one soundstage and eleven music studios at CenterStaging
      Burbank, and one studio at CenterStaging East. We rent our soundstage and
      studios for periods ranging from one day to several months. Rental rates range
      from $500 to $1,000 a day for music studios, and up to several thousand dollars
      per day for our soundstage. In connection with our facilities rentals, we also
      charge for utilities and usually rent most of the musical equipment used.




Our
      soundstage is capable of handling large-scale film and television productions
      due to its 40-foot clearance from floor to ceiling, and its steel superstructure
      designed to hold filming and lighting equipment.




Our
      music
      studios range in size from 23 feet by 30 feet to 40 feet by 60 feet. We believe
      that our facilities in the aggregate constitute one of the largest and
      best-appointed production and rehearsal studios in the United
      States.




The
      majority of our studio rentals are to recording artists for rehearsal and
      recording purposes. A substantial number of those artists are featured in the
      music award shows for which we provide musical production support and services.
      Many artists also rent our facilities to rehearse for a variety of reasons,
      such
      as upcoming performances or concert dates, and on occasion to produce
      recordings.




5




Recording
      artists who have used our musical facilities during our fiscal year 2006
      included, but are not limited to, Chris Brown, Christina Aguilera, Crosby,
      Stills, Nash and Young, Elton John, Faith Hill, Guns n’ Roses, Jamie Foxx, James
      Taylor, Janet Jackson, Jeff Beck, Jennifer Lopez, Jessica Simpson, John Mayer,
      Justin Timberlake, Kanye West, Kelly Clarkson, Les Paul, Mariah Carey, Mick
      Fleetwood, Nine Inch Nails, Paul McCartney, Pink, Pussycat Dolls, Smokey
      Robinson, Tom Petty and U2.




*Equipment
      Rental*




We
      rent
      musical instruments and technical and production equipment to musicians,
      production companies and record companies. The equipment is used for rehearsals
      in-house at our studios as well as for performances at concerts or other live
      events, such as award and television shows.




We
      maintain an inventory of over 10,000 musical instruments and related items,
      including electric guitars, acoustic guitars, bass guitars, guitar amplifiers,
      bass guitar amplifiers, speakers, keyboards, pianos, electronic drums, acoustic
      drum kits, cymbals, consoles, speaker enclosures, microphones and outboard
      processing equipment. We believe we have one of the largest selections of such
      instruments and equipment available for rental to professional musicians and
      recording artists in the United States. Professional musicians and recording
      artists generally require specific brands and models of instruments. Our large
      inventory allows us to supply this equipment on demand. On the rare occasion
      that we do not have a particular instrument, we can generally obtain it quickly
      from the manufacturer or distributor because of our long-standing relationships
      with these companies.




We
      rent
      instruments and equipment at a daily or weekly rate. We have the capability
      of
      supplying musicians with a large array of the musical instruments and equipment
      they want or need, anywhere in the United States, by shipping the instruments
      and equipment directly to them. We also maintain records of what equipment
      is
      preferred by which particular artists or productions, and can accommodate custom
      requests from artists and obtain virtually any type of equipment or gear
      requested.




*Marketing*




We
      have
      no employees dedicated to marketing our products and services and do not engage
      in substantial marketing activities to find our clients or retain them. We
      rely
      on our reputation and on personal relationships and strive to provide
      exceptional service to our clients for repeat business and word-of-mouth
      referrals.




*Competition*




We
      do not
      experience significant competition for providing production support and services
      for the live musical performances at major televised award shows in the United
      States. Our competition in the business of renting musical equipment is
      fragmented and consists largely of small firms. We compete on the basis of
      our
      large inventory of high quality musical instruments and equipment that enables
      us to provide the specific equipment required by the musicians on a timely
      basis. We compete with many other operators for renting studios. We compete
      on
      the basis of location, as we are located in two of the major entertainment
      locations in the United States (the Los Angeles area and Philadelphia area)
      and
      the ability to supply the musical instruments and equipment, which few
      competitors offer.




**Rehearsals.com**




*Overview*




Over
      the
      past 20 years, our involvement in the music industry has enabled us to build
      relationships with well known recording artists and their managers and record
      companies. During the past two years, we have been involved with these
      artists, to create a library of high-definition audio/video content
      for distribution worldwide through multiple distribution channels such as the
      Internet, television, telephone, cable, video, DVD, pay-per-view and airline
      screeners.




6




We
      believe that over the next few years demand for streaming audio/visual content
      will increase as cable and high bandwidth Internet usage increases worldwide.
      We
      also believe that media playback devices, such as personal computers,
      televisions, cell phones and portable electronic devices, will experience
      greater convergence, which will also grow the market for such content.




We
      believe that we are well situated to pursue this growing market through our
      new
      digital media division, rehearsals.com. In addition to the relationships we
      have
      built and our frequent contact with recording artists, our expertise in
      production and our personnel, facilities and equipment will allow us to take
      advantage of the opportunities offered by digital media and other innovations.
      To pursue this business, we have hired experienced senior professionals and
      technicians, have equipped four of our eleven Burbank studios with
      high-definition audio/video recording equipment, and built a new
      state-of-the-art broadcast center. We will similarly equip additional studios
      as
      the need arises.




Our
      plan
      is to generate revenues from rehearsals.com through the distribution and
      licensing of our high-definition audio/video content and through sponsorships
      on
      our rehearsals.com website. Revenues from licensing and distribution may include
      fees from distributors and direct sales to consumers through pay-per-download
      or
      subscription services. We believe that rehearsals.com will be a significant
      and
      growing part of our business. Two principal assumptions underlie this belief.
      First, that recording artists will continue to enter into contracts with us
      to
      permit us to produce, create and distribute video content involving them.
      Second, that there will be a large number of consumers willing to pay to view
      our original content and/or companies willing to become advertisers and sponsors
      on our rehearsals.com website or other distribution channels. We cannot give
      any
      assurances that these assumptions will prove to be accurate.




*The
      Digital Music Market*




According
      to published reports, the online portion of the music market will continue
      to
      expand, reaching $3.3 billion in revenue by 2008. Physical formats continue
      to
      drive much of the industry, but they are losing market share to “a la carte”
music downloads that allow consumers to download individual files or songs
      rather than albums, and music subscription services that provide consumers
      unlimited access to an online music publisher’s library for the length of the
      subscription.




Driving
      this demand are the possibilities created by technological innovations,
      primarily broadband Internet connections, wireless media, and portable digital
      music players such as Apple’s iPod. There is also a growing market convergence
      of portable music devices and mobile handsets, although small memory capacity
      and limited battery life have stalled this trend.




The
      challenge for the digital music businesses has been to make the music easier
      to
      buy than it is to illicitly download online. We believe that the legitimate
      digital music business is increasingly turning the corner from a niche market
      into the mainstream of consumer life. By making music accessible online and
      with
      prices set at competitive levels, de facto industry standards are being
      developed. Online music providers can feature exclusive tracks from major
      artists as well as entire albums or related content such as interviews, live
      event broadcasting or behind the scenes segments.




To
      date,
      the digital music market has been dominated by audio music with little video
      content. However, the same distributors of digital music are increasingly
      delivering content containing video as well as music, better known as music
      videos.




Two
      distinct business models have emerged in digital music; pay-per-download and
      subscription services. Pay-per-download services meet consumer demand to own
      music, but with greater flexibility than traditional albums on compact discs
      or
      CDs, because individual songs can be purchased at a fraction of the cost of
      an
      entire album. Services such as iTunes, MSN Music, Wal-Mart (US) and Tesco (UK)
      sell downloads from $0.80 per track. The tracks are transferable to portable
      devices such as the Apple iPod and can be saved or “burned” onto CDs that can be
      played on CD players.




7




Subscription
      services offer a very wide choice of music for a monthly fee, allowing users
      to
      access all the music they desire with the option to purchase selected tracks.
      Services like Napster, Rhapsody and Virgin Digital offer streaming and
      radio-play access for a monthly fee. Such fees typically amount to $9.99 per
      month and up. Downloads and burns are available for an extra per-track fee,
      typically $0.79 and up.




Many
      traditional retail outlets have yet to address the changes brought by the
      Internet and advances in digital music delivery. A notable exception, among
      others, is Apple’s iTunes service, which has achieved tremendous success. Apple
      has achieved a dominant position in the digital music delivery industry by
      making downloadable music easily available even to relatively unsophisticated
      consumers.




In
      the
      United States, sales of single track downloads (excluding downloads sold as
      albums and song streams) for 2004 rose to approximately 142.6 million, up from
      19.2 million in the second half of 2003 when Nielsen SoundScan began tracking
      such downloads. Album downloads for 2004 totaled approximately 5.5 million.
      In that same period, in the United Kingdom, the largest European download
      market, total downloads rose from insignificant numbers to approximately 5.7
      million.




Subscription
      services are growing steadily in the United States, with the number of paying
      subscribers for the major services, including Rhapsody, Napster, MusicNet,
      MusicMatch and eMusic, having increased to approximately 1.5 million individual
      accounts.




We
      believe that the emergence of a market for digital music delivery has been
      the
      single most important development in the music industry in recent years, and
      that the market for digital video delivery will experience growth in coming
      years. Digital music delivered through the Internet today offers unprecedented
      value, customization, convenience and accessibility for the consumer. During
      the
      past year, record companies have continued to explore with technology firms
      the
      best methods to harness peer-to-peer online communication between consumers
      for
      commercial use.




*Original
      Content Production*




Recording
      artists frequently use our studio facilities. We have entered into agreements
      with more that 50 recording artists (or their record companies) to digitally
      record their rehearsals or performances at our studios, and are continually
      in
      negotiations with other recording artists (or their record companies) for
      similar agreements. To date, we have recorded over 400 hours of unedited and
      edited audio/visual content and placed more than 15 hours of audio/visual
      content on the rehearsals.com website.




Our
      agreements involve a sharing of the revenues generated from distribution of
      the
      content and generally grant to the artists the right to approve all content.
      In
      some cases, we own the content, and in others we obtain a license for
      distribution for specified periods in specified media.




We
      believe that recording artists and their agents, managers and record companies
      are interested in pursuing these opportunities with us principally for two
      reasons. First, the content may generate additional revenues for them without
      any additional cost or material time commitment on their part. Second, the
      distribution of the content will provide additional marketing and promotion
      for
      the recording artists, which could stimulate additional sales of their
      recordings in other formats. This could be especially helpful to newer
      artists.




We
      have
      entered into an agreement with Universal Music Group (“UMG”), the largest
      recording company in the world, which grants us access to their vast roster
      of
      recording artists through December 31, 2006. To date, under our agreement with
      UMG, we have recorded the Pussycat Dolls, Hinder, Hoobastank, Alien Ant Farm,
      Joanna, Todd Snider, Schuyler Fisk (Sissy Spacek’s daughter) and Donny Osmond.




8




In
      July
      2006, rehearsals.com was exposed to television viewers by the airing of the
      NBC
      prime-time special “Star Tomorrow,” which launched the first network-introduced
      online band competition. According to the overnight rating, this show had a
      viewing audience of 3.6 million. We recorded performances by about 100 bands
      participating in the NBC online competition, judged in part by reknowned
      record producer David Foster (currently a judge on the Fox prime-time show
      “Celebrity Duets”). In exchange for production services during the competition,
      we obtained the right to include some of the audio/visual content on our
      rehearsals.com website, had visual banners promoting rehearsals.com, and
      received Internet links to rehearsals.com from the NBC “Star Tomorrow”
website.




We
      are
      also in the process of developing original content for distribution based upon
      concepts created internally and/or jointly created with third parties. For
      example, we have created the “Lessons from the Legends” series, which to date
      has featured recording artists such as Brian McKnight, Burt Bacharach, Manhattan
      Transfer and Richard Sherman.




We
      record
      artists in one of our four Burbank studios equipped with high-definition digital
      cameras and audio equipment. These cameras are remote controlled from our
      broadcast center, and thus our recording is not intrusive to the rehearsal
      or
      recording process. At our broadcast center, which was conceived and designed
      specifically to allow us to enter this business, we review, edit and package
      our
      audio/video content with state-of-the-art viewing and editing
      equipment.




The
      finished and produced content product may range from short segments of a few
      minutes in length, to entire songs, entire recording sessions, private showcases
      or concert rehearsals. This content provides a behind-the-scenes perspective
      of
      recording artists, capturing candid, unscripted interactions among those artists
      and the music they play.




*Distribution
      of Content*




Presently,
      the only distribution channel for our content is on our rehearsals.com website,
      which was launched in March 2006. In addition to carrying our original content,
      we may develop the rehearsals.com website into a supplier of information
      regarding television award shows, clinics, concert tours and itineraries, event
      calendars, technical personnel information, and musician biographies, among
      other categories.




We
      intend
      to extend distribution of our content through distributors such as Internet
      service providers (ISPs), mobile carriers, handheld device makers, cable,
      satellite and broadcast providers, digital exhibitors, digital radio operators,
      and distributors of physical formats, such as DVD. We are currently in the
      process of negotiating with distributors with online digital delivery
      capabilities, and plan to enter into exclusive or nonexclusive agreements with
      them.




In
      furtherance of our strategy, we entered into a binding letter of intent with
      MLB
      Advance Media, L.P., or BAM, on October 7, 2005. Under the letter of intent,
      we
      engaged BAM to provide certain services in connection with the exploitation
      of
      our audio/visual content in interactive media, including PC-based Internet,
      wireless/mobile, satellite and IPTV. These services include: (i) building,
      hosting and operating websites; (ii) providing interactive media marketing
      expertise; (iii) providing marketing, customer service, sponsorship and
      advertising sales support; and (iv) overseeing merchandise production and
      fulfillment and other activities. We may exploit our audio/visual and audio
      content in interactive media only with BAM, but BAM will not acquire any rights
      to such content.




The
      agreement with BAM is for a term of five years, and provides that BAM will
      participate in the revenues generated from our interactive media activities.
      In
      addition, BAM is entitled to receive warrants to purchase an aggregate of
      2,500,000 shares of our Common Stock in three tranches. The first tranche,
      for
      800,000 shares at an exercise price of $2.50 per share, was granted on
      December 31, 2005. Each of the other two tranches, for 850,000 shares at
      exercise prices equal to the market price of our Common Stock on the date of
      grant, will be granted only if our agreement with BAM has not been terminated
      and we achieve specified revenues. Each of the warrants will expire three years
      from the date of grant.




9




*Strategic
      Alliances*




In
      pursuit of expanding rehersals.com, we are pursing various strategic alliances
      with other companies - primarily in digital media - preferably on an in-kind
      basis to minimize cash expenditures. Some of these companies may provide
      opportunities to jointly develop content, or provide enhanced technologies,
      or
      grant access to customers or audiences. For example, we are negotiating with
      several companies to provide a one-day studio shoot of a band competition winner
      in exchange for in-kind advertising, promotion and opt-in email
      lists.




*Competition*




We
      believe that our preexisting music studio facilities, preexisting relationships
      with and access to recording artists, musical instrument and equipment inventory
      and expertise in the production field will allow us to produce our
      high-definition audio/video content at a substantially lower cost than would
      be
      incurred by a competitor just entering this field. Moreover, our content is
      likely to be unique, as it will feature recording artists in rehearsal and
      interacting with other artists or an audience in a “behind-the-scenes”
format.




**Employees**




At
      June
      30, 2006, we had 99 full-time employees. None of our employees is covered by
      a
      collective bargaining agreement. We consider our relationship with our employees
      to be good.




**Item
      2 — Description of Property**





**CenterStaging
      Burbank**




Our
      principal facility is located near the Bob Hope Airport in Burbank, California.
      The 150,000 square foot facility is comprised of our executive and
      administrative offices, warehouse space for our inventory of musical instruments
      and equipment, one soundstage, eleven studios, editing rooms and a recently
      constructed broadcast center. It is also the location for rehearsals.com.




We
      lease
      this facility under three leases. One lease expires June 30, 2008, and provides
      for monthly rent of $32,862 through June 2006, and $41,961 for the remainder
      of
      the term. The second lease expires January 3, 2009, provides for monthly rent
      of
      $13,845 beginning in Feb 2006 with a 3% increase each February for the term
      of
      the agreement. The third lease for the Burbank facility is with Jan &
Johnny, Inc. and expires June 30, 2008 with an option to extend the lease an
      additional five years (until June 30, 2013). This third Burbank lease provides
      for monthly payments of $33,075 with a 5% escalation clause each year through
      June 30, 2008. If the lease is extended, the rent commencing July 1, 2009 will
      be $40,000 per month.




**CenterStaging
      East**




Our
      secondary facility is located midway between New York City and Philadelphia
      in
      Bensalem, Pennsylvania. This facility occupies approximately 6,000 square feet
      of space and includes one studio. The lease expires February 28, 2007 and
      provides for monthly rent of $3,500. We have an option to remain beyond February
      28, 2007 for $3,850 per month until such time as a new lease is finalized or
      the
      lease is terminated.




**Item
      3 — Legal Proceedings**




Not
      applicable.




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




Not
      applicable.




10




**PART
      II**




**Item
      5 — Market for Common Equity and Related Stockholder Matters**




**Market
      Information**




Our
      Common Stock is currently traded under the symbol “CNSC” on the OTC Bulletin
      Board. Our Common Stock was approved for a non-priced quotation on the OTC
      Bulletin Board as of December 31, 2004, but did not trade until February
      17, 2005. The following table sets forth the high and low last sale prices
      on
      the OTC Bulletin Board for each quarter since the quarter ended March 31, 2005.
      These represent prices between dealers, exclusive of retail markup, markdown
      or
      commission, and do not necessarily represent actual transactions.




**Fiscal
                Year ended June 30, 2006**
            **High**
            
            **Low**First
                Quarter
            $5.75
            
            $1.30Second
                Quarter
            $6.90
            
            $3.90Third
                Quarter
            $8.00
            
            $3.00Fourth
                Quarter
            $4.00
            
            $2.00**Fiscal
                Year ended June 30, 2005**
            **High**
            
            **Low**Third
                Quarter(1)
            $6.75
            
            $5.50Fourth
                Quarter
            $7.20
            
            $4.35________________
              
              (1)Reflects
                initial trading activity commencing on February 17, 2005 through
                the end
                of the fiscal quarter ended March 31,
                2005.




**Holders**




As
      of
      September 15, 2006, there were 5,427 holders of record of our Common
      Stock.




**Dividends**




We
      have
      never paid any cash dividends on our Common Stock. We currently anticipate
      that
      we will retain any future earnings for use in our business. Consequently, we
      do
      not anticipate paying any cash dividends in the foreseeable future.




The
      payment of dividends in the future will depend upon our results of operations,
      as well as our short-term and long-term cash availability, working capital,
      working capital needs and other factors, as determined by our board of
      directors. Currently, except as may be provided by applicable laws, there are
      no
      contractual or other restrictions on our ability to pay dividends if we were
      to
      decide to declare and pay them.




**Sales
      of Unregistered Securities**




In
      the
      three months ended June 30, 2006, we sold 1,169,086 shares of our Common
      Stock for $1.50 per share to accredited investors. The issuance of these shares
      was exempt from registration under the Securities Act of 1933, pursuant of
      Section 4(2) of that Act and Regulation D as a transaction not involving a
      public offering. We did not use any general solicitation or general advertising
      in connection with these sales and we placed appropriate restrictions on
      transfer on the shares.




In
      April
      2006, the Company issued warrants to purchase an aggregate of 2,000,000 shares
      of Common Stock to a consultant. The warrants are fully vested, expire on
      March 31, 2009, and are exercisable as follows: (i) 800,000 warrants
      for $1.00 per share; (ii) 800,000 warrants for $1.60 per share; and
      (iii) 400,000 warrants for $1.75 per share. The issuance of these warrants
      was exempt from registration under the Securities Act of 1933, pursuant of
      Section 4(2) of that Act as a transaction not involving a public offering.
      We
      did not use any general solicitation or general advertising in connection with
      these warrants and we placed appropriate restrictions on transfer on the
      warrants.




11




In
      June
      2006, we sold 50,000 shares of our Common Stock for $1.50 per share to an
      accredited investor. The issuance of these shares was exempt from registration
      under the Securities Act of 1933, pursuant of Section 4(2) of that Act and
      Regulation D as a transaction not involving a public offering, and pursuant
      to
      Regulation S as an offshore transaction. We did not use any general solicitation
      or general advertising in connection with these sales and we placed appropriate
      restrictions on transfer on the shares and the transaction was an offshore
      transaction. We will pay a commission on this sale in an amount to be
      negotiated.




**Equity
      Compensation Plans**




The
      following table sets forth certain information regarding the Company’s equity
      compensation plans as of June 30, 2006.




(a)
            (b)
            (c)Plan
                category
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            Weighted-average
                exercise price of outstanding options, warrants and rights
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))Equity
                compensation plans approved by security holders
            3,914,000
            $1.82
            1,086,000Equity
                compensation plans not approved by security holders(1)
            2,840,000
            $1.71
            naTotal
            6,754,000
            $1.78
            1,086,000




(1)
      Represents shares underlying warrants granted from time to time to non-employees
      for services, including the following: (i) warrants that expire on
      March 31, 2009, and are exercisable as follows: (a) 800,000 warrants
      for $1.00 per share; (b) 800,000 warrants for $1.60 per share; and
      (c) 400,000 warrants for $1.75 per share; (ii) warrants to purchase
      800,000 shares for $2.50 per share that expire December 31, 2008; and (iii)
      warrants to purchase 40,000 shares for $2.00 per share that expire on October
      27, 2007.




**Item
      6 — Management's Discussion and Analysis or Plan of
      Operation**





**Overview**




On
      August
      17, 2005, CenterStaging acquired CMPI through a reverse triangular merger (the
      “Merger”) of a subsidiary we formed for this purpose. CMPI was the surviving
      corporation in the Merger and became our wholly owned subsidiary. As a result
      of
      the Merger, the shareholders of CMPI acquired control of CenterStaging, and
      for
      financial reporting purposes CMPI has been deemed to be the acquirer in the
      Merger. We accounted for the transaction as a reverse merger for financial
      reporting purposes, with the effect that our fiscal year automatically changed
      to the fiscal year of CMPI (July 1-June 30).




In
      2004
      we formed a new division, rehearsals.com, to produce and distribute original
      high-definition digital video content of musicians and recording artists at
      its
      studios as they rehearse, give clinics and record. This original digital content
      will provide a behind-the-scenes perspective of recording artists, capturing
      candid, unscripted interactions among those artists and the music they play.
      We
      intend to distribute this original content worldwide, primarily through third
      party distribution channels, such as the Internet, television, cable providers,
      video, DVD, and pay-per-view. We hope to generate revenues from this business
      primarily through sponsorships and through subscription fees and
      pay-per-download for access to content on our website. We have incurred
      significant costs in starting up this division but have not generated any
      revenues to date in the division. In March 2006, we launched the rehearsals.com
      website.




12




We
      recorded a net loss of $25.3 million in fiscal year 2006, compared to a net
      loss
      of $6.5 million for fiscal year 2005. The increase in the net loss was due
      primarily to: (i) $7.2 million of expense associated with the
      conversion of $7.2 million of outstanding convertible notes at a conversion
      price of 50% of the market price; (ii) an increase of $7.3 million of costs
      with
      our rehearsals.com division; and (iii) $2.5 million of expense associated
      with the issuance of Common Stock to consultants for services. Neither the
      conversion of the convertible notes nor the issuance of shares to consultants
      affected our liquidity as these were non-cash expenses. The conversion of the
      convertible notes and issuance of Common Stock to consultants also increased
      our
      Common Stock and paid-in-capital by $16.8 million. As a result and due to the
      issuance of 4,180,983 shares of Common Stock for proceeds of $6.2 million in
      fiscal year 2006, and notwithstanding our net loss, our stockholders’ deficit
      decreased from $8.3 million at June 30, 2005 to $5.8 million at
      June 30, 2006.




**Critical
      Accounting Policies**




Management’s
      discussion and analysis of our financial condition and results of operations
      are
      based on our consolidated financial statements, which have been prepared in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these financial statements requires management to make
      estimates and judgments that affect the reported amounts of assets, liabilities,
      revenues and expenses, and related disclosure of contingent assets and
      liabilities. On an ongoing basis, management evaluates its estimates, including
      those related to reserves for allowance for doubtful accounts, barter
      transactions, deferred income tax assets, estimated useful lives of property
      and
      equipment, accrued expenses, fair value of equity instruments and reserves
      for
      any commitments or contingencies. We base our estimates on historical experience
      and on various other assumptions that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ materially from these estimates under
      different assumptions or conditions.




Our
      significant accounting policies are summarized in Note 1 of the Notes to
      Consolidated Financial Statements contained in this report. We believe the
      following critical accounting policies affect our more significant judgments
      and
      estimates used in the preparation of our consolidated financial
      statements:




*Revenue
      Recognition.* We
      recognize rental revenue over the period that our equipment is held for
      rental or rehearsal studio facilities are rented under the terms of customer
      rental arrangements, which typically is less than 30 days. We recognize revenue
      only when there exists a written contract or purchase order signed by the
      customer evidencing the rental arrangement, we have delivered the equipment
      or
      rendered the services called for under the arrangement, the rental or management
      services fee has been fixed or otherwise can be determined from the terms of
      the
      contract or purchase order, and the fee is reasonably assured of
      collection.




*Costs
        of Producing Audio-visual Content.*We account
        for our entertainment projects in development pursuant to SOP 00-2. Costs
        incurred in producing audio-visual content for which we have secured
        distribution agreements are capitalized and remain unamortized until the
        project
        is distributed or are written off at the time they are determined not to
        be
        recoverable. Costs incurred in producing audio-visual content for which we
        have not secured distribution agreements are expensed as incurred until such
        time as we have secured distribution agreements.
  The
        capitalized cost of producing music videos of rehearsals is recognized as
        expense in accordance with the individual project forecast method specified
        in
        SOP 00-2, pursuant to which we estimate the ratio that revenue which is
        earned for such programming in the current period bears to its estimate at
        the
        beginning of the current year of total revenues to be realized from all media
        and markets for such programming. Amortization commences in the period in
        which
        revenue recognition commences. We regularly review and revise our total
        revenue estimates for each project, which may result in modifications to
        the
        rate of amortization. If a net loss is projected for a particular project,
        the
        related capitalized costs are written down to estimated realizable value.




*Stock-Based
      Compensation.* We
      account for stock-based compensation based on SFAS No.123R, “Accounting for
      Stock-Based Compensation.” Pursuant to SFAS No. 123R, we recognize an
      expense for the fair market value of the stock-based instruments granted to
      third parties and employees. The cost of stock-based awards to employees, based
      upon the fair value of the award on the grant date, is recognized in the period
      in which the award is made or over the vesting period, if any, of the award.
      The
      cost of stock-based awards to consultants and other third parties is determined
      based upon the value of the award on the grant date, or the date the services
      are rendered to us, whichever can be measured more reliably. The cost is
      recognized over the period in which the consultant or third party is committed
      to render services or the services are actually performed, whichever is
      shorter.




We
      adopted our 2005 Incentive Stock Option Plan and our 2005 Non-Qualified Option
      Plan under which we may issue an aggregate of 5,000,000 shares of our common
      stock upon exercise of stock options that may be awarded under the plans to
      directors, officers, employees and consultants. We anticipate that we will
      make
      future stock option awards to eligible directors and employees under the plans
      and to continue to utilize the services of consultants and other third parties
      and to incur stock-based compensation costs.




13




*Impairment
      of Long-Lived Assets.* We
      review
      long-lived assets, including equipment held for rent, for impairment on an
      annual basis as of June 30, or on an interim basis if an event occurs that
      might
      reduce the fair value of such assets below their carrying values. An impairment
      loss would be recognized on the difference between the carrying value of the
      asset and its estimated fair value, which would be determined based on either
      discounted future cash flows or other appropriate fair value
      methods.




*Accounting
          for Convertible Notes.* On
          August 17, 2005 (the date of the Merger), we had issued and outstanding
          convertible notes in an aggregate principal amount of $6,719,800. The
          convertible notes bore interest at 10% per annum and were due and payable
          on
          December 31, 2005. The convertible notes were convertible, at the option of
          either the holder or us, only if we (i) conducted a firmly
          underwritten public offering registered under the Securities Act of 1933
          or
          (ii) merged with a public company (or subsidiary of a public company) by
          December 31, 2005, into shares of us or the surviving entity at 50% of the
          market price of the common stock. On
          September 27, 2005 we converted the convertible notes of $6,719,800
          and $448,815 (principal and accrued interest respectively) into an aggregate
          of
          7,585,719 restricted shares of our common stock at a conversion price of
          $0.945
          per share.
 The
          Merger was the triggering event that provided us the ability to
          determine the associated beneficial conversion feature of the convertible
          notes.
          Previously, we were not able to ascertain the value, if any, of the
          convertible feature due to the triggering event not occurring until
          August 17, 2005. The amount of $7,168,613 allocated to the beneficial
          conversion feature embedded in the debentures, which was amortized in full
          at
          conversion, was determined in accordance with provisions of EITF 98-5,
          “Accounting for Convertible Securities with Beneficial Conversion Features
          or
          Contingently Adjustable Conversion Ratios” and EITF 00-27, “Application of Issue
          No. 98-5 to Certain Convertible Instruments.”
 *Variable
            Interest Entities**.* We lease one of the buildings at its
            Burbank facility from Jan and Johnny, Inc., an entity established for
            the sole
            purpose of acquiring and leasing the building. Financial Accounting Standards
            Board Interpretation No. 46 (Revised December 2003), “Consolidation of Variable
            Interest Entities” (“FIN- 46R”), requires that if an enterprise is the primary
            beneficiary of a variable interest entity, the assets, liabilities and
            results
            of operations of the variable interest entity should be included in the
            consolidated financial statements of the enterprise. Under FIN-46R, Jan
            and
            Johnny, Inc. is a variable interest entity and we are the primary beneficiary.
            We have elected to consolidate Jan and Johnny, Inc., effective July 1,
            2004. The
            building has been recorded as an asset and the related debt has been
            recorded as
            a liability in our consolidated balance sheet. The impact on our future
            consolidated statement of operations will be increased depreciation and
            interest
            expense, which will be partially offset by lower rent expense. The land
            and
            building have a carrying value of $275,000 and $837,677, respectively
            with
            related mortgage debt of $3,106,795 as of June 30, 2006.
  **Results
          of Operations**





Fiscal
      Year 2006 compared to Fiscal Year 2005




*Revenues* .
      Our
      revenues increased from $4.8 million for fiscal year 2005 to $5.7 million for
      fiscal year 2006. This increase was primarily attributable to an increase in
      the
      number of televised award shows we supported, resulting in increased revenues
      from production services and music equipment rentals. Rental rates for studios
      and musical equipment remained relatively constant in fiscal years 2005 and
      2006.




*Gross
      Profit* .
      Gross
      profit increased from $2.2 million for fiscal year 2005 to $2.6 million for
      fiscal year 2006. This increase was due to the increase in revenues with only
      a
      $450,000 increase in cost of revenues. Cost of revenues consist principally
      of
      salaries and compensation of technical support personnel, which vary only with
      changes in personnel and are not based on the number of production service
      engagements. Further, there are minimal changes in expenses associated with
      musical equipment rental. Accordingly, our cost of revenues is not tied to
      our
      revenues except to the extent of certain incremental expenses associated with
      the award shows such as supplies, facilities allocation expense and allocation
      of certain administrative salaries.




*Salaries
      and Wages* .
      Salaries and wages increased from $3.9 million for fiscal year 2005 to $6.6
      million for fiscal year 2006. This increase is primarily attributable to a
      22 %
      increase in the number of employees (from 81 full time employees at June 30,
      2005 to 99 full time employees at June 30, 2006), and due principally to
      staffing of our rehearsals.com division. Due to the highly technical skill
      set
      of the production staff required by our rehearsals.com division, the per person
      salary of these employees is significantly higher than the salary earned by
      our
      staff employed in our core business. In addition, we recorded an expense of
      $798,000 in fiscal year 2006 relating to the grant of options to purchase an
      aggregate of 3,969,000 shares of Common Stock under our stock option plans.




*Selling,
      General and Administrative Expenses.* Selling,
      general and administrative expenses increased from $4.1 million for fiscal
      year
      2005 to $12.5 million for fiscal year 2006, primarily due to: (i) a $5.5 million
      increase in consulting expenses; (ii) a $848,000 increase in development and
      production expense relating to production of content for our rehearsals.com
      division; (iii) a $639,000 increase in costs of legal and accounting services;
      (iv) a $244,000 increase in depreciation and amortization expense; (v) a
      $344,000 increase in travel and entertainment expenses relating primarily to
      our
      rehearsals.com division; (vi) a $271,000 increase in insurance costs; and
      (vii) an increase of $323,000 is due to a write down of a loan to
      a related party for a Las Vegas venture. The increase in consulting
      expense was principally due to $2.3 million expense associated with the issuance
      of 2,480,000 shares of common stock to consultants in August 2005 in connection
      the Merger, and $2.2 million associated with the issuance in April 2006 to
      an
      investor relations firm of warrants to purchase 2,000,000 shares. The increased
      depreciation and amortization expense is primarily attributable to our
      procurement of broadcast related equipment and leasehold improvements to our
      broadcast center and studios, related to our development of our digital music
      business. The increased legal and accounting costs are due primarily to costs
      associated with completing the Merger and related transactions, and the audits
      of our financial statements.




*Interest
      Expense.* Interest
      expense increased from $619,000 for the year ended June 30, 2005 to
      $991,000 for the year ended June 30, 2006. An increase of approximately
      $115, 000 was attributable to an increase in our capital lease liabilities,
      penalties and interest on convertible debenture resulted in an increase of
      approximately $100,000 and interest paid on the mortgage for the property owned
      by Jan & Johnny, Inc increased by approximately $135,000.




14




*Discount
      of Convertible Debenture.* For
      the year ended June 30, 2006, we recorded a non-cash expense of $500,000
      associated with the $500,000 convertible note issued in December 2005 to Montage
      Partners LLC. See Note 7 of Notes to Consolidated Financial Statements.




*Beneficial
      Conversion Feature on Debt.* In
      September 2005 we converted all of our outstanding convertible notes into
      7,585,719 shares of our Common Stock. Because the convertible notes converted
      into Common Stock at a 50% discount to market, we recognized an expense of
      $7.2
      million in connection with the conversion (which equaled the outstanding
      principal and accrued and unpaid interest on the notes).




**Financial
      Condition, Liquidity and Capital Resources**




Cash
        and
        cash equivalents at fiscal year ended June 30, 2006 was
        $5,406.




Our
      accounts receivable (net of allowance for doubtful accounts) increased from
      $473,000 at June 30, 2005 to $703,000 at June 30, 2006, due primarily
      to our increase in revenues.




Our
      revenue-earning equipment consists of our inventory of musical instruments
      for
      rental and broadcasting equipment used in our rehearsals.com division. Our
      revenue-earning equipment, before depreciation, increased from $5.0 million
      at
      June 30, 2005 to $5.7 million at June 30, 2006, due primarily to an
      increase in broadcasting equipment.




Accounts
      payable increased from $1.4 million at June 30, 2005 to $1.6 million at June
      30,
      2006 as we expanded rehearsals.com.




Accrued
      payroll and other compensation increased from $846,000 at June 30, 2005 to
      $1.4
      million at June 30, 2006. This increase was due primarily to $540,000 of
      deferred bonuses to executive officers pursuant to their employment agreements;
      deferred bonuses to executive officers aggregated $1.3 million at June 30,
      2006.




Our
      short-term debt at June 30, 2006 included: (i) $278,000 under revolving
      lines of credit with three financial institutions, with borrowings under these
      credit lines being unsecured and bearing interest at variable rates (weighted
      average interest rate during fiscal year 2006 of 8.5%); (ii) $100,000 under
      a demand note bearing an interest rate of 6% per annum; (iii) $225,000 under
      a
      loan from an employee bearing interest at a variable rate of prime plus 4%
      per
      annum (12.25% per annum at June 30, 2006) due December 31, 2006;
      (iv) $50,000 under notes payable to Johnny Caswell and Jan Parent bearing
      an interest rate of 9.6% per annum and due and payable in May 2007; (v) $102,000
      under notes payable to Johnny Caswell and Jan Parent bearing an interest rate
      of
      10.0% per annum and due and payable in May 2007; (vi) $50,000 under a loan
      bearing an interest rate of 5% per annum which is due and payable in May 2007;
      (vii) $500,000 under a convertible debenture bearing interest at the rate of
      6%
      per annum due and payable June 12, 2006 (subsequently extended to December
      31,
      2006) and secured by the Company’s accounts receivable and customer and client
      lists; and (viii) $160,000 under demand advances Johnny Caswell, Jan Parent,
      Roger Paglia and Howard Livingston in May and June 2006 bearing interest at
      a
      rate of 8% per annum; and (ix) $458,000 that represents the current portion
      of equipment leases.




Our
      long-term debt at June 30, 2006 included: (i) $3,107,000 under a loan
      bearing interest at a variable rate of prime plus 1.75% per annum (10.00% per
      annum at June 30, 2006), maturing in 2010, with payments based on a 25-year
      amortization, and secured by a first deed of trust on the land and buildings
      leased to us by an affiliate; (ii) $1,836,000 under a bank loan bearing interest
      at a variable rate of prime plus 2.75% per annum (11.00% per annum at
      June 30, 2006), and secured by substantially all of our assets and by a
      junior security interest in the land and building; (iii) $224,000 under a bank
      loan bearing interest at a variable rate prime plus 1% (9.25% per annum at
      June 30, 2006) and fully amortizing through maturity in November 2009; and
      (iv) $75,000 under a note payable to Jan Parent bearing at an interest rate
      of
      9% per annum, which is due and payable in July 2010.




15




Our
      Common Stock and paid-in capital increased from $224,000 at June 30, 2005
      to $28.2 million at June 30, 2006, due primarily to: (i) $14.3 million from
      the
      conversion of the convertible notes; (ii) $2.5 million from the issuance of
      2,600,000 shares of Common Stock to consultants; (iii) $6.2 million from the
      sale of 4,130,983 shares of Common Stock to accredited investors for $1.50
      per
      share, and (iv) $3.1 million from the issuance of warrants (see Note 7 of Notes
      to Consolidated Financial Statements).




Since
      the
      start-up of rehearsals.com in fiscal year 2004, we have had a working capital
      deficiency as our cash requirements have exceeded our cash flows from
      operations. We have incurred expenses of approximately $7.3 million in fiscal
      year 2006, in connection with rehearsals.com. These expenses consisted
      primarily of compensation expense, acquisitions of assets, production and
      production support in connection with the start-up of rehearsal.com and the
      creation of digital content. Through the end of fiscal year 2006, we had not
      generated any revenues from this division.




We
      have
      fulfilled these cash flow shortages with proceeds from the sales of securities,
      borrowings and extensions of maturity dates from lenders. During fiscal 2006,
      we
      obtained $6.2 million from the sales of common stock and $815,000 from
      borrowings. Since the latter part of June 2006, we have relied increasingly
      on
      short-term borrowings to fulfill our cash requirements, including; (i) $455,000
      of advances under revolving lines of credit from Johnny Caswell, Jan Parent,
      Roger Paglia and Howard Livingston, bearing interest at the prime rate; (ii)
      a
      loan in the amount of $50,000 bearing interest at the rate of 9% per annum
      due
      and payable on December 31, 2006; (iii) a loan in the amount of $250,000 bearing
      interest at the rate of 18% per annum due and payable October 17, 2006; (iv)
      loans in the aggregate net amount of $215,000 bearing interest at the rate
      of
      10% per annum and due and payable December 31, 2006; and (v) a loan in the
      amount $660,000 (of which $92,000 was retained by the lender as an interest
      reserve) bearing interest at the greater of 14% per annum or prime plus 5.75%
      due and payable on September 1, 2007 and secured by a junior security interest
      in our equipment, which loan was guaranteed by Johnny Caswell, Jan Parent,
      Roger
      Paglia and Howard Livingston. ****




We
      will
      continue to have working capital deficiencies until we can generate either
      a
      significant financing from the sale of securities or other borrowings and/or
      generate material revenues from rehearsals.com. Our cash requirements in fiscal
      year 2007 include not only cash to fund our operating shortages but to repay
      maturing debt and accounts payable and accrued payroll, which aggregated $3.0
      million at June 30, 2006. As of September 15, 2006, we had approximately $2.2
      million principal amount of indebtedness due on demand or by December 31, 2006.
      Of this amount, $780,000 is due to our directors and principal shareholders,
      who
      do not expect repayment of this loan amount until such time as we have
      sufficient financial resources to do so, and $225,000 is due to an employee.




We
      will
      continue to seek additional financing to funds these shortages. In addition,
      our
      plan is to generate revenues from rehearsals.com through the distribution and
      licensing of our high-definition audio/video content and through sponsorships
      on
      our rehearsals.com website. The amount and timing of revenues from
      rehearsals.com will depend upon a number of factors, many of which are beyond
      our control of the Company (see “Certain Factors Relating to our Digital Music
      Division,” below). We anticipate that the earliest we could receive significant
      revenues from rehearsals.com is the second quarter of fiscal year 2007.




We
      can
      give no assurance as to when, if ever, we will have sufficient revenues from
      rehearsals.com to cover our operating cash requirements and to fund
      maturing debt. Further, we can give no assurance that we will be able to
      continue to obtain funds from the sale of debt and equity securities or
      borrowings, or that the terms of such sales or borrowings will be as favorable
      as the terms of prior sales and borrowings. Our ability to obtain additional
      financing in the coming months will depend upon a number of factors, including
      market conditions, our results of operations, our success in implementing our
      business plan for rehearsals.com and investors’ perception of our business and
      prospects. Sales of equity securities, or sales of convertible debt securities,
      could materially dilute our existing shareholders. If we do not obtain funds
      to
      repay our debt as it matures, we will seek extensions from the
      lenders.




16




**FACTORS
      THAT MAY AFFECT FUTURE OPERATING RESULTS**




**Certain
      Factors relating to our Financial Condition and Liquidity**




**We
      have a working capital deficiency as
      our cash requirements exceed our cash flows from
      operations.**




Since
      the
      start-up of rehearsals.com in fiscal year 2004, we have had a working capital
      deficiency as our cash requirements have exceeded our cash flows from
      operations. We have incurred expenses of approximately $7.3 million in fiscal
      year 2006, in connection with rehearsals.com. These losses are due largely
      to
      compensation expense, acquisitions of assets, production and production support
      in connection with the start-up of rehearsal.com and the creation of digital
      content. Through the end of fiscal year 2006, we had not generated any revenues
      from this division.




We
      have
      fulfilled these cash flow shortages with proceeds from the sales of securities,
      borrowings and extensions of maturity dates from lenders. During fiscal 2006,
      we
      obtained $6.2 million from the sales of common stock and $815,000 from
      borrowings. Since the latter part of June 2006 to date, we have relied
      increasingly on short-term borrowings to fulfill our cash requirements,
      including; (i) $455,000 of advances under revolving lines of credit from Johnny
      Caswell, Jan Parent, Roger Paglia and Howard Livingston, bearing interest at
      the
      prime rate; (ii) a loan in the amount of $50,000 bearing interest at the rate
      of
      9% per annum due and payable on December 31, 2006; (iii) a loan in the amount
      of
      $250,000 bearing interest at the rate of 18% per annum due and payable October
      17, 2006; (iv) loans in the aggregate net amount of $215,000 bearing interest
      at
      the rate of 10% per annum and due and payable December 31, 2006; and (v) a
      loan
      in the amount $660,000 (of which $92,000 was retained by the lender as an
      interest reserve) bearing interest at the greater of 14% per annum or prime
      plus
      5.75% due and payable on September 1, 2007 and secured by a junior security
      interest in our equipment, which loan was guaranteed by Johnny Caswell, Jan
      Parent, Roger Paglia and Howard Livingston. ****




We
      will
      continue to have working capital deficiencies until we can generate either
      a
      significant financing from the sale of securities or other borrowings and/or
      generate material revenues from rehearsals.com. Our cash requirements in fiscal
      year 2007 include not only cash to fund our operating shortages but to repay
      maturing debt and accounts payable and accrued payroll, which aggregated $3.0
      million at June 30, 2006. As of September 15, 2006, we had approximately $2.2
      million principal amount of indebtedness due on demand or by December 31, 2006.
      Of this amount, $780,000 is due to our directors and principal shareholders,
      who
      do not expect repayment of this loan amount until such time as we have
      sufficient financial resources to do so, and $225,000 is due to an employee.




We
      will
      continue to seek additional financing to funds these shortages. In addition,
      our
      plan is to generate revenues from rehearsals.com through the distribution and
      licensing of our high-definition audio/video content and through sponsorships
      on
      our rehearsals.com website. The amount and timing of revenues from
      rehearsals.com will depend upon a number of factors, many of which are beyond
      our control of the Company (see “Certain Factors Relating to our Digital Music
      Division,” below). We anticipate that the earliest we could receive significant
      revenues from rehearsals.com is the second quarter of fiscal year 2007.




We
      can
      give no assurance as to when, if ever, we will have sufficient revenues from
      rehearsals.com to cover its operating cash requirements and to fund maturing
      debt. Further, we can give no assurance that we will be able to continue to
      obtain funds from the sale of debt and equity securities or borrowings, or
      that
      the terms of such sales or borrowings will be as favorable as the terms of
      prior
      sales and borrowings. Our ability to obtain additional financing in the coming
      months will depend upon a number of factors, including market conditions, our
      results of operations, our success in implementing our business plan for
      rehearsals.com and investors’ perception of our business and prospects. Sales of
      equity securities, or sales of convertible debt securities, could materially
      dilute our existing shareholders. If we do not obtain funds to repay our debt
      as
      it matures, we will seek extensions from the lenders




17




***We
      have suffered material net losses and have a stockholders’ deficit***




We
      recorded net losses of $25.3 million in the fiscal year 2006 and $6.5 million
      in
      the fiscal year 2005, causing a significant deterioration in our financial
      condition. We had a stockholders’ deficit of $5.8 million at June 30, 2006.




The
      losses in the twelve months of fiscal 2006 included non-recurring non-cash
      expenses of $7.2 million in connection with the conversion of $7.2 million
      the
      convertible notes, $2.5 million from the issuance of Common Stock to consultants
      and $ 2.2 million from the issuance of warrants to a consultant. These
      transactions also resulted in an increase in our Common Stock and
      paid-in-capital by $19 **** million.




We
      anticipate continuing to incur operating losses until such time as we can
      generate net earnings in rehearsals.com. We do not anticipate generating
      revenues in rehearsals.com until the second quarter of fiscal year 2007. The
      success of our rehearsals.com division will be dependent upon a number of
      factors, many of which are beyond our control (see “Certain Factors Relating to
      our Digital Music Division,” below). Accordingly, we can give no assurance as to
      when, if ever, that we will become profitable.




***Our
      independent auditors have included a "going concern" qualification in their
      audit report of our financial statements for fiscal year
      2006.***




The
      report of Stonefield Josephson, Inc., our
      independent auditors, on our financial statements for fiscal year 2006 states
      that our net losses and stockholders' deficit raise substantial doubt about
      our ability to continue as a going concern. Our consolidated financials do
      not
      include any adjustments to the recoverability and classification of recorded
      assets, the amount and classification of liabilities that might be necessary
      in
      the event that we cannot continue in existence.




**Certain
      Factors Relating to Our Production Services and Equipment Rental Business**




***We
      do not have long-term agreements with our clients and rely on preexisting
      personal relationships, and we expend significant time and incur significant
      expense in attracting and maintaining key clients.***




Our
      marketing and sales strategy with respect to our core business of providing
      production services and renting studio facilities and musical instruments relies
      on our ability to retain our recurring clients and attract new ones. Most of
      our
      client relationships are informal (based solely on verbal communication) and
      are
      terminable by either party at will. We currently do not have, nor do we
      anticipate in the future that we will be able to establish, long-term
      contractual commitments from many of our clients. In addition, we have no
      assurance as to the level of performance under our arrangements, or that
      engagements will not be terminated. There is also no assurance that we will
      be
      able to maintain our current relationships or establish and maintain successful
      relationships with clients in existing and new geographic areas. Moreover,
      there
      is the additional possibility that we will have to incur significant expenses
      to
      attract and maintain key clients in one or more of our geographic areas in
      order
      to profitably exploit our geographic markets. We may not have sufficient working
      capital to allow us to do so.




***Because
      our clients are not required to retain our services in advance, we need to
      carefully manage our facilities, equipment and personnel availability, and
      it is
      difficult to predict the timing and amount of our
      sales.***




Our
      clients are not required to place annual orders to retain our services or rent
      our facilities and equipment, as we do not have binding agreements with them,
      though they may need to do so to engage our services and rent our facilities
      and
      equipment. We endeavor to have on hand such equipment and professional
      employees, at such times, as will allow us to satisfy the demands for our
      facilities and services. However, there is no assurance that any of our clients
      will continue to utilize our facilities and services in the same frequencies
      and
      volumes as they may have done in the past. We endeavor to maintain readiness
      levels for our services sufficient to satisfy anticipated orders for our
      services from our clients, which is difficult to estimate.




To
      the
      extent demand for our services exceeds availability and our capacity, or orders
      are not submitted on a timely basis, we will be unable to provide the needed
      services at the required levels on a timely basis. Our failure to accurately
      predict and manage our requirements may impair relationships with our clients,
      which, in turn, would likely have a material adverse effect on our ability
      to
      maintain relationships with those clients.




18




**Certain
      Factors Relating to Rehearsals.com**




***The
      success of rehearsals.com depends on the consent and collaboration of musical
      artists, record labels, and talent managers, which may not be available to
      us on
      commercially reasonable terms or at all.***




Our
      strategy for rehearsals.com depends on various relationships with musical
      artists, record labels and talent managers for our services and product
      development. We cannot produce our own entertainment content for rehearsals.com
      without this consent and collaboration. We will need to maintain and develop
      such relationships as we expand our business into digital media. The success
      of
      rehearsals.com will depend on obtaining agreements with such recording artists,
      record labels and talent managers to permit us to record and distribute the
      rehearsals and performances of the artists. Our right to distribute this content
      is likely to be for limited periods and we may not have any renewal rights.
      The
      recording artists are also likely to have final approval rights on any content
      we produce featuring them.




It
      is
      accordingly vital to the success of rehearsals.com that musical artists, record
      labels and talent managers agree to work with us and enter into contractual
      relationships with us on favorable pricing terms. There can be no assurance,
      however, that we will be able to develop and maintain such relationships, enter
      into such agreements or negotiate favorable terms. In such case, we may be
      forced to change our strategy or abandon rehearsals.com despite our significant
      investment in infrastructure supporting such a business, which could have a
      material adverse effect on the results of our operations.




***The
      content and services offered by rehearsals.com***  ***may
      not achieve consumer acceptance, which would adversely affect our results of
      operations and prospects.***




Our
      future success and growth depends in significant part our ability to deliver,
      through rehearsals.com, original and compelling content and services that
      attract and retain consumers and that consumers are willing to purchase. The
      successful development and production of content and services is subject to
      numerous uncertainties, including without limitation our ability to:




·
            anticipate
                and successfully respond to rapidly changing consumer tastes and
                preferences,




·
            fund
                new program development,




·
            attract
                and retain qualified editors, producers and technical personnel,
                and




·
            successfully
                anticipate and respond to the increased acceptance of methods other
                than
                personal computers to access the Internet.




We
      can
      give no assurance that we will achieve consumer acceptance or that once achieved
      we will be able to maintain this acceptance. Consumer preferences are also
      affected by factors other than taste, such as general trends and media
      attention. If we do not adjust to respond to these and other changes in consumer
      preferences, our results of operations will be adversely affected.




We
      cannot
      assure you that our content and services will be attractive to a sufficient
      number of users to generate revenues sufficient to sustain operations. In
      addition, we cannot assure you that we will develop any new content or services
      in a timely or cost-effective manner. If we are unable to develop content and
      services that allow us to attract, retain and expand a loyal consumer base,
      we
      will be unable to generate sufficient revenues to cover the expenses of our
      rehearsals.com division or to recoup our investment in this
      division.




***The
      digital content we produce will be competing against a large number of currently
      available music videos, and numerous large, established companies that have
      substantially greater financial, technical, manufacturing, marketing,
      distribution and other resources than us may produce content similar to
      ours.***




The
      online digital music delivery and digital production industry is characterized
      by intense competition and rapid and significant technological advancements.
      Many companies in a variety of related industries are working on business plans
      that involve the production of audio/video content and the subsequent online
      and
      other distribution of that content.




19




We
      believe that our content will be differentiated because it is likely to be
      unique, as it will feature recording artists in rehearsal and interacting with
      other artists or an audience in a “behind the scenes” format. In addition, the
      content will be recorded in high-definition digital video. Moreover, we believe
      that our (i) preexisting music studio facilities, (ii) preexisting relationships
      with and access to recording artists, (iii) musical equipment inventory, and
      (iv) expertise in the production field will allow us to produce our
      high-definition audio/video content at a substantially lower cost than would
      be
      incurred by a competitor just entering this field.




Many
      companies are engaged in the production of original content that are or will
      be
      competitive with our proposed products. Although we believe that our content
      will be unique due to its format, many of these companies, which have
      substantially greater financial, technical, manufacturing, marketing,
      distribution and other resources than us, may compete directly with our business
      by reproducing our format or improving on it.




Moreover,
      certain parties in the music industry have announced their intent to consolidate
      their music distribution operations, which could limit the availability and
      increase the fees required to offer music content to customers through our
      distribution network or our website rehearsals.com. Further, third-party content
      providers currently, or may in the future, offer music products and services
      that compete with our music products and services, and could take action to
      make
      it more difficult or impossible for us to license music content in the future.
      If we are unable to offer a wide variety of musical and related content at
      reasonable prices with acceptable usage rules, then rehearsals.com will be
      adversely affected.




***We
      have a relatively limited operating history with the digital media business
      of
      rehearsals.com, which makes it difficult to evaluate our business.***




We
      have a
      relatively limited history operating with the digital media business of
      rehearsals.com, which is still in its start-up phase. Moreover, we may expand
      into related areas in the future in which we have limited or no experience.
      As a
      result, we have limited financial results from this business on which you can
      assess our future prospects. Our prospects must be considered in light of the
      risks, expenses and difficulties frequently encountered by companies entering
      a
      new and rapidly evolving businesses.




***We
      need to effectively manage our growth and the execution of our business plan.
      Any failure to do so would negatively impact our results.***




To
      manage
      operations effectively, we must constantly improve our operational, financial
      and other management processes and systems. Our success also depends largely
      on
      our ability to maintain high levels of employee utilization, to manage our
      costs
      in general and general and administrative expense in particular, and otherwise
      to execute on our business plan. We need to cost-efficiently develop
      rehearsals.com as well as expand our core business and effectively implement
      our
      business strategy. There are no assurances that we will be able to effectively
      and efficiently manage this growth. Any inability to do so could increase our
      expenses and negatively impact our results of operations.




***Our
      inability to protect our trademarks, patent and trade secrets may prevent us
      from successfully marketing our products and competing effectively.***




Failure
      to protect our intellectual property could harm our brand and our reputation,
      and adversely affect our ability to compete effectively. Further, enforcing
      or
      defending our intellectual property rights, including our trademarks, copyrights
      and trade secrets, could result in the expenditure of significant financial
      and
      managerial resources. We regard our intellectual property, particularly our
      copyrights, trademarks and trade secrets, and our rights to original content
      under rehearsals.com, to be of considerable value and importance to our business
      and our success. We rely on a combination of trademark, and trade secrecy laws,
      confidentiality procedures and contractual provisions to protect our
      intellectual property rights. There can be no assurance that the steps taken
      by
      us to protect these proprietary rights will be adequate or that third parties
      will not infringe or misappropriate our trademarks, trade secrets or similar
      proprietary rights. In addition, there can be no assurance that other parties
      will not assert infringement claims against us, particularly as we begin
      producing original content, and we may have to pursue litigation against other
      parties to assert our rights and prevent the illicit distribution and
      downloading of our content. Any such claims or litigation could be costly and
      we
      may lack the resources required to defend against such claims or pursue
      infringements of our rights. In addition, any event that would jeopardize our
      proprietary rights or any claims of infringement by third parties could have
      a
      material adverse effect on our ability to retain our current clients and attract
      new ones, particularly musical talent for our original content.




20




***The
      digital media business of rehearsals.com involves risks of liability claims
      for
      Internet content or technology, which could result in significant costs.***




As
      a
      publisher and a distributor of content through the Internet, we may face
      potential liability for:




·
            defamation,




·
            negligence,




·
            copyright,
                patent or trademark infringement,
                and




·
            other
                claims based on the nature and content of the materials published
                or
                distributed.




These
      types of claims have been brought, sometimes successfully, against producers
      of
      distributed digital media. In addition, we could be exposed to liability in
      connection with material indexed or offered on our Internet sites including
      rehearsals.com, or for information collected from and about our users.




There
      has
      been a recent increase in the granting and attempted enforcement of business
      process patents that cover practices that may be widely employed in the Internet
      industry. If we are found to violate any such patent, and we are unable to
      enter
      into a license agreement on reasonable terms, our ability to offer services
      could be materially and adversely affected. We cannot assure you that third
      parties or users will not bring claims against us relating to proprietary rights
      or use of personal information. We do not have insurance for patent
      infringement.




Our
      insurance may not cover potential claims of defamation, negligence and similar
      claims, and it may or may not apply to a particular claim or be adequate to
      reimburse us for all liability that may be imposed. Any imposition of liability
      that is not covered by insurance or is in excess of insurance coverage could
      have a material adverse effect on our financial condition.




**Certain
      Factors Relating to our Business Generally**




***The
      loss of key personnel would directly affect our efficiency and economic
      results.***




We
      are
      dependent upon the creative skills, leadership and relationships of
      CenterStaging founders Johnny Caswell and Jan Parent, who serve as our President
      and Senior Executive Vice President, respectively, Roger Paglia, our Chief
      Executive Officer, Howard Livingston, our Chief Financial Officer, Paul
      Schmidman, our Executive Vice President and Chief Operating Officer, Michael
      Sandoval, our Executive Vice President - Administration and Music Publishing,
      and Tommy Nast, our Executive Vice President - Business Development. We do
      not
      currently maintain key person life insurance on any of these persons. The loss
      of services of any of these key personnel could have a material adverse affect
      on our business and operations, including our ability to develop and execute
      a
      long-term, profitable business plan.




Our
      management team consists of several key production, creative and technology
      personnel who have been recruited within the past two years. In order to manage
      and operate our business successfully in the future, it will be necessary to
      further strengthen our management team. The hiring of any additional executives
      will increase our compensation expense.




21




***Our
      four principal stockholders constitute all of our directors, and their interests
      may differ from those of other stockholders.***




As
      of
      June 30, 2006, Johnny Caswell, Jan Parent, Roger Paglia and Howard
      Livingston owned beneficially 61% **** of
      our
      outstanding Common Stock. These four shareholders also constitute our board
      of
      directors and are our four most senior executive officers. Because of their
      share ownership, these four shareholders have the power to elect all of our
      directors (there are no cumulative voting rights), and have the power to approve
      or disapprove any actions considered by our shareholders, including a change
      in
      the authorized capital stock, the sale of all or substantially all of our
      assets, and mergers. This concentration of ownership of our Common Stock may
      delay, prevent or deter a change in control, could deprive other stockholders
      of
      an opportunity to receive a premium for their Common Stock as part of a sale
      of
      our company or our assets and may adversely affect the market price of our
      Common Stock.




***We
      have no independent directors, and thus our board of directors provides no
      independent oversight of our management.***




Each
      of
      our directors is also an executive officer of the Company, and thus we have
      no
      directors who are independent of management. As a result of having no
      independent directors, our board of directors cannot provide any independent
      oversight of the actions and performance of management. Further, the lack of
      independent directors can result in conflicts of interest between our
      stockholders and the controlling officers and directors, as these individuals
      have the power to make determinations affecting their own interests, such as
      compensation. Lastly, we have no directors who can independently review and
      approve transactions between us and our four principal shareholders, such as
      our
      borrowings from these individuals, and compensation arrangements between these
      individuals in their capacities as executive officers.




The
      composition of our board of directors would not satisfy the listing requirements
      for the Nasdaq Stock Market or any securities exchange, such as the American
      Stock Exchange, which require that a majority of the directors be independent.
      Our Common Stock is currently quoted on the OTC Bulletin Board, which does
      not
      have any requirements regarding the independence of directors.




**Certain
      Factors Related to Our Common Stock**




***Our
      Common Stock is thinly traded on the OTC Bulleting Board, and you may be unable
      to sell at or near ask prices or at all if you need to sell your shares to
      raise
      money or otherwise desire to liquidate your shares.***




Our
      Common Stock is currently listed for trading on the OTC Bulletin Board
      maintained by the National Association of Securities Dealers, Inc. Our Common
      Stock is thinly traded, meaning the number of persons interested in purchasing
      our shares at or near ask prices at any given time may be relatively small
      or
      non-existent. This situation is attributable to a number of factors, including
      the fact that we have a small number of freely tradable shares, and we are
      a
      small public company that is relatively unknown to stock analysts, stock
      brokers, institutional investors and others in the investment community that
      generate or influence sales volume, and that even if we came to the attention
      of
      such persons, they tend to be risk-averse and would be reluctant to follow
      a
      company of our size and expanding into a related but new line of business as
      we
      are, or purchase or recommend the purchase of our shares until such time as
      we
      became more seasoned and proven. As a consequence, there may be periods of
      several days or far more when trading activity in our shares is minimal or
      non-existent, as compared to a seasoned issuer which has a large and steady
      volume of trading activity that will generally support continuous sales without
      an adverse effect on share price. We cannot give you any assurance that a
      broader or more active public trading market for our Common Stock will develop
      or be sustained, or that current trading levels will be sustained. Due to these
      conditions, we can give you no assurance that you will be able to sell your
      shares at or near ask prices or at all if you need money or otherwise desire
      to
      liquidate your shares.




22




***If
      securities or industry analysts do not publish research reports about our
      business, our stock price and trading volume could
      decline.***




Small,
      relatively unknown public companies can achieve visibility in the trading market
      through research and reports that industry or securities analysts publish.
      However, to our knowledge, no analysts cover our company. The lack of published
      reports by independent securities analysts could limit the interest in our
      stock
      and negatively affect our stock price. We do not have any control over research
      and reports these analysts publish or whether they will be published at all.
      If
      any analyst who does cover us downgrades our Common Stock, our stock price
      would
      likely decline. If any analyst initiates and then ceases coverage of our Company
      or fails to regularly publish reports on us, we could lose visibility in the
      financial markets or never achieve such visibility, which in turn could cause
      our Common Stock price or trading volume to stagnate or decline.




***You
      may have difficulty selling our Common Stock because it is a “penny
      stock.”***




Since
      our
      Common Stock is not listed on the Nasdaq Stock Market or any national securities
      exchange, if the trading price of our Common Stock is below $5.00 per share,
      trading in our Common Stock will be subject to the requirements of certain
      rules
      promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
      Act”). These rules require additional disclosures by broker-dealers in
      connection with any trades involving a stock defined as a penny stock. These
      disclosures include a schedule explaining the penny stock market and the risks
      associated therewith and impose various sales practice requirements on
      broker-dealers who sell penny stocks to persons other than established customers
      and accredited investors (generally defined as an investor with a net worth
      in
      excess of $1,000,000 or annual income exceeding $200,000 individually or
      $300,000 together with a spouse). For these types of transactions, the
      broker-dealer must make a special suitability determination for the purchaser
      and have received the purchaser’s written consent to the transaction prior to
      the sale. The broker-dealer also must disclose the commissions payable to the
      broker-dealer, current bid and offer quotations for the penny stock and, if
      the
      broker-dealer is the sole market-maker, the broker-dealer must disclose this
      fact and the broker-dealer’s presumed control over the market. This information
      must be provided to the customer orally or in writing before or with the written
      confirmation of trade sent to the customer. Monthly statements must be sent
      disclosing recent price information for the penny stock held in the account
      and
      information on the limited market in penny stocks. The additional burdens
      imposed upon broker-dealers by such requirements could discourage broker-dealers
      from effecting transactions in our Common Stock, which could severely limit
      the
      market liquidity of the Common Stock and the ability of holders of the Common
      Stock to sell their shares.




***The
      market price of our Common Stock may be adversely affected by market
      volatility.***




The
      market price of our Common Stock is likely to be volatile and could fluctuate
      widely in response to many factors, including:




· announcements
      of the results of our operations or the operations of our
      competitors,




· developments
      with respect to intellectual property rights,




· announcements
      of technological innovations by us or our competitors,




· announcements
      of new services, products or new contracts by us or our
      competitors,




· actual
      or
      anticipated variations in our operating results due to the level of development
      expenses and other factors,




· changes
      in financial estimates by securities analysts and whether our earnings meet
      or
      exceed such estimates,




· conditions
      and trends in the online digital music distribution or production
      industries,




· new
        accounting standards,
  · general
        economic, political and market conditions and other factors, and
  · the
        occurrence of any of the risks described in this Report.




23




**Item
        7 — Financial Statements**




REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To
        The
        Board Of Directors And Stockholders Of CenterStaging Corp.
 Los
        Angeles, California
 
 We
        have
        audited the accompanying consolidated balance sheet of CenterStaging Corp
        as of
        June 30, 2006 and the related consolidated statements of operations,
        stockholders' deficit and cash flows for each of the two years then ended.
        These
        consolidated financial statements are the responsibility of the Company's
        management. Our responsibility is to express an opinion on these financial
        statements based on our audits.
 
 We
        conducted our audits 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 about whether the financial
        statements are free of material misstatement. We were not engaged to perform
        an
        audit of the Company's internal control over financial reporting. Our audit
        included consideration of internal control over financial reporting as a
        basis
        for designing audit procedures that are appropriate in the circumstances,
        but
        not for the purpose of expressing an opinion on the effectiveness of the
        Company's internal control over financial reporting. Accordingly, we express
        no
        such opinion. An audit also includes examining, on a test basis, evidence
        supporting the amounts and disclosures in the financial statements, assessing
        the accounting principles used and significant estimates made by management,
        as
        well as evaluating the overall financial statement presentation. We believe
        that
        our audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of CenterStaging Corp as of June
        30,
        2006 and the results of its operations and its cash flows for each of the
        two
        years then ended, in conformity with accounting principles generally accepted
        in
        the United States of America.
 
 The
        accompanying financial statements have been prepared assuming that the Company
        will continue as a going concern. As discussed in Note 1 to the consolidated
        financial statements, the Company has incurred substantial net losses and
        has
        substantial monetary liabilities in excess of monetary assets as of June
        30,
        2006 and had a stockholders' deficit of $5,811,626. These matters,
        among others, raise substantial doubt about its ability to continue as a
        going
        concern. Management’s plans concerning these matters are described in Note 1.
        These consolidated financial statements do not include any adjustments relating
        to the recoverability and classification of recoded assets, or the amounts
        and
        classification of liabilities that might be necessary in the event the Company
        cannot continue in existence.
 
 
 */s/
        Stonefield Josephson*
 Stonefield
        Josephson
 Los
        Angeles, California
 September
        22, 2006


24




**CenterStaging
                    Corp.****Consolidated
                    Balance Sheet****June
                    30, 2006****AUDITED**
 **ASSETS****Current
                  assets**Cash
                  and cash equivalents
              
              $
              5,406Investment
                  in marketable securities available for sale
              
              
              45,561Accounts
                  receivable, net of allowance for doubtfulaccounts
                  of $62,000
              
              
              703,760Other
                  current assets
              
              
              159,462**Total
                  current assets**
              
              
              **914,189****Revenue-earning
                  equipment**Musical
                  instruments
              
              
              1,541,888Broadcasting
                  equipment
              
              
              4,188,499Less
                  accumulated depreciation
              
              
              (1,789,934
              )**Total
                  revenue-earning equipment, net**
              
              
              **3,940,453****Property
                  and equipment**Land
              
              
              275,000Building
              
              
              837,677Leasehold
                  improvements
              
              
              3,163,126Machinery
                  and equipment
              
              
              458,213Furniture
                  and fixtures
              
              
              343,179Less
                  accumulated depreciation
              
              
              (2,749,442
              )**Total
                  property and equipment, net**
              
              
              **2,327,753****Other
                  assets**Deposits
              
              
              57,580Deferred
                  costs, net
              
              
              147,515**Total
                  Other Assets**
              
              
              **205,095****Total
                  Assets**
              
              $
              **7,387,490**
  See
          accompanying notes to these consolidated financial statements
 25
  **CenterStaging
                  Corp.****Consolidated
                  Balance Sheet (continued)****June
                  30, 2006****AUDITED**
  **LIABILITIES
                  AND STOCKHOLDERS' DEFICIT****Current
                  liabilities**Accounts
                  payable
              
              $
              1,602,826Accrued
                  payroll and other compensation
              
              
              1,412,537Accrued
                  interest, rent, and other liabilities
              
              
              796,496Loans
                  and lines of credit
              
              
              378,469Related
                  party notes payable
              
              
              598,314Convertible
                  Debenture, net of discount
              
              
              500,000Current
                  portion of deferred rent liability
              
              
              73,598Current
                  portion of capital lease obligations
              
              
              458,041Current
                  portion of notes payable
              
              
              400,746**Total
                  current liabilities**
              
              
              **6,221,027****Long-term
                  liabilities**Deferred
                  rent liability, less current portion
              
              
              101,660Capital
                  lease obligations, less current portion
              
              
              1,276,841Notes
                  payable (includes $75,000 related party payable), less current
                  portion
              
              
              5,082,891**Total
                  Long Term Liabilities**
              
              
              **6,461,392****Total
                  Liabilities**
              
              
              **12,682,419****Interest
                  of consolidated variable interest entity**
              
              
              **516,697****Stockholders'
                  deficit**Common
                  stock, $.0001 par value, 100,000,000 shares authorized,59,890,706
                  shares issued and outstanding
              
              
              5,989Additional
                  paid-in capital
              
              
              27,908,513Notes
                  receivable from stockholders and related party
              
              
              (889,320
              )Accumulated
                  deficit
              
              
              (32,836,808
              )**Total
                  Stockholders' Deficit**
              
              
              **(5,811,626**
              **)****Total
                  Liabilities and Stockholders' Deficit**
              
              $
              **7,387,490**




See
        accompanying notes to these consolidated financial statements


26


**CenterStaging
                  Corp****Consolidated
                  Statements of Operations and Comprehensive
                  Loss****For
                  the Fiscal Years Ended June 30, 2006 and
                  2005**
  **Years
                  ended June 30,****AUDITED**
              
              **2006**
              
              **2005****Revenue**
              
              $
              **5,705,241**
              
              $
              **4,807,813****Cost
                  of revenue**
              
              
              **3,049,394**
              
              
              **2,598,600****Gross
                  profit**
              
              
              **2,655,847**
              
              
              **2,209,213****Operating
                  expenses:**Salaries
                  and wages
              
              
              6,604,602
              
              
              3,906,049Selling,
                  general, and administrative expenses
              
              
              12,481,886
              
              
              4,089,191**Total
                  operating expenses**
              
              
              **19,086****,488**
              
              
              **7,995,240****Loss
                  from Operations**
              
              
              **(16,430,641**
              **)**
              ****
              **(5,786,027**
              **)****Other
                  income (expense)**Interest
                  income
              
              
              71,488
              
              
              9,589Interest
                  expense
              
              
              (991,234
              )
              
              (619,949
              )Discount,
                  convertible debenture
              
              
              (500,000
              )
              
              -Loss
                  on disposition of assets
              
              
              (20,837
              )
              
              -Other
                  than temporary impairment on marketable securities
              
              
              (119,158
              )
              
              -Beneficial
                  conversion feature on debt
              
              
              (7,168,615
              )
              
              -**Total
                  other expenses**
              
              
              **(8,728,356**
              **)**
              
              **(610,360**
              **)****Loss
                  before provision for income taxes and income of variable
                  interest entity**
              
              
              **(25,158,997**
              **)**
              
              **(6,396,387**
              **)****Provision
                  for income taxes**
              
              
              -
              
              
              -**Provision
                  for income of variable interest entity**
              
              
              **(139,934**
              **)**
              
              **(76,800**
              **)****Net
                  loss**
              
              $
              **(25,298,931**
              **)**
              $
              **(6,473,187**
              **)****Net
                  loss per share (basic and diluted)**
              
              $
              **(0.47**
              **)**
              $
              **(0.16**
              **)****Weighted
                  average shares****(basic
                  and diluted)**
              
              
              **54,292,112**
              
              
              **40,000,000**


See
        accompanying notes to these consolidated financial statements
  
 27




**CenterStaging
                  Corp.****Consolidated
                  Statement of Stockholders'
                  Deficit****For
                  the Fiscal Years ended June 30, 2006 and
                  2005****AUDITED**
  **Common
                  Stock**
              
              **Additional**
              
              **Notes
                    Receivable****from
                  stockholders**
              
              **Accumulated**
              
              **Total
                  Stockholders'******
              
              **Shares**
              
              **Amount**
              
              **Paid-in
                    Capital**
              
              **and
                  related party**
              
              **Deficit**
              
              **Deficit****Balance
                  at July 1, 2004**
              
              **$**
              **40,000,000**
              ****
              **$**
              **4,000**
              ****
              **$**
              **219,990**
              ****
              **$**
              **(175,662**
              **)**
              **$**
              **(1,064,690**
              **)**
              **$**
              **(1,016,362**
              **)**Advances
                  to stockholders and related party
              
              
              -
              
              
              -
              
              
              -
              
              
              (849,296
              )
              
              -
              
              
              (849,296
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (6,473,187
              )
              
              (6,473,187
              )**Balance
                  at June 30, 2005**
              
              
              **40,000,000**
              
              
              **4,000**
              
              
              **219,990**
              
              
              **(1,024,958**
              **)**
              ****
              **(7,537,877**
              **)**
              ****
              **(8,338,845**
              **)**Issuance
                  of stock for consulting services
              
              
              2,600,000
              
              
              260
              
              
              2,529,343
              
              
              -
              
              
              -
              
              
              2,529,603Issuance
                  of shares due to reverse merger
              
              
              5,524,004
              
              
              552
              
              
              164,168
              
              
              -
              
              
              -
              
              
              164,720Conversion
                  of debt to equity
              
              
              7,585,719
              
              
              759
              
              
              14,326,453
              
              
              -
              
              
              -
              
              
              14,327,212Sale
                  of common stock for cash
              
              
              4,180,983
              
              
              418
              
              
              6,246,058
              
              
              -
              
              
              -
              
              
              6,246,476.Intrinsic
                  value of beneficial conversion feature
              
              
              -
              
              
              -
              
              
              254,491
              
              
              -
              
              
              -
              
              
              254,491Relative
                  fair value of warrants in conjunction with convertible
                  debenture
              
              
              -
              
              
              -
              
              
              245,509
              
              
              -
              
              
              -
              
              
              245,509Warrants
                  issued to third parties
              
              
              -
              
              
              -
              
              
              3,124,804
              
              
              -
              
              
              -
              
              
              3,124,804Stock
                  Options Granted
              
              
              -
              
              
              -
              
              
              797,697
              
              
              -
              
              
              -
              
              
              797,697Advances
                  to stockholders and related party
              
              
              -
              
              
              -
              
              
              -
              
              
              (158,638
              )
              
              -
              
              
              (158,638
              )Write
                  down of related party loan for Las Vegas venture
              
              
              -
              
              
              -
              
              
              -
              
              
              294,276
              
              
              -
              
              
              294,276Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (25,298,931
              )
              
              (25,298,931
              )**Balance
                  at June 30, 2006**
              
              
              **59,890,706**
              
              **$**
              **5,989**
              
              **$**
              **27,908,513**
              
              **$**
              **(889,320**
              **)**
              **$**
              **(32,836,808**
              **)**
              **$**
              **(5,811,626**
              **)**


See
        accompanying notes to these consolidated financial
        statements.




28




**CenterStaging
                  Corp.****Consolidated
                  Statements of Cash Flows****For
                  the Fiscal Years Ended June 30, 2006 and 2005****AUDITED**
  **Year
                  ended June 30,****2006**
              
              **2005****Cash
                  flows used for operating activities:****Net
                  Loss**
              
              **$**
              **(25,298,931**
              **)**
              **$**
              **(6,473,187**
              **)****Adjustments
                  to reconcile net loss to net cash used for****for
                  operating activities:**Income
                  of consolidated variable interest entity
              
              
              139,934
              
              
              76,800Change
                  in allowance for bad debts
              
              
              22,000
              
              
              (10,000
              )Loss
                  on sale of asset and allowance for related receivable
              
              
              20,837
              
              
              -Amortization
                  of non-cash marketing revenue
              
              
              (22,445
              )
              
              (19,882
              )Impairment
                  in value of equipment
              
              
              -
              
              
              266,000Depreciation
                  of revenue-earning equipment
              
              
              651,885
              
              
              319,378Depreciation
                  of other property, plant, and equipment
              
              
              637,509
              
              
              388,049Noncash
                  compensation of consultants with common stock
              
              
              2,529,600
              
              
              -Noncash
                  compensation of third party warrants
              
              
              3,124,806
              
              
              -Noncash
                  compensation of employee stock option plan
              
              
              797,697
              
              
              -Amortization
                  of deferred costs
              
              
              26,525
              
              
              36,361Amortization
                  of discount related to convertible debentures
              
              
              500,000
              
              
              -Beneficial
                  conversion feature on debt
              
              
              7,168,613
              
              
              -Other
                  than temporary impairment on marketable securities
              
              
              119,158
              
              
              -Write
                  down of loan to related party for Las Vegas venture
              
              
              230,924
              
              
              -**Changes
                  in assets and liabilities:**Decrease
                  (increase) in accounts receivable
              
              
              (253,021
              )
              
              33,256Decrease
                  in other current assets
              
              
              60,659
              
              
              63,469(Increase)
                  in deposits
              
              
              (7,216
              )
              
              (13,501
              )(Increase)
                  decrease in deferred costs
              
              
              (40,000
              )
              
              -
 Increase
                  (decrease) in accounts payable
              
              
              636,424
              
              
              1,249,962
 Increase
                    (decrease) in accrued payroll and other compensation
                
                
                566,928
                
                
                592,352
 Increase
                      (decrease) in accrued interest, rent and other liabilities
                  
                  
                  649,032
                  
                  
                  371,541
 (Decrease)
                  in deferred rent liabilities
              
              
              (22,708
              )
              
              (18,676
              )**Net
                  cash used for operating activities**
              
              
              **(7,761,790**
              **)**
              ****
              **(3,138,078**
              **)****Cash
                  flows used for investing activities:**Purchases
                  of musical instruments
              
              
              (41,459
              )
              
              (114,729
              )Purchases
                  of broadcasting equipment
              
              
              (34,747
              )
              
              (2,819,933
              )Purchases
                  of other property and equipment
              
              
              (273,953
              )
              
              (1,361,562
              )Loans
                  to related party for Las Vegas venture
              
              
              -
              
              
              (55,262
              )Loan
                  repayments from officers
              
              
              -
              
              
              1,274Loans
                  to shareholders of consolidated variable interest entity
              
              
              (95,287
              )
              
              (794,034
              )**Net
                  cash used for investing activities**
              
              
              **(445,446**
              **)**
              ****
              **(5,144,246**
              **)****Cash
                  flows provided by (used for) financing
                  activities:**Payments
                  on lines of credit
              
              
              (64,703
              )
              
              (61,671
              )Payments
                  on related party notes payable
              
              
              -
              
              
              (75,000
              )Payments
                  on notes payable (not related parties)
              
              
              (387,390
              )
              
              (1,758,644
              )Payments
                  on capital lease obligations
              
              
              (330,805
              )
              
              (67,397
              )Proceeds
                  from lines of credit
              
              
              30,703
              
              
              106,941Proceeds
                  from issuance of related party note payable
              
              
              235,000
              
              
              300,000Proceeds
                  from issuance of notes payable (not related parties)
              
              
              129,073
              
              
              5,379,166Proceeds
                  from issuance of convertible notes
              
              
              1,791,000
              
              
              3,889,492Proceeds
                  from issuance of convertible debenture
              
              
              500,000
              
              
              -Proceeds
                  from issuance of common stock
              
              
              6,246,476
              
              
              -**Net
                  cash provided by financing activities**
              
              
              **8,149,354**
              ****
              ****
              **7,712,887**
 See
          accompanying notes to these consolidated financial statements
  29
  **CenterStaging
                  Corp.****Consolidated
                  Statements of Cash Flows (continued)****For
                  the Fiscal Years Ended June 30, 2006 and 2005****AUDITED****Years
                  ended June 30,**
              ********
              ****
              ****
              **2006**
              ****
              ****
              **2005****Decrease
                  in cash and cash equivalents**
              
              
              **(57,882**
              **)**
              
              **(569,437**
              **)****Cash
                  and cash equivalents, beginning of period**
              
              
              **63,288**
              
              
              **610,703****Cash
                  and cash equivalents in consolidated****variable
                  interest entity, July 1**
              
              
              -
              
              
              **22,022****Cash
                  and cash equivalents, end of period**
              
              $
              **5,406**
              
              $
              **63,288****Supplemental
                  disclosures of cash flow information:**Cash
                  paid for interest
              
              $
              831,971
              
              $
              259,651Cash
                  paid for income taxes
              
              $
              -
              
              $
              -**Supplemental
                  disclosure of non-cash investing and financing
                  activities:**Revenue
                  earning instruments obtained for marketing
                  considerations
              
              $
              37,694
              
              $
              37,444Marketable
                  securities acquired in reverse merger
              
              $
              164,720
              
              $
              -Conversion
                  of debt to equity
              
              $
              7,163,228
              
              $
              -Financing
                  costs on debt
              
              $
              -
              
              $
              179,964


See
        accompanying notes to these consolidated financial statements




30




**CENTERSTAGING
        CORP.**
  **Notes
        to Consolidated Financial Statements**
 **Fiscal
        Years Ended June 30, 2006 and 2005**
  **1.**
              **Summary
                  of Significant Accounting
                  Policies**
  A.
              General
                  Description of Business
  On
        August 17, 2005, CenterStaging Corp. (“CenterStaging”) (formerly Knight
        Fuller, Inc.) acquired all the outstanding shares of CenterStaging Musical
        Productions, Inc. (“CMPI”), in exchange for 42,480,000 restricted shares of its
        Common Stock in a reverse triangular merger (the “Merger”). The acquisition has
        been accounted for as a reverse merger (recapitalization) with CMPI deemed
        to be
        the accounting acquirer. Accordingly, these historical financial statements
        are
        those of CMPI, as adjusted to give effect to any difference in the par value
        of
        the issuer’s and the accounting acquirer’s stock with an offset to capital in
        excess of par value, and those of CenterStaging (the legal acquirer) since
        the
        Merger. The retained earnings of the accounting acquirer have been carried
        forward after the acquisition and CMPI’s basis of its assets and liabilities
        were carried over in the recapitalization. Operations prior to the business
        combination are those of the accounting acquirer.
  For
        purposes of these financial statements, references to the “Company” shall mean
        CenterStaging and its wholly owned subsidiary CMPI.
  The
        Company engages primarily in: (i) providing production and support services
        for
        live musical performances at major televised award shows such as the Academy
        Awards and the GRAMMY Awards, and other televised shows and events, such
        as the
        Super Bowl halftime show and presidential inaugurations; (ii) renting its
        studio facilities to musicians for rehearsal, production and recording; and
        (iii) renting musical instruments and related equipment for use at its studios
        and other venues. In 2004, the Company formed a digital media division, which
        we
        call “rehearsals.com,” to produce and distribute original high definition
        audio/video content of musicians and recording artists at our studios as
        they
        rehearse, give clinics and record. The Company’s plan
        is
        to generate revenues from rehearsals.com through the distribution and licensing
        of our high-definition audio/video content and through sponsorships on its
        rehearsals.com website, which was launched in March 2006.
  B.
              Basis
                  of Consolidation
  The
        consolidated financial statements include the accounts of CenterStaging and
        CMPI. All significant intercompany accounts and transactions have been
        eliminated upon consolidation.
  The
        Company is the primary beneficiary of a variable interest entity (VIE), Jan
        and
        Johnny, Inc. Jan and Johnny, Inc. is owned by Jan Parent and Johnny Caswell,
        directors and executive officers of the Company who together owned 37% of
        the
        outstanding Common Stock of the Company as of June 30, 2006. The Company
        adopted FIN 46(R) effective July 1, 2004. This requires that the Company
        consolidate the activities of the VIE into its financial statements. During
        the
        periods ended June 30, 2006 and 2005, all intercompany balances have been
        eliminated in consolidation.
  31
  C.
              Going
                  Concern
  The
        accompanying consolidated financial statements have been prepared in conformity
        with generally accepted accounting principles in the United States, which
        contemplate continuation of the Company as a going concern. However, the
        Company
        experienced net losses of $25,298,931 and $6,473,187 for the year ended
        June 30, 2006 and 2005, respectively. In addition, the Company has incurred
        substantial monetary liabilities in excess of monetary assets over the past
        several years and, as of June 30, 2006, had an accumulated deficit of
        $32,836,808 and a total stockholders’ deficit of $5,811,626. These matters,
        among others, raise substantial doubt about its ability to continue as a
        going
        concern. In view of the matters described above, recoverability of a major
        portion of the recorded asset amounts shown in the accompanying balance sheet
        is
        dependent upon the Company’s ability to generate sufficient sales volume to
        cover its operating expenses and to raise sufficient capital to meet its
        payment
        obligations. Historically, the Company has been able to raise additional
        capital. During the year ended June 30, 2006, the Company sold 4,180,983
        shares
        of Common Stock in a private offering generating $6,246,476 of
        capital. Additionally, the Company converted $7.2 million of Convertible
        Notes into shares of its Common Stock. The Company's ability to obtain
        additional financing in the coming months will depend upon a number of factors,
        including market conditions, our results of operations, our success in
        implementing its business plan for rehersals.com and investors' perceptions
        of our business and prospects. The Company therefore may not be
        able to continue to raise the needed capital.  The consolidated financial
        statements do not include any adjustments relating to the recoverability
        and
        classification of recorded asset amounts, or amounts and classification of
        liabilities that might be necessary should the Company be unable to continue
        in
        existence. The Company is taking action to address these matters, which include:
  ·
              Retention
                  of experienced management personnel with particular skills in the
                  development and commercialization of rehearsal.com services.
  ·
              Seeking
                  contracts with musical performing artists.
  ·
              The
                  Company is seeking investment capital.
  Our
        plan
        is to generate revenues from rehearsals.com through the distribution and
        licensing of our high-definition audio/video content and through sponsorships
        on
        our rehearsals.com website. We launched this website in March 2006, and as
        of
        June 30, 2006, more than 15 hours of content was available.
  Our
        plan
        is to expand the distribution of our content worldwide through third-party
        distributors such as Internet service providers (ISPs), mobile carriers,
        handheld device makers, cable, satellite and broadcast providers, digital
        exhibitors, digital radio operators, and distributors of physical formats
        such
        as DVD. We have a binding letter of intent with MLB Advance Media, L.P.,
        or BAM,
        for the exclusive exploitation of our audio/visual content in interactive
        media,
        including PC-based Internet, wireless/mobile, satellite and IPTV.
  In
        the
        absence of material revenues from its rehearsals.com division, the Company
        will
        seek additional capital and borrowings to fund its working capital requirements.
        The successful outcome of future activities cannot be determined at this
        time
        and there is no assurance that if achieved, the Company will have sufficient
        funds to execute its intended business plan or generate positive operating
        results.
  D.
              Cash
                  and Cash Equivalents, Short and Long-Term
                  Investments
  For
        purposes of cash flows, the Company considers all highly liquid investments
        purchased with a maturity of three months or less to be cash equivalents,
        those
        with original maturities not greater than three months and current maturities
        less than twelve months from the balance sheet date are considered short-term
        investments, and those with maturities greater than twelve months from the
        balance sheet date are considered long-term investments.
  32
  Financial
        instruments that potentially subject the Company to significant concentration
        of
        credit risk consist primarily of cash and cash equivalents. Substantially
        all of
        the Company’s cash and cash equivalents are deposited with a single large
        commercial bank. At June 30, 2006, these deposits did not exceed the
        government insurance limit.
  E.
              Revenue-Earning
                  Equipment and Property and
                  equipment
  Revenue
        earning equipment and property are recorded at cost and are depreciated on
        a
        straight-line basis over the estimated useful lives of the respective assets,
        as
        follows:
  Revenue
                  Earning Equipment (“REE”):Musical
                  instruments and cases
              
              3
                  to 7 yearsBroadcasting
                  equipment and cases
              
              5
                  to 7 yearsProperty
                  and Equipment:Machinery,
                  computers and equipment
              
              1
                  to 5 yearsFurniture
                  and fixtures
              
              3
                  to 7 yearsVehicles
              
              5
                  yearsBuilding
              
              30
                  yearsLeasehold
                  improvements
              
              Term
                  of lease (1 to 5 years)
 
 *Basis
        for Recording Assets and Depreciation Methods*
  Property
        and equipment are recorded at cost. Depreciation is provided over the estimated
        useful lives of the related assets using the straight-line method for financial
        statement purposes. The Company uses other depreciation methods (generally,
        accelerated depreciation methods) for tax purposes where appropriate.
        Amortization of leasehold improvements is computed using the straight-line
        method over the shorter of the remaining lease term, including the option
        to
        extend if extension is probable, or the estimated useful lives of the
        improvements.
  When
        REE
        is acquired, the Company estimates the period it will hold the asset.
        Depreciation is recorded on a straight-line basis over the estimated holding
        period, with the objective of minimizing gain or loss on the disposition
        of the
        REE. Upon disposal of the REE, depreciation expense is adjusted for the
        difference between the net proceeds from the sale and the remaining book
        value.
        As market conditions change, the Company adjusts its depreciation rates
        prospectively, over the remaining holding period, to reflect the changes
        in
        market conditions. The Company received promotional REE valued at $37,694
        and
        $37,444 in the years ended June 30, 2006 and 2005, respectively (see Note
        1L -- Barter Transactions).
  *Policy
        for Repairs and Maintenance, Capitalization, and Disposal of
        Assets*
  Repairs
        and maintenance are expensed as incurred. Expenditures that increase the
        value
        or productive capacity of assets are capitalized. When property and equipment
        are retired, sold or otherwise disposed of, the asset’s carrying amount and
        related accumulated depreciation are removed from the accounts and any gain
        or
        loss is included in operations.
  F.
              Long-lived
                  Assets
  In
        accordance with Statement of Financial Accounting Standards (“SFAS”)
        No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
the Company periodically evaluates the carrying value of long-lived assets
        to be
        held and used, including intangible assets, when events and circumstances
        warrant such a review or annually, whichever is sooner. The carrying value
        of a
        long-lived asset is considered impaired when the anticipated discounted cash
        flow from such asset is separately identifiable and is less than its carrying
        value. In that event, a loss is recognized based on the amount by which the
        carrying value exceeds the fair market value of the long-lived asset held
        for
        use. Fair market value is determined primarily using the anticipated cash
        flows
        discounted at a rate commensurate with the risk involved. Losses on long-lived
        assets to be disposed of are determined in a similar manner, except that
        fair
        market values are reduced for the cost to dispose.
  33
  *Costs
        of Producing Audio-visual Content*
  The
        Company expenses all costs to create its content for multiplatform distribution
        . Once the Company has the ability to determine ultimate revenues to be derived
        from the content, it will begin to capitalize the cost in accordance with
        SOP
        00-2.
  The
        capitalized cost of producing music videos of rehearsals is recognized as
        expense in accordance with the individual project forecast method specified
        in
        SOP 00-2, pursuant to which the Company estimates the ratio that revenue
        which
        is earned for such programming in the current period bears to its estimate
        at
        the beginning of the current year of total revenues to be realized from all
        media and markets for such programming. Amortization commences in the period
        in
        which revenue recognition commences. Management regularly reviews and revises
        its total revenue estimates for each project, which may result in modifications
        to the rate of amortization. If a net loss is projected for a particular
        project, the related capitalized costs are written down to estimated realizable
        value.
  During
        2006 and 2005, the Company did not secure distribution agreements for any
        of the
        audio-visual content it has produced. Accordingly, no production costs were
        capitalized.
  G.
              Fair
                  Value of Financial Instruments
  The
        carrying value of certain financial instruments, including accounts receivable,
        other current assets, accounts payable, accrued expenses, and deferred revenues
        approximate fair value due to their short maturities. Based on borrowing
        rates
        currently available to the Company for loans with similar terms, the carrying
        value of notes payable approximate fair value.
  H.
              Business
                  Risks and Credit Concentrations
  Accounts
        receivable are unsecured. The Company performs ongoing credit evaluations
        of its
        customers’ financial condition. It generally requires no collateral and
        maintains reserves for potential credit losses on customer accounts, when
        necessary. Management evaluated the accounts receivable and reserved $62,000
        as
        an allowance for doubtful accounts as of June 30, 2006.
  I.
              Accounting
                  for Convertible Debt Securities
  On
        August 17, 2005 (the date of the Merger), the Company had issued and
        outstanding convertible notes (the “Convertible Notes”) in an aggregate
        principal amount of $6,719,800, including Convertible Notes in the aggregate
        principal amount of $1,791,000 issued from July 1, 2005 to August 17,
        2005. The Convertible Notes bore interest at 10% per annum and were due and
        payable on December 31, 2005. The Convertible Notes were convertible, at
        the option of either the holder or the Company, only if the Company
        (i) conducted a firmly underwritten public offering registered under the
        Securities Act of 1933 or (ii) merged with a public company (or subsidiary
        of a public company) by December 31, 2005, into shares of the Company or
        the surviving entity at 50% of the market price of the Common Stock.
  34
  On
        September 27, 2005 the Company converted the Convertible Notes of
        $6,719,800 and $448,815 (principal and accrued interest respectively) into
        an
        aggregate of 7,585,719 restricted shares of Common Stock at a conversion
        price
        of $0.945 per share.
  The
        Merger on August 17, 2005 was the triggering event that provided the
        Company the ability to determine the associated beneficial conversion feature
        of
        the Convertible Notes. Previously, the Company was not able to ascertain
        the
        value, if any, of the convertible feature due to the triggering event not
        occurring until August 17, 2005. The amount of $7,168,613 allocated to the
        beneficial conversion feature embedded in the debentures, which was amortized
        in
        full at conversion, was determined in accordance with provisions of EITF
        98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features
        or
        Contingently Adjustable Conversion Ratios” and EITF 00-27, “Application of Issue
        No. 98-5 to Certain Convertible Instruments.”
  J.
              Income
                  Taxes
  The
        Company accounts for its income taxes using the SFAS No. 109, “Accounting
        for Income Taxes,” which requires the establishment of a deferred tax asset or
        liability for the recognition of future deductible or taxable amounts and
        operating loss and tax credit carryforwards. Deferred tax expense or benefit
        is
        recognized as a result of timing differences between the recognition of assets
        and liabilities for book and tax purposes during the year.
  Deferred
        tax assets and liabilities are measured using enacted tax rates expected
        to
        apply to taxable income in the years in which those temporary differences
        are
        expected to be recovered or settled. Deferred tax assets are recognized for
        deductible temporary differences and operating loss, and tax credit
        carryforwards. A valuation allowance is established to reduce that deferred
        tax
        asset if it is “more likely than not” that the related tax benefits will not be
        realized.
  K.
              Revenue
                  Recognition
  Revenue
        is recognized over the period the revenue earning equipment or rehearsal
        studio
        space is rented based on the terms of the rental contract. Generally, the
        rental
        period is less than 30 days.
  The
        Company recognizes revenue only when all of the following criteria have been
        met:
  ·
              Persuasive
                  evidence of an arrangement exists;
  ·
              Delivery
                  has occurred or services have been
                  rendered;
  ·
              The
                  fee for the arrangement is fixed or determinable; and
  ·
              Collectibility
                  is reasonably assured.
  *Persuasive
        Evidence of an Arrangement Exists* —The
        Company documents all terms of an arrangement in a written contract or purchase
        order signed by the customer prior to recognizing revenue.
  35
  *Delivery
        Has Occurred or Services Have Been Rendered* —The
        Company performs all services or delivers necessary rental equipment prior
        to
        recognizing revenue. Equipment is considered delivered upon delivery to a
        customer’s designated location.
  *The
        Fee for the Arrangement is Fixed or Determinable* —Prior
        to
        recognizing revenue, a customer’s fee is either fixed or determinable under the
        terms of the written contract. Fees for most equipment rentals and rehearsal
        space rentals are fixed under the terms of the written contract. The customer’s
        fee is negotiated at the outset of the arrangement and is not subject to
        refund
        or adjustment during the initial term of the arrangement.
  *Collectibility
        is Reasonably Assured* —The
        Company determines that collectibility is reasonably assured prior to
        recognizing revenue. Collectibility is assessed on a customer-by-customer
        basis
        based on criteria outlined by management. New customers are subject to a
        credit
        review process, which evaluates the customer’s financial position and ultimately
        its ability to pay. The Company does not enter into arrangements unless
        collectibility is reasonably assured at the outset. Existing customers are
        subject to ongoing credit evaluations based on payment history and other
        factors. If it is determined during the arrangement that collectibility is
        not
        reasonably assured, revenue is recognized on a cash basis.
  Management
        fees are recognized when the facility management services are rendered. During
        fiscal year 2005 and 2006, facility management services were provided to
        a
        related party. During fiscal year 2005 and 2006, management fees from this
        related party were eliminated in consolidation of this variable interest
        entity.
  L.
              Barter
                  Transactions
  *Marketing
        and Product Placement Revenues and Expenses*
  Pursuant
        to the consensus reached by the Emerging Issues Task Force (“EITF”) in Issue
        No. 99-17, “Accounting for Advertising Barter Transactions,” the Company’s
        barter transactions are recorded at the estimated fair value of the asset
        received, generally using vendor invoice prices. Product placement revenue
        is
        recognized on a straight-line basis over the estimated life of the
        equipment. When the Company receives the musical instruments or audio equipment
        prior to its delivery of the product placement, a corresponding liability
        (deferred revenue) is recorded under the caption “Accounts Payable and Accrued
        Expenses.” CenterStaging received promotional instruments valued at $37,694 and
        $37,444 in the years ended June 30, 2006 and 2005,
        respectively.
  M.
              Website
                  Development
  Material
        software development costs incurred subsequent to the establishment of
        technological feasibility are capitalized. Technological feasibility is
        determined based on the completion of a working model. As of June 30, 2006
        the Company has not capitalized any website development costs because
        such amounts are not material.
  N.
              Advertising
                  Costs
  The
        Company has minimal advertising costs, which are expensed as
        incurred.
  O.
              Comprehensive
                  Loss
  Comprehensive
        loss consists of net loss and other gains and losses affecting stockholders’
equity that, under generally accepted accounting principles, are excluded
        from
        net loss in accordance with SFAS No. 130, “Reporting Comprehensive Income”
(“SFAS No. 130”). The Company, however, does not have any components of other
        comprehensive loss as defined by SFAS No. 130 and therefore, for the years
        ended June 30, 2006 and 2005, comprehensive loss is equivalent to the
        Company’s reported net loss. Accordingly, a statement of comprehensive loss is
        not presented.
  36
  P.
              Use
                  of Estimates
  The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and 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.
  Management
        makes estimates that affect reserves for allowance for doubtful accounts,
        barter
        transactions, deferred income tax assets, estimated useful lives of REE and
        property and equipment, accrued expenses, fair value of equity instruments
        and
        reserves for any other commitments or contingencies. Any adjustments applied
        to
        estimates are recognized in the year in which such adjustments are
        determined.
  Q.
              Segments
                  of an Enterprise and Related
                  Information
  The
        Company follows SFAS No. 131, “Disclosures about Segments of an Enterprise
        and Related Information” (“SFAS No. 131”). SFAS No. 131 requires that a
        business enterprise report financial and descriptive information about its
        reportable operating segments on the basis that is used internally for
        evaluating segment performance and deciding how to allocate resources to
        segments. Currently, the Company operates in two segments: (i) provision
        of
        musical production services, renting of musical instruments and renting studios
        for rehearsals and production; and (ii) “rehearsals.com.” (See Note
        8)
  R.
              Stock
                  and Warrant-Based Compensation for
                  Non-employees
  The
        Company accounts for stock and warrants issued to non-employees for services
        in
        accordance with the provisions of the EITF Issue No. 96-18, “Accounting for
        Equity Instruments That Are Issued to Other Than Employees for Acquiring,
        or in
        Conjunction with Selling Goods or Services,” and EITF 01-9, “Accounting for
        Consideration Given by a Vendor to a Customer (Including a Reseller of the
        Vendor’s Products).” Under the provisions of EITF 96-18, because none of the
        Company’s agreements for these services have a disincentive for nonperformance,
        the Company records a charge for the fair value of the stock and the portion
        of
        the warrants earned from the point in time when vesting of the warrants becomes
        probable. Final determination of fair value of the stock and warrants occurs
        upon actual vesting. EITF 01-9 requires that the fair value of certain types
        of
        warrants issued to customers be recorded as a reduction of revenue to the
        extent
        of cumulative revenue recorded from that customer. (See Note 4)
  S.
              Stock
                  Options
  In
        December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
        Payment” (“SFAS No. 123R”), that requires companies to expense the value of
        employee stock purchase plans, stock option grants and similar awards at
        the
        beginning of their next fiscal year that begins after December 15, 2005 and
        requires the use of either the modified prospective or the modified
        retrospective application method. The Company has early adopted the fair
        value
        based method of accounting prescribed in SFAS No. 123(R) for its Incentive
        Stock Option and Non-Qualified Stock Option plans.
  37
  In
        November 2005 the Company’s Board of Directors adopted, and in January 2006 the
        Company’s stockholders approved, the 2005 Incentive Stock Option Plan and the
        2005 Non-Qualified Stock Option Plan. The Company adopted SFAS No. 123R on
        January 1, 2006 under the modified prospective method; as such, prior
        periods do not include share-based compensation expense related to SFAS No.
        123R. The modified prospective method requires the application of SFAS No.
        123R
        to new awards and to awards modified, repurchased or cancelled after the
        effective date. Additionally, compensation cost for the portion of outstanding
        awards for which services have not been rendered (such as unvested options)
        that
        are outstanding as of the date of adoption are recognized as the remaining
        services are rendered. The Company accounts for the fair value of its grants
        under those plans in accordance with SFAS No. 123R. (See Note
        4)
  T.
              Variable
                  Interest Entities
  The
        Company leases one of the buildings at its Burbank facility from Jan and
        Johnny,
        Inc., an entity established for the sole purpose of acquiring and leasing
        the
        building. Financial Accounting Standards Board Interpretation No. 46
        (Revised December 2003), “Consolidation of Variable Interest Entities” (“FIN-
        46R”), requires that if an enterprise is the primary beneficiary of a variable
        interest entity, the assets, liabilities and results of operations of the
        variable interest entity should be included in the consolidated financial
        statements of the enterprise. Under FIN-46R, Jan and Johnny, Inc. is a variable
        interest entity and the Company is the primary beneficiary. The Company has
        elected to consolidate Jan and Johnny, Inc., effective July 1, 2004. The
        building has been recorded as an asset and the related debt has been recorded
        as
        a liability in the Company’s consolidated balance sheet. The impact on the
        Company’s future consolidated statement of operations will be increased
        depreciation and interest expense, which will be partially offset by lower
        rent
        expense. The land and building have a carrying value of $275,000 and $837,677,
        respectively with related mortgage debt of $3,106,795 as of June 30, 2006.
        (See Note 5)
  U.
              Basic
                  and Diluted Net Earnings (loss) per
                  Share
  Basic
        net
        earnings (loss) per common share is computed by dividing net earnings (loss)
        applicable to common stockholders by the weighted-average number of common
        shares outstanding during the period. Diluted net earnings per common share
        is
        determined using the weighted-average number of common shares outstanding
        during
        the period, adjusted for the dilutive effect of common stock equivalents,
        consisting of shares that might be issued upon exercise of common stock options.
        In periods where losses are reported, the weighted-average number of common
        shares outstanding excludes common stock equivalents, because their inclusion
        would be anti-dilutive.
  V.
              Recent
                  Accounting Pronouncements
  38
  In
        November 2004, the Financial Accounting Standards Board Statement issued
        SFAS
        No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4”,
        which clarifies the accounting for abnormal amounts of idle facility expense,
        freight, handling costs, and charges regardless of whether they meet the
        criterion of “so abnormal” that was originally stated in Accounting Research
        Bulletin No. 43, chapter 4. In addition, SFAS No. 151 requires that
        the allocation of fixed production overheads to conversion costs be based
        on the
        normal capacity of the production facilities. SFAS No. 151 is effective for
        inventory costs incurred during fiscal years beginning after June 15, 2005.
        The implementation of this proposed statement did not have a material effect
        on
        its financial position and results of operations.
  In
        December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
        Assets - an amendment of APB Opinion No. 29” (“SFAS No. 153”), which amends
        Opinion 29 by eliminating the exception for nonmonetary exchanges of similar
        productive assets and replaces it with a general exception for exchanges
        of
        nonmonetary assets that do not have commercial substance. A nonmonetary exchange
        has commercial substance if the future cash flows of the entity are expected
        to
        change significantly as a result of the exchange. SFAS No. 153 is effective
        for fiscal years beginning after June 15, 2005, and implementation is done
        prospectively. Management does not expect the implementation of this new
        standard to have a material impact on its consolidated financial position,
        results of operations and cash flows.
  39
  In
        March
        2005, the SEC released Staff Accounting Bulletin No. 107, “Share-Based
        Payment”(“SAB 107”), which provides interpretive guidance related to the
        interaction between SFAS No. 123R and certain SEC rules and regulations.
        It also
        provides the SEC staff’s views regarding valuation of share-based payment
        arrangements. In April 2005, the SEC amended the compliance dates for SFAS
        No.
        123R, to allow companies to implement the standard at the beginning of their
        next fiscal year, instead of the next reporting period beginning after
        June 15, 2005. SAB 107 will not have an impact on its consolidated
        financial statements, since the Company has already adopted the provisions
        of
        SFAS No. 123R.
  In
        May
        2005, the FASB issued SFAS No. 154, Accounting Changes and Error
        Corrections - a replacement of APB Opinion No. 20 and FASB Statement
        No. 3 (“SFAS No. 154”). SFAS No. 154 requires retrospective
        application to prior periods’ financial statements of changes in accounting
        principle, unless it is impracticable to determine either the period-specific
        effects or the cumulative effect of the change. SFAS No. 154 also requires
        that retrospective application of a change in accounting principle be limited
        to
        the direct effects of the change. Indirect effects of a change in accounting
        principle, such as a change in nondiscretionary profit-sharing payments
        resulting from an accounting change, should be recognized in the period of
        the
        accounting change. SFAS No. 154 also requires that a change in
        depreciation, amortization or depletion method for long-lived, non-financial
        assets be accounted for as a change in accounting estimate effected by a
        change
        in accounting principle. SFAS No. 154 is effective for accounting changes
        and corrections of errors made in fiscal years beginning after December 15,
        2005. Early adoption is permitted for accounting changes and corrections
        of
        errors made in fiscal years beginning after the date this Statement is issued.
        Management does not expect the implementation of this new standard to have
        a
        material impact on its consolidated financial position, results of operations
        and cash flows.
  40
  In
        September 2005, the EITF issued EITF 05-07, “Accounting for Modifications to
        Conversion Options Embedded in Debt Instruments and Related Issued” (“EITF
        05-07”). EITF 05-07 is effective for future modifications of debt instruments
        beginning in the first interim or annual reporting period beginning after
        December 15, 2005. We do not expect there to be a material impact from the
        adoption of EITF 05-07 on our consolidated financial position, results of
        operations or cash flows.
  In
        September 2005, the FASB Emerging Issues Task Force issued EITF 05-08, “Income
        Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion
        Feature.” EITF 05-08 is effective for financial statements beginning in the
        first interim or annual reporting period beginning after December 15, 2005.
        We do not expect there to be any impact from the adoption of EITF 05-08 on
        our
        consolidated financial position, results of operations or cash
        flows.
  In
        February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
        Financial Instruments - an amendment of FASB Statements No. 133 and 140.”
Companies are required to apply SFAS No. 155 as of the first annual
        reporting period that begins after September 15, 2006. The Company does not
        believe adoption of SFAS No. 155 will have a material effect on its audited
        condensed consolidated financial position, results of operations or cash
        flows.
  In
        March
        2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
        Assets-an amendment of FASB Statement No. 140.” Companies are required to
        apply SFAS No. 156 as of the first annual reporting period that begins
        after September 15, 2006. The Company does not believe adoption of SFAS
        No. 156 will have a material effect on its audited condensed consolidated
        financial position, results of operations or cash flows.
  In
          July
          2006, the FASB issued Interpretation(“FIN”) 48, “Accounting for Uncertainty in
          Income Taxes—An Interpretation of Statement of Financial Accounting Standards
          No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes
          recognized in an enterprise’s financial statements, and prescribes a recognition
          threshold and measurement attribute for the financial statement recognition
          and
          measurement of a tax position taken or expected to be taken in a tax return.
          FIN
          48 also provides guidance on derecognition, classification, interest and
          penalties, accounting in interim periods, disclosure and transition. The
          provisions of FIN 48 are effective for fiscal years beginning after December
          15,
          2006. The Company is currently determining the effect, if any, the adoption
          of
          FIN 48 will have on its financial statements.
  In
          September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This
          statement clarifies the definition of fair value, establishes a framework
          for
          measuring fair value, and expands the disclosures on fair value measurements.
          SFAS No. 157 is effective for fiscal years beginning after November 15,
          2007.
          The Company has not determined the effect, if any, the adoption of this
          statement will have on its results of operations or financial position.
 **2.**
              **Income
                  Taxes**
  No
        provision for federal income taxes was recorded for fiscal years 2006 and
        2005,
        because the Company incurred net operating losses for these
        periods.
 **2006**
                  
                  **2005**Income
                      Tax ProvisionCurrent:Federal
                  
                  $
                  -
                  
                  $
                  -State
                  
                  
                  -
                  
                  
                  -$
                  -
                  
                  $
                  -Deferred:Federal
                  
                  $
                  -
                  
                  $
                  -State
                  
                  
                  -
                  
                  
                  -$
                  -
                  
                  $
                  -**2006**
                  
                  
                  **2005**Effective
                      Tax ReconciliationFederal
                      income tax rate
                  
                  
                  34.0
                  %
                  
                  34.0
                  %State
                      and local taxes, net of federal tax benefit
                  
                  
                  5.8
                  
                  
                  5.8Other
                  
                  
                  -
                  
                  
                  0.1Change
                      in valuation allowance
                  
                  
                  (39.8
                  )
                  
                  (39.9
                  )0.0
                  %
                  
                  0.0
                  %
  41
  The
        following table summarizes the deferred tax assets and liabilities for fiscal
        years 2006 and 2005:
 **Year
                    Ended
                    June 30,****2006**
                
                **2005****Federal**
                
                **State**
                
                **Federal**
                
                **State**Deferred
                    income tax assets:Net
                    operating loss carryforwards
                
                $
                8,626,955
                
                $
                1,418,298
                
                $
                1,567,000
                
                $
                233,000Other
                
                
                1,664,763
                
                
                1,427,037
                
                
                1,155,000
                
                
                197,000Total
                    deferred tax assets
                
                
                10,291,718
                
                
                2,845,335
                
                
                2,722,000
                
                
                430,000Deferred
                    income tax liabilities:Property
                    and equipment
                
                
                (83,911
                )
                
                (10,544
                )
                
                (85,000
                )
                
                (7,000
                )Net
                    deferred tax assets before valuation allowance
                
                
                10,207,807
                
                
                2,834,791
                
                
                2,637,000
                
                
                423,000Valuation
                    allowance
                
                
                (10,207,807
                )
                
                (2,834,791
                )
                
                (2,637,000
                )
                
                (423,000
                )Net
                    deferred tax assets
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
 Due
        to
        the uncertainty surrounding the realization of deferred tax assets, the Company
        has recorded a valuation allowance against its net deferred tax asset. The
        Company has loss carryforwards of approximately $25,373,356 (federal) and
        $24,453,416 (state) from continuing operations, which may be used to offset
        future United States federal and state income taxes and which begin to expire
        in
        2012. The valuation allowance changed by approximately $9,982,598 and $2,550,000
        during fiscal years 2006 and 2005, respectively.
  **3.**
              **Debt**
  A.
              Short-Term
                  Debt
  *Convertible
        Debenture*
  The
        Company has outstanding a convertible debenture in the principal amount of
        $500,000 that bears interest at the rate of 6% per annum and was due and
        payable
        June 12, 2006 (subsequently extended to December 2006). See Note 7.
  *Loans
        and Lines of Credit (Non-Related Parties)*
  The
        Company has borrowings under revolving lines of credit with three financial
        institutions that provide for borrowings of up to an aggregate of $280,000
        outstanding at any time, bear interest at variable rates, are unsecured and
        do
        not have any material covenants. The outstanding borrowings under these
        revolving lines of credit totaled $278,000 as of June 30, 2006. The
        weighted average interest rate on these borrowings during fiscal years 2006
        and
        2005 was 8.5% and 7.15%, respectively.
  The
        Company has an outstanding unsecured note in the amount of $100,000 bearing
        interest at the rate of 6% per annum and due and payable on demand.
  42
  *Loans
        (Related Parties)*
  An
        employee of the Company loaned $300,000 to the Company in February 2005.
        This
        unsecured loan bears interest at a variable rate of prime plus 4% per annum
        (12.25% per annum at June 30, 2006) and is due on December 31, 2006.
        On June 30, 2006, the outstanding principal amount of this loan was
        $225,000.
  The
        Company has outstanding notes to Johnny Caswell and Jan Parent, directors,
        executive officers and 10% stockholders of the Company in an aggregate principal
        amount of $50,000 as of June 30, 2006, bearing interest at a rate of 9.6%
        per
        annum and due and payable in May 2007.
  The
        Company has outstanding notes to Johnny Caswell and Jan Parent in the aggregate
        principal amount of $102,000 as of June 30, 2006, bearing interest at the
        rate
        of 10.0% per annum and due and payable in May 2007.
  The
        Company has outstanding loans from Johnny Caswell, Howard Livingston (Mr.
        Livingston is a director and the Chief Financial Officer), Roger
        Paglia (Mr. Paglia is a director and the Chief
        Executive Officer) and Jan Parent in the aggregate principal amount of
        $160,000 bearing interest at the rate of 8% per annum and due and payable
        on
        demand.
  Also
        included in related party loans is $61,000 of
        reimbursements of business expenses to officers
        and employees.
  B.
              Long-term
                  Debt
  *Mortgage
        on Building*
  The
        building leased by Jan and Johnny, Inc. to the Company is subject to mortgage
        that bears interest at a variable rate of prime plus 1.75% (10.0% as of
        June 30, 2006) payable monthly based on a 25-year amortization and due and
        payable in 2010. The outstanding principal amount of this mortgage at June
        30,
        2006 was $3,106,795.
  *SBA
        Loan*
  In
        May
        2005, the Company obtained a 10-year, fully amortizing SBA-loan in the principal
        amount of $2,000,000 bearing interest at a variable rate of prime plus 2.75%
        per
        annum, adjusting quarterly. The loan is secured by a substantial amount of
        the
        Company’s assets and by a junior security interest in the land and building
        owned by Johnny and Jan, Inc. At June 30, 2006, the outstanding principal
        balance of the loan was $1,836,089 and the interest rate was 11.0% per annum.
  *Bank
        Loan*
  In
        November 2004, the Company obtained a loan from a commercial bank in the
        principal of $327,722 bearing interest at a variable rate of prime plus 1%,
        and
        fully amortizing through maturity in November 2009. The loan is secured by
        certain equipment. At June 30, 2006, the outstanding principal amount of
        the loan was $223,943 and the interest rate was 9.25% per annum.
  43
  *Loan
        (Related Party)*
  The
        Company has an outstanding note to Jan Parent **** in
        the
        principal amount of $75,000 as of June 30, 2006, bearing interest at the
        rate of
        9% per annum and due and payable in July 2010.
  C.
              Maturities
                  of Notes Payable
  **Fiscal
                  year ending**
                **June 30,**
              
              **Amount**2007
              
              $
              400,7462008
              
              
              238,6712009
              
              
              252,1022010
              
              
              294,8382011
              
              
              201,600Thereafter
              
              
              4,095,680Total
                  long-term debt
              
              $
              5,483,637
 
 **4.**
              **Equity
                  Transactions**
  A.
              Conversion
                  of 10% Convertible Notes
  On
        August 17, 2005 (the date of the Merger), the Company had issued and
        outstanding convertible notes (the “Convertible Notes”) in an aggregate
        principal amount of $6,719,800, including Convertible Notes in the aggregate
        principal amount of $1,791,000 issued from July 1, 2005 to August 17,
        2005. The Convertible Notes bore interest at 10% per annum and were due and
        payable on December 31, 2005. The Convertible Notes were convertible, at
        the option of either the holder or the Company, only if the Company
        (i) conducted a firmly underwritten public offering registered under the
        Securities Act of 1933 or (ii) merged with a public company (or subsidiary
        of a public company) by December 31, 2005, into shares of the Company or
        the surviving entity at 50% of the market price of the Common Stock.
  The
        proceeds from the issuance of the Convertible Notes were primarily used to
        repay
        debt under the Company’s bank borrowings, acquire assets, and for general
        working capital purposes.
  On
        September 27, 2005 the Company converted the Convertible Notes of
        $6,719,800 and $448,815 (principal and accrued interest respectively) into
        an
        aggregate of 7,585,719 restricted shares of Common Stock at a conversion
        price
        of $0.945 per share.
  The
        Merger on August 17, 2005, was the primary triggering event that provided
        the Company the ability to determine the associated beneficial conversion
        feature of the convertible notes. Previously, the Company was not able to
        ascertain the value, if any, of the convertible feature due to the triggering
        event not occurring until August 17, 2005. The amount of $7,168,613
        allocated to the beneficial conversion feature embedded in the debentures,
        which
        was amortized in full at conversion, was determined in accordance with
        provisions of EITF 98-5 Accounting for Convertible Securities with Beneficial
        Conversion Features or Contingently Adjustable Conversion Ratios and EITF
        00-27
        Application of Issue No. 98-5 to Certain Convertible
        Instruments.
  44
  B.
              Private
                  Placement of Common Stock
  During
        the year ended June 30, 2006, the Company sold 4,180,983 restricted shares
        of its Common Stock for $1.50 per share in a private placement for an aggregate
        of $6,246,476. The Company used the proceeds from these sales for general
        corporate purposes.
  C.
              Issuance
                  of Securities to Third Parties for
                  Services
  On
        August 17, 2005, the Company issued an aggregate of 2,480,000 restricted
        shares of its Common Stock to various consultants in connection with the
        Merger
        and recognized an expense of $2,343,600 in connection with such issuance.
        The
        Company based the fair value of these shares on pricing models using prevailing
        financial market information with specific reference to the price per share
        that
        the holders of the Convertible Notes received upon conversion of their Notes
        ($0.945 per share).
  In
        October 2005, the Company engaged MLB Advance Media, L.P. (“BAM”) to provide
        certain services to the Company. As part of its compensation for the services,
        on December 31, 2005, the Company issued to BAM warrants to purchase
        800,000 shares of its Common Stock at an exercise price of $2.50 per share
        and
        expiring December 31, 2008. BAM is also entitled to two other tranches of
        warrants, each for the purchase of 850,000 shares. These tranches of
        warrants will be issued only if the consulting agreement has not been terminated
        and the Company achieves specified cumulative revenues ($75 million for the
        first tranche and $125 million for the second tranche). The exercise prices
        of
        these additional warrants will equal to the market price on the date of issuance
        and the warrants will expire three years from the date of issuance. Under
        the
        provisions of EITF 96-18, because none of the Company’s agreements have a
        disincentive for nonperformance, the Company records a charge for the fair
        value
        of the stock and the portion of the warrants earned from the point in time
        when
        vesting of the warrants becomes probable. Final determination of fair value
        of
        the stock and warrants occurs upon actual vesting. The fair value of these
        warrants was determined using the Black-Scholes option-pricing mode. The
        value
        was derived using the following assumptions: (i) expected term 3 years;
        (ii) volatility 157%; (iii) risk free interest rate 4.30%; and (iv)
        Dividend yield 0%. The Company estimates that the services to be provided
        for
        the warrants issued in December 2005 will be provided over a one-year period.
        As
        a result, the Company has recorded $848,000 in expense for fiscal year
        2006.
  In
        December 2005, the Company issued 100,000 restricted shares of its Common
        Stock
        to a consultant for services rendered. The Company determined the fair value
        of
        these shares to be $1.50 per share for an aggregate of $150,000.
  In
        April
        2006, the Company issued warrants to purchase an aggregate of 2,000,000 shares
        of Common Stock to a consultant. The warrants are fully vested, expire on
        March 31, 2009, and are exercisable as follows: (i) 800,000 warrants
        for $1.00 per share; (ii) 800,000 warrants for $1.60 per share; and
        (iii) 400,000 warrants for $1.75 per share. The Company accounted for these
        warrants under EITFs 96-18 and 00-19 and SFAS No. 123R, and a fair value of
        $2,224,000 was determined using the Black-Scholes option-pricing model (with
        the
        same assumptions as those used for the options), which resulted in the recording
        of $2,224,000 in compensation expense on April 1, 2006.
  In
        April
        2006, the Company entered into an agreement to issue 20,000 restricted shares
        of
        its Common Stock at $1.80 per share, with an aggregate fair market value
        of
        $36,000, to a consultant for services to be rendered through July 31, 2006
        and
        to be expensed over the service period.
  The
        Company issued no securities to third parties services during the year ended
        June 30, 2005.
  45
  D.
              Stock
                  Option Plans
  In
        November 2005 the Company’s Board of Directors adopted, and in January 2006 the
        Company’s stockholders approved, the 2005 Incentive Stock Option Plan (“2005 ISO
        Plan”) and the 2005 Non-Qualified Stock Option Plan (“2005 NQO
        Plan”)(collectively, the “Plans”). The Company adopted SFAS 123R on
        January 1, 2006 under the modified prospective method; as such, prior
        periods do not include share-based compensation expense related to SFAS 123R.
        The modified prospective method requires the application of SFAS 123R to
        new
        awards and to awards modified, repurchased or cancelled after the effective
        date. Additionally, compensation cost for the portion of outstanding awards
        for
        which service has not been rendered (such as unvested options) that are
        outstanding as of the date of adoption are recognized as the remaining services
        are rendered. The Company accounts for the fair value of its grants under
        those
        plans in accordance with Financial Accounting Standards Board Statement
        No. 123R.
  The
        2005
        ISO Plan provides for the issuance to employees of up to 2,000,000 shares
        of
        Common Stock upon exercise of options intended to qualify as “incentive stock
        options” under the Internal Revenue Code. The exercise price of each option may
        not be less than the fair market value of the Common Stock on the date of
        grant
        and an option’s maximum term is ten years (110% of the fair market value and
        five-year term for incentive stock options to 10% shareholders). A summary
        of
        the status of the 2005 ISO Plan as of June 30, 2006, and changes during
        the year ended on that date is presented below:
  **2005
                  ISO Plan**
              
              **Number
                  Of**
                **Options**
              
              **Weighted-**
                **Average**
                **Exercise
                  Price**Outstanding
                  at July 1, 2005
              
              
              -
              
              $
              -Granted
                  (1/26/06)
              
              
              1,709,000
              
              $
              1.85Granted
                  (6/11/06)
              
              
              25,000
              
              $
              1.80Exercised
              
              
              -
              
              
              -Forfeited
              
              
              (25,000)
              
              $
              1.80Converted
              
              
              -
              
              
              -Expired
              
              
              -
              
              $
              -Cancelled
              
              
              -
              
              
              -Outstanding
                  at June 30, 2006
              
              
              1,709,000
              
              $
              1.85Options
                  exercisable at June 30, 2006
              
              
              -
              
              
              -Options
                  vested and expected to vest
                At
                  June 30, 2006
              
              
              1,709,000
              
              $
              1.85
  46
  The
        2005
        NQO Plan provides for the issuance to directors, employees and consultants
        of up
        to 3,000,000 shares of Common Stock upon exercise of options. The exercise
        price
        of each option may not be less than 85% of the fair market value of the Common
        Stock on the date of grant and an option’s maximum term is ten years. A summary
        of the status of the 2005 NQO Plan as of June 30, 2006, and changes during
        the year ended on that date is presented below:
  **2005
                  NQO Plan**
              
              **Number
                  Of**
                **Options**
              
              **Weighted-**
                **Average**
                **Exercise
                  Price**Outstanding
                  at July 1, 2005
              
              
              -
              
              $
              -Granted
                  (1/26/06)
              
              
              2,235,000
              
              $
              1.80Exercised
              
              
              -
              
              
              -Forfeited
              
              
              (30,000
              )
              $
              1.80Converted
              
              
              -
              
              
              -Expired
              
              
              -
              
              
              -Cancelled
              
              
              -
              
              
              -Outstanding
                  at June 30, 2006
              
              
              2,205,000
              
              $
              1.80Options
                  exercisable at June 30, 2006
              
              
              -
              
              
              -Options
                  vested and expected to vest at
                June 30,
                  2006
              
              
              2,205,000
              
              $
              1.80
 
 For
        both
        plans, the fair values of stock options granted during the third and fourth
        quarter of 2006 were estimated on the date of grant using the Black-Scholes
        option-pricing model with the following assumptions:
  **2006**
              
              **2005**Expected
                  life (in years)
              
              
              6.5
              
              
              --Average
                  risk-free interest rate
              
              
              4.4%
              
              
              --Expected
                  volatility
              
              
              157.0%
              
              
              --Expected
                  dividend yield
              
              
              --
              
              
              --
 
 The
        Company determined the expected life of the stock options using guidance
        from
        SAB 107; thus, the expected life of the options is the average of the vesting
        term and the full-term of the options. The risk-free interest rate is based
        on
        the U.S. Treasury yield curve in effect as of the grant date. The Company’s
        computation of expected volatility is based on historical volatility of a
        similar publicly traded company. The dividend yield assumption is based on
        the
        Company’s expectation of dividend payouts.
  The
        weighted-average grant date estimated fair value of stock options granted
        during
        the three months ended March 31, 2006 and three months ended June 30,
        2006 were $1.44 and $1.45 per share, respectively.
  SFAS
        No.
        123R requires the recognition of stock-based compensation for the number
        of
        awards that are ultimately expected to vest. As a result, for most awards,
        recognized stock compensation was reduced for estimated forfeitures prior
        to
        vesting primarily based on historical annual forfeiture rates of approximately
        0%. Estimated forfeitures will be reassessed in subsequent periods and may
        change based on new facts and circumstances.
  The
        table
        below presents information related to stock option activity for the years
        ended
        June 30, 2006 and 2005:
  **Year
                  Ended June 30,****2006**
              
              **2005**Total
                  intrinsic value of stock options exercised
              
              $
              --
              
              $
              --Cash
                  received from stock option exercises
              
              
              --
              
              
              --Gross
                  income tax benefit from the exercise of stock options
              
              
              --
              
              
              --
  47
  The
        aggregate intrinsic value of the stock options at June 30, 2006 is zero.
        Accordingly, there is also no pretax intrinsic value that would have been
        received by the option holder. There were no options exercised for the twelve
        months ended June 30, 2006.
  During
        the years ended June 30, 2006 and 2005, the Company recognized $798,000 and
        zero of stock-based compensation expense, respectively (which expenses were
        included in salaries and wages expenses). No tax benefits were
        attributed to the stock-based compensation expense because a valuation allowance
        was maintained for substantially all net deferred tax assets.
  Prior
        to
        January 1, 2006, the Company accounted for its stock options in accordance
        with SFAS No. 123; however, prior to January 1, 2006, the Company did
        not have any employee stock options outstanding. Accordingly, the Company
        did
        not recognize compensation expense in its consolidated financial statements
        for
        stock options for periods prior to January 1, 2006.
  **5.**
              **Variable
                  Interest Entities**
  The
        Company leases one of the buildings at its Burbank facility from Jan and
        Johnny,
        Inc., an entity established for the sole purpose of acquiring and leasing
        the
        building. Under FIN-46R, Jan and Johnny, Inc. is a variable interest entity
        and
        the Company is the primary beneficiary. Therefore, the Company has consolidated
        the lessor in its consolidated financial statements. The land and building
        have
        a carrying value of $275,000 and $837,677, respectively with related mortgage
        debt of $3,106,795 as of June 30, 2006.
  *Disclosure
        of Summarized Information of Assets, Liabilities, and Results of Operations
        of
        Jan and Johnny, Inc.*
  The
        Company consolidates Jan and Johnny, Inc. in accordance with FIN 46R. See
        Note 1.B
  The
        unconsolidated results of operations and financial position of Jan and Johnny,
        Inc. for fiscal year 2006 are summarized below:
  **2006**Income
                  statement information:Related
                  party revenue
              
              $
              388,616Expenses
              
              
              248,683Net
                  income
              
              $
              139,933Balance
                  sheet information:Current
                  assets
              
              $
              34,531Notes
                  and receivables from CenterStaging
              
              
              1,814,140Notes
                  and receivables from stockholders
              
              
              889,320Land
                  and building, net
              
              
              875,335Other
                  assets
              
              
              10,165Total
                  assets
              
              $
              3,623,491Current
                  liabilities
              
              $
              144,000Mortgage
                  debt, less current portion
              
              
              2,962,795Equity
              
              
              516,696Total
                  liabilities and equity
              
              $
              3,623,491
 
 Jan
        and
        Johnny, Inc. derives all of its rental revenue (and the majority of its interest
        revenue) from CenterStaging.
  48
  **6.**
              **Related
                  Party Transactions**
  The
        following transactions occurred between the Company and certain related parties:
  A.
              Jan
                  and Johnny, Inc.
  Jan
        and
        Johnny, Inc. is owned by Jan Parent and Johnny Caswell, directors and executive
        officers of the Company who together owned 37% of the outstanding Common
        Stock
        of the Company as of June 30, 2006. The Company consolidates Jan and
        Johnny, Inc. in accordance with FIN 46R and accordingly all intercompany
        transactions have eliminated for financial reporting purposes. See Note
        5.
  The
        Company leases one of the buildings at its Burbank facility from Jan and
        Johnny,
        Inc. The lease provides for monthly payments of $33,075 in the year ending
        June 30, 2006 with a 5% escalation clause, and expires in 2008, and
        contains a renewal option for an additional five years. Rent expense related
        to
        this facility was approximately $397,000 for 2006. Effective July 1, 2004,
        Jan and Johnny, Inc., was consolidated with the Company pursuant to guidelines
        of FIN 46R.
  The
        Company manages the building leased from Jan and Johnny, Inc. pursuant to
        a
        facilities management agreement that will terminate in 2008 concurrently
        with
        the termination of the building lease.
  B.
              Loans
                  (Related Parties)
  The
        Company has obtained loans from certain directors and executive officers
        of the
        Company. See Note 3.
 The
          Company had a loan due from an entity that was partially owned by a shareholder
          of the Company, who is an officer of the Company. The loan was guaranteed
          by the
          officer. Given the nature of the loan it was classified as shareholders’
deficit. The funds advanced were used by the borrower to pay for architectural
          plans to construct a rehearsal facility in Las Vegas, NV. During the fourth
          quarter the entity was dissolved and the officer decided not to continue
          to
          guarantee the receivable. The Company decided that since it plans to construct
          a
          facility in Las Vegas at a future date, that it would take possession and
          utilize the plans accordingly. Due to these events, the accounting treatment
          of
          the funds advanced  switched from a receivable to a potential asset.
          Although management of the company does foresee building and operating
          a Las
          Vegas facility in the future, Paragraphs 4 and 5 of SFAS 67 “Accounting for
          Costs and Initial Rental Operations of Real Estate Projects” requires that the
          Company expense the cost associated with these renderings rather than present
          them as an asset. Thus, the Company wrote off the asset as of June 30,
          2006.
  **7.**
              **Commitments
                  and Contingencies**
  A.
              Legal
                  Actions
  The
        Company is periodically involved in legal actions and claims that arise as
        a
        result of events that occur in the normal course of operations. The Company
        is
        not currently aware of any formal legal proceedings or claims that the Company
        believes will have, individually or in the aggregate, a material adverse
        effect
        on the Company’s financial position or results of operations.
  B.
              Operating
                  Leases
  The
        Company leases its facilities in Burbank, California and Bensalem, Pennsylvania
        under long-term, non-cancelable operating lease agreements. The leases expire
        at
        various dates through 2009 and provide for renewal options ranging from
        month-to-month to five years. In the normal course of business, it is expected
        that these leases will be renewed or replaced by leases on other properties.
        The
        leases provide for increases in future minimum annual rental payments based
        on
        defined increases that are generally meant to correlate with the Consumer
        Price
        Index, subject to certain minimum increases. The leases generally require
        the
        Company to pay real estate taxes, insurance and repairs. Lease expense totaled
        $1,114,182 and $1,040,178 during fiscal year 2006 and 2005,
        respectively.
  Effective
        April 1, 2006, the Company amended one of its leases at its Burbank
        facility to include approximately 7,900 additional square feet which will
        be
        used as offices and a warehouse. This addendum terminates at the same time
        as
        the original lease, which is June 30, 2008. Rent expense for this
        additional space over the life of the lease will be $199,722.
  49
  Certain
        of these operating leases for our facilities contain provisions for future
        rent
        increases, or periods in which rent payments are reduced (abated). The Company
        records monthly rent expense equal to the total of the payments due over
        the
        lease term, divided by the number of months of the lease term. The difference
        between rent expense recorded and the amount paid is credited or charged
        to
“deferred rent liability” which is reflected as a separate line item in the
        accompanying balance sheet.
  The
        following is a schedule by year of future minimum rental payments required
        under
        these property operating lease agreements:
  **Fiscal
                  year ending**
                **June 30,**
              
              **Amount**2007
              
              $
              1,119,7752008
              
              
              1,144,6722009
              
              
              114,8252010
              
              
              4,2262011
              
              
              --Thereafter
              
              
              --$
              2,383,498
  C.
              Capital
                  Leases—Future Minimum Lease
                  Payments
  The
        Company leases certain equipment under agreements that are classified as
        capital
        leases. The cost of equipment under capital leases is included in the balance
        sheet as revenue-earning equipment (or property and equipment, where
        appropriate) was $2,307,188 at June 30, 2006. Accumulated amortization of
        the leased equipment at June 30, 2006, was approximately $431,791.
        Amortization of assets under capital leases is included in depreciation
        expense.
  50
  The
        future minimum lease payments required under the capital leases and the present
        value of the net minimum lease payments as of June 30, 2006, are as
        follows:
  **Fiscal
                  year ending**
                **June 30,**
              
              **Amount**2007
              
              $
              619,7882008
              
              
              588,0442009
              
              
              517,7252010
              
              
              306,0042011
              
              
              77,894Thereafter
              
              
              --Total
                  minimum lease payments
              
              
              2,109,455Less:
                  Amount representing interest
              
              
              (374,573
              )Present
                  value of net minimum lease payments
              
              
              1,734,882Less:
                  Current maturities of capital lease obligations
              
              
              (458,041
              )Long-term
                  capital lease obligations
              
              $
              1,276,841
 
 D.
              Securities
                  Purchase Agreement with Montage Partners III,
                  LLC
  In
        December 2005, the Company entered into the Securities Purchase Agreement
        (the
“Montage Agreement”) with Montage Partners III, LLC (“Montage”). Pursuant to the
        Securities Purchase Agreement, on December 12, 2005, Montage purchased for
        $500,000 a 6% Senior Secured Convertible Debenture (the “Montage Debenture”) in
        the principal amount of $500,000 due June 12, 2006 together with warrants
        (the
“Montage Warrants”) to purchase an aggregate of 380,000 shares of Common Stock
        for $1.60 per share. The Company used the proceeds of the financing to finance
        on-going operations. The Company concurrently entered into a Security Agreement
        dated December 12, 2005 with Montage (the “Montage Security Agreement”),
        pursuant to which the Montage Debenture is secured by all of the accounts
        receivable including the Company’s customer and client lists, and a Registration
        Rights Agreement (the “Montage Registration Rights Agreement”).
  Total
        funds received of $500,000 were allocated first to the Montage Warrants,
        on the
        relative fair value method ($245,509), second to the embedded derivative
        related
        to a “put” feature, which has been determined to have zero value, third to the
        beneficial conversion feature of the Montage Debenture, based on the intrinsic
        value method ($254,491), and lastly, zero value to the Montage Debenture.
        The
        $500,000 discount, consisting of the value of the warrants and beneficial
        conversion feature, on the Montage Debenture is being amortized to interest
        expense over the term of the Montage Debenture using the effective interest
        method. At June 30, 2006, the unamortized discount on the Montage Debenture
        was zero. The following table reflects the Montage Debenture at June 30,
        2006:
  Montage
                  Debenture
              
              $
              500,000Less:
                  Current portion of debt discount
              
              
              --Value
                  of Montage Debenture at June 30, 2006
              
              $
              500,000
  51
  The
        following table summarizes the charges to interest, amortization and other
        expense, relating to the Montage Agreement for the year ended June 30,
        2006:
  Interest
                  expense on debt
              
              $
              16,521Accretion
                  of debt discount
              
              $
              500,000
 
 *Montage
        Debenture* .
        The
        Montage Debenture accrues interest at a rate of 6% per annum, with principal
        and
        interest due on June 12, 2006 (the “Maturity Date”). Pursuant to this
        agreement, default occurs only after written notice of such default is received
        by the Company from the Holder. As of September 22, 2006 the Company has
        not
        paid and no notice of default has been received by the Company. The Montage
        Debenture holder may convert all or any portion of the principal and accrued
        interest on the Montage Debenture at any time and from time to time into
        Common
        Stock of the Company at a conversion price of $1.50 per share, subject to
        certain adjustments as delineated below. If the aggregate principal amount
        and
        accrued interest owing under the Montage Debenture is converted, the Company
        will issue 343,333 shares of Common Stock.
  If
        the
        Company (i) pays a dividend or makes a distribution on its Common Stock in
        shares of Common Stock; (ii) subdivides its outstanding shares of Common
        Stock into a greater number of shares; (iii) combines its outstanding
        shares of Common Stock into a smaller number of shares; (iv) makes a
        distribution on its Common Stock in shares of its capital stock other than
        Common Stock; or (v) issues by reclassification of its Common Stock any shares
        of its capital stock; then the number and kind of securities issuable upon
        conversion of the Montage Debenture shall be proportionately adjusted so
        that
        the Montage Debenture holder may receive upon the conversion the aggregate
        number and kind of shares of capital stock of the Company which it would
        have
        owned immediately following such action if the conversion had taken place
        immediately prior to such action. The adjustment will become effective
        immediately after the record date in the case of a dividend or distribution
        and
        immediately after the effective date in the case of a subdivision, combination
        or reclassification. These adjustments will be made successively whenever
        any
        event listed above shall occur. In the event that a registration statement
        covering all of the shares issuable upon conversion of the Montage Debenture
        has
        not become effective within 60 or more days prior to the Maturity Date, the
        Montage Debenture holder has the right to extend the Maturity Date until
        the
        earlier of 60 days following (i) the date the registration statement
        becomes effective or (ii) the date upon which all of the shares of Common
        Stock issuable upon conversion of the Debenture may be sold under Rule 144
        under the Act.
  Events
        of
        default under the Montage Debenture include, but are not limited
        to:
  (a)  The
        Company fails to issue shares of Common Stock upon conversion of the Montage
        Debenture in accordance with the terms of the Montage Debenture, fails to
        transfer or to cause its transfer agent to transfer any certificate for shares
        of Common Stock issued to the holder upon conversion of the Montage Debenture
        and when required by the Montage Debenture or the Registration Rights Agreement,
        and such transfer is otherwise lawful, or fails to remove any restrictive
        legend
        or to cause its transfer agent to transfer on any certificate or any shares
        of
        Common Stock issued to the holder upon conversion of the Debenture as and
        when
        required by the Montage Debenture, Montage Agreement or the Montage Registration
        Rights Agreement and such legend removal is otherwise lawful, and any such
        failure shall continue uncured for five business days following written notice
        from the holder; or
  (b)  The
        Company fails to perform or observe, in any material respect, any other material
        covenant or obligation of the Montage Debenture or the Montage Security
        Agreement and such failure shall continue uncured for a period of ten days
        after
        written notice from the holder of such failure; or
  (c)  The
        Company fails to perform or observe, in any material respect, any material
        covenant or obligation of the Company under the Montage Securities Purchase
        Agreement, the Montage Registration Rights Agreement or the Montage Warrants
        and
        such failure shall continue uncured for a period of ten days after written
        notice from the Holder of such failure; or
  (d)  The
        Company shall have its Common Stock suspended or delisted from an exchange
        or
        the OTC Bulletin Board from trading for in excess of five trading days;
        or
  52
  (e)  The
        Company is in default under the terms of any other loan agreement, note or
        debt
        instrument, including, without limitation, the loan agreements (including
        the
        Note and Commercial Security Agreement) relating to that certain small business
        association loan with Community National Bank, dated May 2,
        2005.
  If
        the
        Company is in default, and unless such event of default has been cured by
        the
        Company or waived in writing by the holder (which waiver shall not be deemed
        to
        be a waiver of any subsequent default) at the option of the holder and in
        the
        holder’s sole discretion, the debenture holder may upon written notice to the
        Company cause the Montage Debenture to become immediately due and payable
        in
        cash (and not by conversion into Common Stock), without presentment, demand,
        protest or notice of any other kind, and the debenture holder may immediately
        enforce any and all of the holder’s rights and remedies provided in the
        Debenture, or any other rights or remedies afforded by law. Upon an event
        of
        default, the Company must pay, automatically on all installments of principal
        and interest which are not timely paid when due and on the then outstanding
        principal balance, additional interest in addition to the rate set forth
        hereinabove, so that interest will thereafter accrue at an aggregate rate
        equal
        to 12% per annum.
  *Registration
        Rights Agreement* .
        The
        sale of the Montage Debenture and the Montage Warrants was completed through
        a
        private placement to an accredited investor and was exempt from registration
        under the Securities Act. Pursuant to the Montage Registration Rights Agreement,
        the Company agreed to file a resale registration statement covering the resale
        of the shares issuable upon the conversion of the Debenture and the exercise
        of
        the Warrants by January 26, 2006. The Montage Registration Rights Agreement
        requires the Company to pay liquidated damages of: (i) $10,000 if it does
        not file the registration statement by January 26, 2006, and an additional
        $10,000 for each month thereafter that it does not file the registration
        statement; and (ii) $10,000 if the registration statement is not declared
        effective by the earlier of April 11, 2006 or seven days after the SEC
        advises the Company the registration statement may be declared effective,
        and an
        additional $10,000 for each month thereafter that the registration statement
        is
        not declared effective, until such time that the shares can be registered
        under
        Rule 144. Because the Company did not file by January 26, 2006 the
        registration statement covering the shares underlying the Montage Debentures
        and
        Montage Warrants, as of June 30, 2006 the Company had accrued a penalty of
        $60,000 to Montage. The liquidated damage clause has a maximum potential
        of
        $110,000.
  The
        Company evaluated that the maximum amount of the liquidated damages is less
        than
        the differential between registered and unregistered shares. The analysis
        was
        performed by comparing the maximum liquidated damages over the number of
        shares
        covered by the Montage Registration Rights Agreement to the estimated discount
        for an unregistered share. In accordance with guidance in EITF 05-4, the
        Company
        believes that the effect of the liquidated damages should be treated under
        the
        first view (View A), which states that a registration rights agreement
        should be treated as a combined unit together with the underlying financial
        instruments, warrants and debenture and evaluate each as a single instrument.
        The Company concluded that this view is the most appropriate for the
        transaction. Accordingly, the Montage Registration Rights Agreement was
        individually combined with each of the financial instruments (the Montage
        Warrants and the Montage Debenture) and they were considered a combined
        instrument. The Company assessed the delivery of unregistered shares, plus
        the
        liquidated damages clause to be an economical alternative to the issuance
        of
        registered shares. Therefore, the financial instruments were determined not
        to
        be derivative instruments given their association with the Montage Registration
        Rights Agreement and will be accounted for as equity instead of
        liabilities.
  53
  *Montage
        Warrants.* The
        Montage Warrants are exercisable into 380,000 shares of Common Stock at an
        exercise price of $1.60 per share, and expire December 12, 2009. The
        Company would receive proceeds of approximately $608,000 if all of the Montage
        Warrants were exercised. The Montage Warrants contain provisions to adjust
        the
        exercise price and number of shares that may acquired upon exercise in the
        event
        that the Company shall at any time (a) pay a dividend in Common Stock or
        securities convertible into Common Stock; (b) subdivide or split its
        outstanding Common Stock; or (c) combine its outstanding Common Stock into
        a smaller number of shares; then the number of shares to be issued immediately
        after the occurrence of any such event shall be adjusted so that the warrant
        holder thereafter may receive the number of shares of Common Stock it would
        have
        owned immediately following such action if it had exercised the Montage Warrants
        immediately prior to such action and the exercise price shall be adjusted
        to
        reflect such proportionate increases or decreases in the number of shares.
        Given
        that the Montage Warrants were not deemed a derivative as defined above,
        they
        were assigned a relative fair value of $245,509 estimated using the
        Black-Scholes valuation model, and were recorded as a credit to
“Additional-Paid-in-Capital” in the Company’s Balance Sheet. The following
        assumptions were used to determine the fair value of the Montage Warrants
        using
        the Black-Scholes valuation model: a term of four years, risk-free rate of
        4.30%, volatility of 157.31%, and dividend yield of zero. The Black-Scholes
        model resulted in a fair value of $1.63 per Montage Warrant.
  *Embedded
        Derivatives.* The
        Company has evaluated the terms of the Montage Debenture in accordance with
        EITF
        05-02 and determined the Montage Debenture is a “non-conventional convertible
        debt instrument” because it is not settlable in either all cash or all common
        stock. Below is the analysis of the embedded derivative.
  The
        Montage Debenture contains a forced conversion feature that occurs, if
        (i) at any time after the date of the Montage Debenture the average of the
“closing prices” during any consecutive five trading days (the “Pricing Period”)
        exceeds 200% of $1.50 (as such conversion price may subsequently be adjusted
        pursuant to the Montage Debenture)(i.e. 200% of $1.50 is $3.00), and
        (ii) the Company has not forced a conversion within the prior five trading
        days, then the Company may, within one trading day after the Pricing Period,
        deliver a notice (by both facsimile and email) to the holder (a “Forced
        Conversion Notice”) to cause the holder to immediately convert up to $50,000 (a
“Forced Conversion”), provided that in no event will the Forced Conversion
        amount exceed the average daily dollar trading volume of the Common Stock
        during
        the Pricing Period. Notwithstanding the foregoing, the Company may deliver
        a
        Forced Conversion Notice only if, at the time of such delivery, there is
        an
        effective registration statement under the Securities Act pursuant to which
        the
        holder is entitled to use the prospectus contained therein to resell the
        Common
        Stock that the holder acquires as a result of the Forced Conversion. The
        Company
        is required to deliver the shares of Common Stock into which the Montage
        Debenture was converted on a Forced Conversion within three business days
        after
        the date of the Forced Conversion Notice and the Company is subject to the
        same
        late delivery penalties and remedies under the Montage Debenture and the
        Montage
        Agreement that the Company is subject to for late delivery of Common Stock
        upon
        conversion by the holder. In the event the registration statement becomes
        ineffective within ten business days after the Forced Conversion, the holder
        has
        the right, by providing written notice to the Company within 15 business
        days
        after the Forced Conversion, to sell any shares of Common Stock not sold
        by the
        holder that was the subject of the Forced Conversion to the Company for $2.00
        per share. The closing for such repurchase by the Company shall occur within
        ten
        days after such notice is delivered by the holder to the Company. Management
        has
        evaluated the provision for the Forced Conversion and determined that the
        likelihood of a forced conversion is deemed to be very remote due to:
        (i) it is not probable that the registration will take place in the time
        frame required, and therefore the Company could not force the conversion;
        and
        (ii) even if the registration does occur, the Company is registering over
        11 million shares and it is not readily determinable what the market value
        will
        be, including whether or not a $180 million market cap floor would be
        sustainable. Accordingly, the Company has assigned zero value to this forced
        conversion feature.
  54
  *Embedded
        Beneficial Conversion Feature* .
        The
        application of the provisions of EITF 98-5, “Accounting for Convertible
        Securities with Beneficial Conversion Features or Contingently Adjustable
        Conversion Ratios,” and EITF 00-27, “Application of Issue 98-5 to Certain
        Convertible Instruments” resulted in the calculation of an embedded beneficial
        conversion feature in the Montage Debenture, which is required to be treated
        as
        an additional discount to the Montage Debenture. The value of the beneficial
        conversion feature was limited to the intrinsic value of the Montage Debenture,
        accordingly $254,491, and will be amortized to interest, using the effective
        interest method, over the life of the Montage Debenture.
  **8.**
              **Segments:
                  Musical Production Services and Rentals of Musical Instruments
                  and
                  Rehearsal Studio Space, and “rehearsals.com”
                  Operations**
  The
        Company manages its operations through two business segments: (i) provision
        of musical production services, renting of musical instruments and renting
        studios for rehearsals and production, and (ii) “rehearsals.com”
operations. Through June 30, 2006, the Company has derived all of its revenues
        from production and support services and the rental of musical instruments
        and
        rehearsal studio space. In 2004, the Company formed a digital media division,
        which we call “rehearsals.com,” to produce and distribute original high
        definition audio/video content of musicians and recording artists at our
        studios
        as they rehearse, give clinics and record. The Company’s plan
        is
        to generate revenues from rehearsals.com through the distribution and licensing
        of our high-definition audio/video content and through sponsorships on its
        rehearsals.com website, which was launched in March 2006.
  Administrative
        functions such as finance, treasury and information systems are centralized.
        However, where applicable, portions of the administrative function expenses
        are
        allocated between the operating segments. During fiscal years 2006 and 2005,
        there were no transactions between the two segments. The operating costs
        of each
        segment are captured discretely within each segment. The Company’s property and
        equipment, inventory, and accounts receivable are captured and reported
        discretely within each operating segment.
  Summary
        financial information for the two reportable segments is as
        follows:
  **June 30,
                  2006**
              
              **June 30,
                  2005**Musical
                  Production Services and Rental Operations:Net
                  sales
              
              $
              5,705,241
              
              $
              4,807,813Operating
                  loss
              
              
              9,162,051
              
              
              508,958Identifiable
                  assets
              
              
              3,867,931
              
              
              2,821,519Accounts
                  receivable, net
              
              
              703,760
              
              
              472,739Property
                  and Equipment, net
              
              
              1,429,444
              
              
              1,553,104REE,
                  net
              
              
              246,007
              
              
              567,378Rehearsals.com
                  Operations:Net
                  sales
              
              
              --
              
              
              --Operating
                  loss
              
              
              7,268,590
              
              
              5,277,069Identifiable
                  assets
              
              
              3,519,559
              
              
              4,473,856Accounts
                  receivable, net
              
              
              --
              
              
              --Property
                  and equipment, net
              
              
              898,309
              
              
              1,138,207REE,
                  net
              
              
              3,694,446
              
              
              3,265,981
  55
 
 **June 30,
                  2006**
              
              **June 30,
                  2005**Consolidated
                  Operations:Net
                  sales
              
              $
              5,705,241
              
              $
              4,807,813Operating
                  loss
              
              
              16,430,641
              
              
              5,786,027Identifiable
                  assets
              
              
              7,387,490
              
              
              7,295,375Accounts
                  receivable, net
              
              
              703,760
              
              
              472,739Property
                  and equipment, net
              
              
              2,327,753
              
              
              2,691,311REE,
                  net
              
              
              3,940,453
              
              
              3,833,359
 
 **9.**
              **Subsequent
                  Events**
  A.
              Revolving
                  Lines of Credit with Directors
  As
        of
        July 1, 2006, the Company entered into separate Revolving Line of Credit
        Agreements with each Johnny Caswell, Howard Livingston, Roger Paglia and
        Jan
        Parent. Under the terms of these agreements, each of these individuals may,
        in
        his sole and absolute discretion, advance funds to the Company on a revolving
        basis to meet our short-term working capital needs as the Company may request
        from time to time. The total principal amount of all advances outstanding
        at any
        time under each agreement may not exceed $250,000 for an aggregate of
        $1,000,000. Each advance bears interest at a fixed rate equal to the prime
        rate
        in effect at the time of the advance and will be due and payable on
        demand. A total of $455,000 principal amount of advances are
        outstanding under these agreements.
  B.
              Loans
  Since
        June 30, 2006, the Company has obtained the following loans: (i) a loan in
        the
        amount of $50,000 bearing interest at the rate of 9% per annum due and payable
        on December 31, 2006; (ii) a loan in the amount of $250,000 bearing interest
        at
        the rate of 18% per annum due and payable October 17, 2006; (iii) loans in
        the
        aggregate net amount of $215,000 bearing interest at the rate of 10% per
        annum
        and due and payable December 31, 2006; and (iv) a loan in the amount
        $660,000 (of which $92,000 was retained by the lender as an interest reserve)
        bearing interest at the greater of 14% per annum or prime plus 5.75% due
        and
        payable on September 1, 2007 and secured by a junior security interest in
        the
        Company’s equipment, which loan was guaranteed by Johnny Caswell, Jan Parent,
        Roger Paglia and Howard Livingston. ****
  C.
              Hiring
                  of Executive Officer
  In
        July
        2006 Paul Schmidman became the Chief Operating Officer of the Company. In
        September 2006 the Company entered into an employment agreement with Mr.
        Schmidman that provides: (i) for a base salary at the annualized rate of
        $300,000 per year through June 30, 2007, which will increase by not less
        than
        10% each year; (ii) for a $25,000 signing bonus on October 1, 2006; and (iii)
        that Mr. Schmidman will be eligible for a performance bonus of up to 60%
        of base
        salary each year. The Company may terminate Mr. Schmidman’s employment at any
        time with or without cause. If the Company terminates Mr. Schmidman’s employment
        without cause, Mr. Schmidman will be entitled to receive salary, bonus and
        other
        benefits until the earlier to occur of his death or three years from the
        date of
        termination of employment. If there is a change of control of the Company
        and
        Mr. Schmidman does not elect to continue his employment, he will be entitled
        to
        a lump sum payment equal to: (a) the greater of (i) his annual base salary
        at
        the rate in effect as of the date of change of control; or (ii) the amount
        of
        salary and minimum annual bonuses that he would have received from the date
        of
        the change of control to June 30, 2009; plus (b) three times his prior year’s
        bonus (assuming maximum bonus if termination is in the first year of
        employment). He will also receive the health and insurance benefits that
        were
        available to him under the Employment Agreement until one year following
        the
        change of control or June 30, 2009, whichever is later. Unless terminated
        sooner, Mr. Schmidman’s employment will terminate on June 30, 2009.
  56
  D.
              Sale
                  of Common Stock
  During
        the period from July 1, 2006 to September 15, 2006, the Company sold
        729,920 restricted shares of its Common Stock for $901,000 to various accredited
        investors. The proceeds will be used for general corporate
        purposes.
  E.
              Capital
                  Lease Obligations
  Subsequent
        to June 30, 2006, the Company entered into leases for certain equipment
        under agreements that are classified as capital leases. The cost of equipment
        under capital leases will be included in the balance sheets as fixed assets
        and
        the amortization of these assets will be included in depreciation expense.
  The
        future minimum lease payments required under the capital leases and the present
        value of the net minimum lease payments are as follows:
  **Year
                  Ending**
                **June 30,**
              
              **Amount**2007
              
              $
              33,6582008
              
              
              37,7412009
              
              
              37,7412010
              
              
              37,7412011
              
              
              37,741Thereafter
              
              
              4,082Total
                  minimum lease payments
              
              $
              188,704
 
 57




**Item
      8 — Changes In and Disagreements With Accountants on Accounting and Financial
      Disclosure**




Not
      applicable.




**Item
      8A — Controls and Procedures**




We
      maintain disclosure controls and procedures (as defined in Exchange Act Rule
      13a-15(e)) that are designed to assure that information required to be disclosed
      in its Securities Exchange Act of 1934 reports is recorded, processed,
      summarized and reported within the time periods specified in the Securities
      and
      Exchange Commission’s rules and forms, and that such information is accumulated
      and communicated to management, including the Chief Executive Officer and Chief
      Financial Officer, as appropriate, to allow timely decisions regarding required
      disclosures.




In
      designing and evaluating the disclosure controls and procedures, management
      recognizes that any controls and procedures, no matter how well designed and
      operated, can provide reasonable assurance only of achieving the desired control
      objectives, and management necessarily is required to apply its judgment in
      weighting the costs and benefits of possible new or different controls and
      procedures. Limitations are inherent in all control systems, so no evaluation
      of
      controls can provide absolute assurance that all control issues and any fraud
      within the company have been detected.




As
      required by Exchange Act Rule 13a-15(b) and as of the end of the period covered
      by this report, we evaluated the effectiveness of our disclosure controls and
      procedures under the supervision and with the participation of our Chief
      Executive Officer and Chief Financial Officer. Based on this evaluation, our
      Chief Executive Officer and Chief Financial Officer concluded that our
      disclosure controls and procedures were effective as of that date.




There
      was
      no change in our internal control over financial reporting during our most
      recently completed fiscal quarter that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial
      reporting.




**Item
      8B — Other Information**




On
      September 25, 2006, Johnny Caswell and Jan Parent extended the due date of
      the
      following notes payable by us to them until May 31, 2007: (i) notes in the
      aggregate principal amount of $102,000 outstanding as of June 30, 2006 bearing
      interest at the rate of 10.0% per annum; and (ii) a note in the principal
      amount of $50,000 bearing interest at the rate of 9.6% per
      annum.




**PART
      III**




**Item
      9 — Directors, Executive Officers, Promoters and Control Persons; Compliance
      With Section 16(a) of the Exchange Act**




The
      information under the captions “Election of Directors - Information About the
      Nominees, and - Board Committees and “Other Information - Executive Officers,
      -  Section 16(a) Beneficial Ownership Reporting Compliance  and - Code
      of Ethics” in our definitive proxy statement for the 2006 Annual Meeting of
      Shareholders (the “Proxy Statement”) is incorporated herein by
      reference.




58




**Item
      10 — Executive Compensation**




The
      information under the captions, “Other Information - Compensation of Executive
      Officers, - Employment Agreements and - Stock Option Plans” and “Election of
      Directors - Compensation of Directors” in the Proxy Statement are
      incorporated herein by reference.




**Item
      11 — Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters**




The
      information under the captions, “Other Information - Security Ownership of
      Principal Shareholders, Directors and Executive Officers” in the Proxy Statement
      is incorporated herein by reference.





**Item
      12 — Certain Relationships and Related Transactions**




The
      information under the caption “Other Information - Certain Relationships and
      Related Transactions” in the Proxy Statement is incorporated herein by
      reference.




**Item
      13 — Exhibits**




See
      attached Exhibit List.




**Item
      14 — Principal Accounting Fees and Services**




The
      information under the caption “Independent Public Accountants” in the Proxy
      Statement is incorporated herein by reference.




59




**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.




CENTERSTAGING
              CORP.By:
            /s/ Roger
              PagliaRoger
                Paglia
              Chief
                Executive Officer




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.




**Signature**
            
            **Title**
            **Date**/s/
                Roger Paglia
            
            Director
                and Chief Executive Officer
            September
                28, 2006Roger
                Paglia
            
            (Principal
                Executive Officer)/s/
                Johnny Caswell
            
            Director
            September
                  28, 2006Johnny
                Caswell/s/
                Jan Parent
            
            Director
            September
                  28, 2006Jan
                  Parent/s/
                Howard Livingston
            
            Director
                and Chief Financial Officer
            September
                  28, 2006Howard
                Livingston
            
            (Principal Financial Officer
              and Principal Accounting Officer)




60




**INDEX
      TO EXHIBITS**







**Exhibit
                Number**
            
            **Description**2.1
            
            Agreement
                and Plan of Merger, dated as of August 17, 2005, among Knight Fuller,
                Inc., CenterStaging Musical Productions, Inc., Knight Fuller Merger
                Sub,
                Inc., and the other parties identified therein, and Agreement of
                Merger
                dated as of August 17, 2005.(1)3.1
            
            Certificate
                of Incorporation of Knight Fuller, Inc. dated as of May 8,
                2002;Certificate
                of Correction to Certificate of Incorporation of Knight Fuller, Inc.
                dated
                as of February 24, 2004; Certificate of Amendment to Certificate
                of
                Incorporation of Knight Fuller, Inc. dated as of August 27, 2004;
                Certificate of Amendment of Certificate of Incorporation of Knight
                Fuller,
                Inc. dated as of January 20, 2006.(2)Certificate
                of Elimination filed August 16, 2005.3.2
            
            Bylaws.
                Incorporated by reference to Registration Statement on Form S-4 of
                Knight
                Fuller, Inc. filed May 9, 2002 (SEC File No. 333-87968), as
                amended.4.1
            
            Form
                of common stock certificate.(3)10.1
            
            Unsecured
                Promissory Note dated as of September 22, 1997 in the original principal
                amount of $670,500 made by CenterStaging Musical Productions, Inc. in
                favor of Jan & Johnny Inc.(4)10.2
            
            Facility
                Management Agreement dated as of February 1, 1998 between Jan & Johnny
                Inc. and CenterStaging Musical Productions, Inc.(4)10.3
            
            Lease
                dated as of May 9, 2000 between CenterStaging Musical Productions,
                Inc.
                and Two Bills, LLC, with addenda.(4)10.4
            
            Promissory
                Note dated as of August 31, 2000 in the original principal amount of
                $75,000 made by CenterStaging Musical Productions, Inc. in favor of
                Paul Router, Trustee under the Premier Career Management Corporation
                Deferred Compensation Plan for the Interests of John Guthrie
                Caswell.(4)Promissory Note Amendment dated as of June 30,
                2006.10.5
            
            Promissory
                Note dated as of August 31, 2000 in the original principal amount
                of
                $75,000 made by CenterStaging Musical Productions, Inc. in favor of
                Paul Router, Trustee under the Premier Career Management Corporation
                Deferred Compensation Plan for the Interests of Jan Paul
                Parent.(4)Promissory Note Amendment dated as of June 30,
                2006.10.6
            
            Lease
                Agreement dated as of December 1, 2000 between Fred J. Levinson and
                CenterStaging Musical Productions, Inc., with addenda.(4)10.7
            
            Commercial
                Lease dated as of July 1, 2003 between CenterStaging Musical Productions,
                Inc. and Jan & Johnny Inc.(4)10.8
            
            Lease
                dated as of December 1, 2003 between CenterStaging Musical Productions,
                Inc. and The Macpherson Helsabeck Revocable Trust dated as of September
                29, 1992, with addenda.(4)10.9
            
            Amended
                and Restated Letter Agreement, between Roger Paglia and CenterStaging
                Musical Productions, Inc., a California corporation, dated as of
                April 1,
                2004.(1)




61




10.10
            
            Amended
                and Restated Letter Agreement, between Howard Livingston and CenterStaging
                Musical Productions, Inc., a California corporation, dated as of
                April 1,
                2004.(1)10.11
            
            Amended
                and Restated Letter Agreement, between Jan Parent and CenterStaging
                Musical Productions, Inc., a California corporation, dated as of
                November
                8, 2004.(1)10.12
            
            Amended
                and Restated Letter Agreement, between Johnny Caswell and CenterStaging
                Musical Productions, Inc., a California corporation, dated as of
                November
                8, 2004.(1)10.13
            
            Promissory
                Note dated as of November 11, 2004 in the original amount of
                $50,000 made by CenterStaging Musical Productions, Inc. in favor of
                Jan Parent and John Caswell.(4)Promissory Note Amendment dated of June 30, 2006.10.14
            
            Business
                Loan Agreement dated as of November 18, 2004 in the original
                principal amount of $327,722 between John G. Caswell, Jan Paul Parent
                and Community Bank, with Promissory Notes made by John G. Caswell
                and Jan
                Paul Parent in favor of Community Bank, and including security
                agreement.(4)10.15
            
            Promissory
                Note dated as of January 28, 2005 made by CenterStaging Musical
                Productions, Inc. in favor of Charles Lico;(4)First Amendment to Promissory Note dated as of January 18,
                2006;(2)Second Amendment dated as of March 6, 2006 to Promissory Note dated
                as of January 28, 2005 made by CenterStaging Musical Productions,
                Inc. in
                favor of Charles Lico; Third Amendment dated as of April 28, 2006
                to
                Promissory Note dated as of January 28, 2005 made by CenterStaging
                Musical
                Productions, Inc. in favor of Charles Lico;(5)Fourth Amendment dated as of September 21, 2006to
                Promissory Note dated as of January 28, 2005 made by CenterStaging
                Musical
                Productions, Inc. in favor of Charles Lico.10.16
            
            Loan
                Agreement dated as of February 16, 2005 between Jan & Johnny Inc. and
                Grand Pacific Financing Corporation, with Promissory Note made by
                Jan
                & Johnny Inc. in favor of Grand Pacific Financing Corporation, and
                ancillary documents.(4)10.17
            
            Unsecured
                Promissory Note dated as of February 25, 2005 in the original principal
                amount of $700,000 made by CenterStaging Musical Productions, Inc. in
                favor of Jan & Johnny Inc.(4)10.18
            
            U.S.
                Small Business Administration Loan Agreement dated as of May 2, 2005
                in
                the original principal amount of $2,000,000 between
                Community National Bank, a national banking association, John G.
                Caswell,
                Jan Paul Parent, Jan & Johnny Inc., and CenterStaging Musical
                Productions, Inc.(4)10.19
            
            Commercial
                Lease dated as of June 1, 2005 between Madhatter Realty, Inc. and
                CenterStaging Musical Productions, Inc.(4)10.20
            
            Promissory
                Note dated as of July 7, 2005 in the original principal amount of
                $75,000 made by CenterStaging Musical Productions, Inc. in favor of
                Jan Paul Parent.(4)10.21
            
            Put
                and Sale Agreement, dated as of August 17, 2005, between Knight Fuller,
                Inc. and Opus International, LLC.(1)10.22
            
            Assumption
                Agreement, dated as of August 17, 2005, by Knight Fuller, Inc. with
                respect to the Convertible Promissory Notes of CenterStaging Musical
                Productions, Inc.(1)




62




10.23
            
            Letter
                of Intent dated as of October 7, 2005 between CenterStaging Corp.
                and MLB
                Advance Media, L.P. Portions of this exhibit have been deleted and
                filed
                separately with the Securities and Exchange Commission pursuant to
                a
                request for confidential treatment.(2)10.24
            
            Employment
                Agreement dated as of December 5, 2005 between CenterStaging Musical
                Productions, Inc and Tommy Nast.(5)10.25
            
            Securities
                Purchase Agreement dated as of December 12, 2005, between Knight
                Fuller,
                Inc. and Montage Partners III, LLC; Security Agreement dated as of
                December 12, 2005 between Knight Fuller, Inc. and Montage Partners
                III,
                LLC; Warrants dated as of December 12, 2005, issued by Knight Fuller,
                Inc.
                to Montage Partners III, LLC, to purchase 380,000 shares of common
                stock;
                Registration Rights Agreement dated as of December 12, 2005 between
                Knight
                Fuller, Inc. and Montage Partners III, LLC.(6)10.26
            
            2005
                Incentive Stock Option Plan;(2)Form of Stock Option Certificate and Agreement (Incentive Stock Option)
                under the 2005 Incentive Stock Option Plan.(5)10.27
            
            2005
                Non-Qualified Stock Option Plan;(2)Form of Stock Option Certificate and Agreement (Non-Qualified Option)
                under the 2005 Non-Qualified Stock Option Plan.(5)10.28
            
            Warrant
                Certificate dated as of April 1, 2006, in favor of Trilogy Capital
                Partners, Inc. evidencing 800,000 Warrants exercisable for $1.00
                per
                share; Warrant Certificate dated as of April 1, 2006, in favor of
                Trilogy
                Capital Partners, Inc. evidencing 800,000 Warrants exercisable for
                $1.60
                per share; Warrant Certificate dated as of April 1, 2006, in favor
                of
                Trilogy Capital Partners, Inc. evidencing 400,000 Warrants exercisable
                for
                $1.75 per share.(5)10.29
            
            Promissory
                Notes in favor of Johnny Caswell, Howard Livingston, Roger Paglia
                and Jan
                Parent issued in May and June 2006 in the aggregate amount of $160,00010.30
            
            Revolving
                Line of Credit Agreement dated as of July 1, 2006 between CenterStaging
                Corp. and Johnny Caswell, Revolving Line of Credit Agreement dated as
                of July 1, 2006 between CenterStaging Corp. and Howard Livingston,
                Revolving Line of Credit Agreement dated as of July 1, 2006 between
                CenterStaging Corp. and Roger Paglia, Revolving Line of Credit
                Agreement dated as of July 1, 2006 between CenterStaging Corp. and
                Jan
                Parent.(7)10.31
            
            Employment
                Agreement dated as of May 1, 2006 between CenterStaging Musical
                Productions, Inc. and Michael R. Sandoval.(5)10.32
            
            Employment
                Agreement dated as of September 1, 2006 between CenterStaging Corp.
                and
                Paul Schmidman. Incorporated by reference to Form 8-K dated as of
                September 7, 2006.10.33
            
            Promissory
                Note in the original principal amount of $659,673 by and between
                CenterStaging Musical Productions, Inc. and Helmsreich, LLC, dated
                as of
                September 6, 2006; Security Agreement by and between CenterStaging
                Musical
                Productions, Inc. and Helmsreich, LLC, dated as of September 6, 2006;
                Unconditional Guaranty by and among Johnny Caswell, CenterStaging
                Musical
                Productions, Inc. and Helmsreich, LLC, dated as of September 6, 2006;
                Unconditional Guaranty by and among Howard Livingston, CenterStaging
                Musical Productions, Inc. and Helmsreich, LLC, dated as of September
                6,
                2006; Unconditional Guaranty by and among Roger Paglia, CenterStaging
                Musical Productions, Inc. and Helmsreich, LLC, dated as of September
                6,
                2006; Unconditional Guaranty by and among Jan Paul Parent, CenterStaging
                Musical Productions, Inc. and Helmsreich, LLC, dated as of September
                6,
                2006.(8)




63




21.1
            
            Subsidiaries
                of CenterStaging Corp.31.1
            
            Certification
                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act.31.2
            
            Certification
                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act.32.1
            
            Certification
                of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
                Act.32.2
            
            Certification
                of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
                Act.




____________________


(1)
            Incorporated
                by reference to Form 8-K filed August 19,
                2005.


(2)
            Incorporated
                by reference to Form 10-QSB filed February 16,
                2006.


(3)
            Incorporated
                by reference toForm
                8-A12g filed September 24, 2004.


(4)
            Incorporated
                by reference to Form 10-QSB filed November 22,
                2005.


(5)
            Incorporated
                by reference to Form 10-QSB filed May 15,
                2006.


(6)
              Incorporated
                  by reference to Form 8-K filed December 16,
                  2005.


(7)
              Incorporated
                  by reference to Form 8-K filed July 18,
                  2006.


(8)
              Incorporated
                  by reference to Form 8-K filed September 12, 2006.




64