10QSB 1 file1.htm Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-QSB

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

           For the quarterly period ended June 30, 2006

or

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

           For the transition period from                to                .

Commission File No. 333-96257

TAG Entertainment Corp.

(Exact name of Small Business Issuer as specified in its charter)


Delaware
(State or other jurisdiction of
incorporation or organization)		 13-3851304
(I.R.S. Employer
Identification No.)
1333 Second Street, Suite 240
Santa Monica, CA
(Address of principal executive offices)		     
90401
(Zip Code)

Issuer’s telephone number: (310) 260-3350

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 [ ]

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: The registrant had 21,414,948 shares of common stock, $0.001 par value, issued and outstanding as of August 30, 2006.

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



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FORWARD LOOKING STATEMENTS

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

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

•  the Company’s inability to generate revenues sufficient to sustain operations or to raise capital as and when required;
•  unanticipated increases in development, production or marketing expenses related to the Company’s business activities;
•  the Company’s inability to effectively compete with other entertainment providers;
•  the Company’s inability to protect its intellectual property from infringement by others;
•  the Company’s inability to fully implement its business plan for any reason; or
•  the loss of the services of the Company’s Chief Executive Officer or other key persons.

In evaluating forward-looking statements, readers should consider the factors identified above as well as those risks outlined in the section of this report titled ‘‘Management’s Discussion and Analysis or Plan of Operation’’. Although we believe that expectations reflected in the forward-looking statements are reasonable, future results, levels of activity, or achievements are not assured.

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Part I

Item 1.    Financial Statements

TAG ENTERTAINMENT CORP.

CONSOLIDATED CONDENSED BALANCE SHEETS


  June 30,
2006
  (unaudited)
ASSETS  
Current assets  
Cash $ 126,000
Accounts receivable, net of allowance of $142,000 2,956,000
Receivables from affiliated partnerships 1,501,000
Notes receivable 1,377,000
Other current assets 343,000
Total current assets 6,303,000
Capitalized film costs, net 1,389,000
Investments in limited partnerships 1,013,000
Equipment, net 22,000
Other assets 165,000
  $ 8,892,000
LIABILITIES AND STOCKHOLDERS’ EQUITY  
Current liabilities  
Accounts payable and accrued expenses $ 1,047,000
Cash overdraft 2,000
Payables to affiliated partnerships 2,895,000
Notes payable 75,000
Notes payable, related party 100,000
Deferred production funding 8,000
Accrued residuals 71,000
Accrued salaries 475,000
Total current liabilities 4,673,000
6% Series A convertible preferred stock  
$.001 par value: 500,000 shares authorized; 5,000 shares outstanding; mandatorily redeemable, $5,000,000 redemption value; net of unamortized discount 1,944,000
Commitments and contingencies  
Minority interest 2,052,000
Stockholders’ equity  
Common stock, $.001 par value: 50,000,000 shares authorized;
21,414,948 shares outstanding 		21,000
Additional paid-in capital 9,417,000
Accumulated (deficit) (9,215,000
)
Total stockholders’ equity 223,000
  $ 8,892,000

See accompanying notes to consolidated financial statements.

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TAG ENTERTAINMENT CORP.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)


  Three months ended June 30,
  2006 2005
Revenue  
 
Film revenue $ 44,000
$ 128,000
Production fees 365,000
—
Distribution fees 45,000
—
Management fees 66,000
90,000
Overhead fees 85,000
60,000
Sponsorship fees 135,000
—
Total revenue 740,000
278,000
Operating expenses  
 
Amortization of film costs 18,000
52,000
Studio rent and other expenses —
10,000
Selling, general and administrative 537,000
996,000
Total operating expenses 555,000
1,058,000
Income (loss) from operations 185,000
(780,000
)
Interest expense (291,000
)
 (984,000
)
Interest and other income 12,000
7,000
Net (loss) before minority interest (94,000
)
 (1,757,000
)
Minority interest 5,000
20,000
Net (loss) $ (89,000
)
 $ (1,737,000
)
Net (loss) per share  
 
Basic and Diluted $ (0.00
)
 $ (0.08
)
Weighted average shares  
 
Basic and Diluted 21,415,000
21,069,000

See accompanying notes to consolidated financial statements.

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TAG ENTERTAINMENT CORP.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)


  Six months ended June 30,
  2006 2005
Revenue  
 
Film revenue $ 225,000
$ 359,000
Production fees 632,000
—
Distribution fees 74,000
—
Management fees 135,000
180,000
Overhead fees 195,000
120,000
Sponsorship fees 270,000
—
Total revenue 1,531,000
659,000
Operating expenses  
 
Amortization of film costs 86,000
196,000
Studio rent and other expenses —
43,000
Selling, general and administrative 1,111,000
1,666,000
Total operating expenses 1,197,000
1,905,000
Income (loss) from operations 334,000
(1,246,000
)
Interest expense (581,000
)
 (984,000
)
Interest and other income 12,000
11,000
Net (loss) before minority interest (235,000
)
 (2,219,000
)
Minority interest 5,000
19,000
Net (loss) $ (230,000
)
 $ (2,200,000
)
Net (loss) per share  
 
Basic and Diluted $ (0.01
)
 $ (0.10
)
Weighted average shares  
 
Basic and Diluted 21,269,000
21,065,000

See accompanying notes to consolidated financial statements.

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TAG ENTERTAINMENT CORP.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30 (unaudited)


  2006 2005
Cash flows from (to) operating activities  
 
Net (loss) before minority interest $ (235,000
)
 $ (2,219,000
)
Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities:  
 
Amortization of film costs 86,000
196,000
Depreciation 11,000
27,000
Bad debt expense 147,000
—
Stock and warrants issued for consulting services 220,000
167,000
Amortization of discount on debt financings 430,000
782,000
Amortization of deferred financing costs 54,000
21,000
Loss on disposal of assets 49,000
—
Changes in operating assets and liabilities:  
 
Accounts receivable 370,000
181,000
Investments in films 28,000
(37,000
)
Other current assets (177,000
)
 —
Bank overdrafts 2,000
(124,000
)
Accounts payable (341,000
)
 (251,000
)
Due from/to affiliated partnerships (115,000
)
 (819,000
)
Deferred revenue —
(81,000
)
Accrued salaries 60,000
(5,000
)
Other (140,000
)
 (88,000
)
Net cash provided by (used in) operating activities 449,000
(2,250,000
)
Cash flows from (to) investing activities  
 
Issuance of notes receivable (342,000
)
 (250,000
)
Collections on notes receivable 165,000
—
Investment in film partnerships (200,000
)
 (8,000
)
Proceeds from disposition of equipment —
49,000
Purchases of equipment (4,000
)
 (12,000
)
Net cash (used in) investment activities (381,000
)
 (221,000
)
Cash flows from (to) financing activities  
 
Proceeds from issuance of notes payable —
1,025,000
Payments on notes payable —
(1,273,000
)
Proceeds from issuance of convertible preferred stock —
5,000,000
Proceeds from related party —
85,000
Payments to related party —
(8,000
)
Proceeds from private placement offerings of common stock —
88,000
Payment of financing costs —
(370,000
)
Minority interest capital returned —
(17,000
)
Proceeds for film production —
106,000
Net cash provided by financing activities —
4,636,000
Net increase in cash 68,000
2,165,000
Cash at beginning of period 58,000
23,000
Cash at end of period $ 126,000
$ 2,188,000
Supplemental disclosure of cash flow information:  
 
Interest and original issue discount paid $ 74,000
$ 197,000

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TAG ENTERTAINMENT CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

Accounting Principles and Use of Estimates

The accompanying consolidated condensed financial statements for the six month periods ended June 30, 2006 and 2005 have been prepared in accordance with accounting principles generally accepted in the United States (‘‘GAAP’’) and with the instructions to Form 10-QSB and Item 310 of Regulation S-B. These consolidated financial statements have not been audited by independent public accountants, but include all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the financial condition, results of operations, and cash flows for such periods. However, these results are not necessarily indicative of results for any other interim period or for the full year. The accompanying consolidated condensed balance sheet as of December 31, 2005 has been derived from the audited financial statements, but does not include all disclosures required by GAAP.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to guidelines of the Securities and Exchange Commission (the ‘‘SEC’’). Management believes that the disclosures included in the accompanying interim financial statements and footnotes are adequate to make the information not misleading, but the disclosures contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005.

The preparation of the financial statements in accordance with GAAP requires management to make estimates and assumptions that affect 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 and other estimates.

Nature of Operations

TAG Entertainment Corp. (the ‘‘Company’’ or ‘‘TAG’’) is a Delaware corporation headquartered in Santa Monica, California. The Company is engaged in the development, production and distribution of motion pictures and the management of studio facilities. The Company also acquires the copyrights and/or distribution rights to already completed films for media exhibition. In order to finance film production, the Company raises funds through the establishment of single purpose limited partnerships and through the sale of equity or debt securities. TAG Entertainment USA, Inc. (‘‘TAG USA’’), the Company's wholly-owned subsidiary, serves as the sole general partner of the following four limited partnerships: Majestic Film Partners, LP, Majestic Film Partners II, LP, Majestic Film Partners III, LP and Majestic Film Partners IV, LP (the ‘‘Limited Partnerships’’). TAG USA is also the distributor of films produced by numerous other limited partnerships as well as assists in facilitating the production and distribution of films produced by limited partnerships for which it receives an overhead and/or production fee. Five of these other limited partnerships have as their general partner an entity owned and controlled by Steve Austin, the Company’s Chief Executive Officer.

The Company's revenues are derived from motion picture production and distribution, which includes theatrical, home entertainment, television and international distribution. Theatrical revenues are derived from the domestic theatrical release of motion pictures in North America. Home entertainment revenues are derived from the sale of video and DVD releases of the Company's own productions and acquired films, including theatrical releases and direct-to-video releases. Television revenues are primarily derived from the licensing of the Company's productions and acquired films to the domestic cable, free and pay television markets. International revenues are derived from the licensing of the Company's productions and acquired films to international markets on a territory-by-territory basis.

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The Company's primary operating expenses include the following: direct operating expenses, which include amortization of production or acquisition costs, participation and residual expenses; distribution and marketing expenses; which primarily include the costs of theatrical ‘‘prints and advertising’’ and of video and DVD duplication and marketing; and general and administration expenses, which include salaries and other overhead.

Going Concern and Management Plans

The Company’s consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has experienced recurring losses and negative cash flows from operations and has a capital deficit, which raises substantial doubt about its ability to continue as a going concern. The Company is currently devoting its efforts to raising additional capital and achieving profitable operations. The Company’s ability to continue as a going concern is dependent upon its ability to develop additional sources of capital. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.

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

In order to satisfy future cash requirements, management is actively pursuing and has entered into discussions regarding additional financing to support expansion plans and ongoing operations. The Company currently has no firm agreements with any third parties for any future transactions and future financings.

Principles of Consolidation

The accompanying consolidated financial statements of the Company include the accounts of TAG, TAG USA and of the Limited Partnerships, which the Company is the sole general partner. The General Partner has the full and exclusive control of the management and operation of the business of each partnership. The Company in its capacity as General Partner participates in 1% of the losses of the limited partnerships but shares in 60% of any profits. All significant inter-company balances and transactions have been eliminated in consolidation.

Minority Interests

TAG consolidates the Limited Partnerships for which it is the sole general partner. The amount of minority interest represents the aggregate net limited partnership capital of each partnership offset by 99% of accumulated Limited Partnership losses.

Revenue Recognition

Revenue from the sale or licensing of films and television programs is recognized upon meeting all recognition requirements of SOP 00-2. Revenue from the theatrical release of feature films is recognized at the time of exhibition based on the Company’s participation in box office receipts. Revenue from the sale of videocassettes and digital video disks (‘‘DVDs’’) in the retail market is recognized on the ‘‘street date’’ when it is available for sale by the customer. Revenues from televisions licensing are recognized when the feature film or television program is available to the licensee for telecast. Revenues from sales to international territories are recognized when the feature film or television program is available to the distributor for exploitation and no conditions for delivery exist.

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

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

The Company bills overhead fees to limited partnerships for reasonable, direct and allocable costs arising during the management of film projects.

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

Sponsorship income is recognized pursuant to the terms stipulated in the agreement.

Cash payments received which may include minimum guarantees are recorded as deferred revenue until all conditions of revenue recognition have been met.

Cash Equivalents

For purposes of reporting cash flows, the Company considers all short-term, interest bearing deposits with original maturities of three months or less to be cash equivalents.

Capitalized Film Costs

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

For films produced by the Company, capitalized costs include all direct production and financing costs, and production overhead. For acquired films, these capitalized costs consist of minimum guarantee payments to acquire the distribution rights.

Costs of acquiring and producing films and of acquired libraries are amortized using the individual-film-forecast method, whereby these costs are amortized and participation and residual costs are accrued in the proportion that current year’s revenue bears to management’s estimate of ultimate revenue at the beginning of the current year expected to be recognized from the exploitation, exhibition or sale of the films.

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

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

Films in progress include the accumulated costs of production, which have not yet been completed by the Company.

Films in development include costs of acquiring film rights to original screenplays and costs to adapt such projects. Such costs are capitalized and, upon commencement of production, are transferred to production costs. Projects in development are written off at the earlier of the date determined not to be recoverable or when abandoned, or three years from the date of the initial investment.

Equipment

Equipment is carried at cost and is depreciated on the straight-line basis over their estimated useful lives of three to eight years. Repairs and maintenance are expensed as incurred. When assets

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are retired or otherwise disposed of, the property accounts are relieved of costs and accumulated depreciation and any existing gain or loss is credited or charged to operations. Depreciation expense was $11,000 and $27,000 for the six months ended June 30, 2006 and 2005, respectively.

Impairment of Long-Lived Assets

Statement of Financial Accounting Standards No. 144, ‘‘Accounting for the Impairment or Disposal of Long-Lived Assets’’ (‘‘SFAS No. 144’’) requires that long-lived assets to be disposed of by sale, including those of discontinued operations, be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations.  SFAS No. 144 broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 also establishes a ‘‘primary-asset’’ approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used. The Company has no impairment issues to disclose.

Stock-Based Compensation

Prior to the January 1, 2006 adoption of Statement of Financial Accounting Standards (‘‘SFAS’’) No. 123R, ‘‘Share-Based Payment,’’ the Company accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, ‘‘Accounting for Stock Issued to Employees,’’ and related interpretations. Accordingly, under APB Opinion No. 25, no compensation expense was recognized because the exercise price of the Company’s employee stock options was equal to the market price of the underlying stock on the date of grant. The Company applied the disclosure provisions of SFAS No. 123, ‘‘Accounting for Stock Based Compensation,’’ as amended by SFAS No. 148, ‘‘Accounting for Stock Based Compensation – Transition and Disclosure,’’ as if the fair value method had been applied in measuring compensation expense.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, under which compensation expense is recognized in the Consolidated Statement of Operations for the fair value of employee stock-based compensation. The Company has elected the modified-prospective transition method as permitted by SFAS No. 123R and accordingly, prior periods have not been restated to reflect the effect of SFAS No. 123R. The modified-prospective transition method requires that stock-based compensation expense recognized in the first quarter of fiscal 2006 include (1) quarterly amortization of all stock-based payments granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (2) quarterly amortization of all stock-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. In addition, pursuant to SFAS No. 123R, the Company is required to estimate the amount of expected forfeitures when calculating stock-based compensation expense, rather than accounting for forfeitures as incurred, which was the Company’s previous method. Compensation expense will be recognized over the requisite service (vesting) period using the straight-line attribution method.

Valuation of the Company’s Common Stock

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

Concentrations of Risk

The Company’s financial instruments that are exposed to concentrations of credit risk consist of cash and receivables. The Company invests its cash in banks with high credit ratings; however, certain account balances have been maintained at levels in excess of federally insured limits. The Company has not experienced a loss in such accounts.

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The Company extends credit based on an evaluation of the customer’s financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customer’s financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses, as required. The Company sub-distributes titles in both the domestic and international markets. The Company is typically paid an advance or minimum guarantee for these rights. Any overages (revenue in excess of the minimum guarantee) are reported to the Company 45 to 90 days after the reporting period. Because of the minimum guarantees and the details of the Company’s distribution relationships, the Company’s outstanding balances may extend to greater than 90 days.

At June 30, 2006, the Company’s receivables included $1.2 million to be collected from an international film distributor for sub-distribution rights on a film completed and delivered during 2005. In addition, the Company received a note for production funding provided to the investor partnership that owns the underlying rights to this film. The note receivable balance was $1.4 million at June 30, 2006. The receivable from distributor represents a minimum guarantee under a distribution contract with the Company to be collected from receipts in various foreign markets. The note receivable, which originally matured during the fourth quarter of 2005 was extended until the fourth quarter of 2006. The amount due of $1,035,000 bears interest at 12% per annum and will be collected from the partnership after payment of distribution and production fees and expenses related to the film. While estimates of gross receipts, including video and DVD sales, support the stated values of these amounts, the collection of these balances is subject to inherent risks associated with the worldwide performance of the film and general conditions in the various foreign markets. During the six months ended June 30, 2006 the Company also advanced in the form of a note receivable at total of $342,000 for the movie ‘‘Deal’’ which is due on December 31, 2006.

Income Taxes

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

Earnings per Common Share

The Company computes earnings per common share in accordance with Statement of Financial Accounting Standards No. 128, ‘‘Earnings per Share’’ (SFAS No. 128). The Statement requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding. The computation of diluted EPS is similar to the basic EPS computation except the denominator is increased to include the number of additional shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, the numerator is adjusted for any changes in income or loss that would result from the assumed conversions of those potential shares. However, such presentation is not required if the effect is anti-dilutive. The diluted EPS amounts for the periods ended June 30, 2006 and 2005 do not reflect the impact of common share equivalents arising from warrants and options totaling 7,713,000 and 5,567,000 at June 30, 2006 and 2005, respectively, as the effects would be anti-dilutive in those periods.

Recently Issued Accounting Pronouncements

In May 2005, the FASB issued SFAS No. 154, ‘‘Accounting Changes and Error Corrections.’’ This statement applies to all voluntary changes in accounting principle and requires retrospective

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application to prior periods' financial statements of changes in accounting principle, unless this would be impracticable. This statement also makes a distinction between ‘‘retrospective application’’ of an accounting principle and the ‘‘restatement’’ of financial statements to reflect the correction of an error. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. SFAS No. 154 has not had a material effect on the consolidated financial position or results of operations of the Company through the date of this filing.

In February 2006, FASB issued SFAS No. 155, ‘‘Accounting for Certain Hybrid Financial Instruments’’. SFAS No. 155 amends SFAS No 133, ‘‘Accounting for Derivative Instruments and Hedging Activities’’, and SFAS No. 140, ‘‘Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities’’. SFAS No. 155, permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for all financial instruments acquired or issued after the beginning of the Company’s first fiscal year that begins after September 15, 2006. SFAS No. 155 is not expected to have a material effect on the consolidated financial position or results of operations of the Company.

In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements (‘‘EITF 05-6.’’) EITF 05-6 provides guidance on determining the amortization period for leasehold improvements acquired in a business combination or acquired subsequent to lease inception. The guidance in EITF 05-6 will be applied prospectively and is effective for periods beginning after June 29, 2005. EITF 05-6 is not expected to have a material effect on its consolidated financial position or results of operations.

NOTE 2 – CAPITALIZED FILM COSTS

Capitalized film costs for theatrical and non-theatrical films at June 30, 2006:


  Gross cost Accumulated
amortization		 Net cost
Produced and released films $ 6,366,000
$ (5,508,000
)
 $ 858,000
Acquired films and film rights 393,000
(352,000
)
 41,000
Films in progress 261,000
—
261,000
Films under development 229,000
—
229,000
Total $ 7,249,000
$ (5,860,000
)
 $ 1,389,000

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NOTE 3 – INVESTMENT IN LIMITED PARTNERSHIPS

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


Limited Partnerships % Owned Cost
Family Film Partners VII, LP 5.94
%
 $ 200,000
Animal Partners, LP 14.21
%
 425,000
Fairy Tale Partners III, LP 2.82
%
 150,000
Family Film Partners, LP 0.05
%
 13,000
Motocross Kids 0.42
%
 25,000
Deal The Movie LP (acquired with cash)  
200,000
   
$ 1,013,000

NOTE 4 – RECEIVABLES/PAYABLES FROM/TO AFFILIATED PARTNERSHIPS

We have incurred net debt to unconsolidated partnerships in the aggregate amount of $1,394,000 as of June 30, 2006, which we required during the course of managing our operations and facilitating the activities of the partnerships. There is an accounts receivable due from these partnerships in the amount of $1,501,000 and a payable to the partnerships in the amount of $2,895,000. Cash transfers were required between affiliated partnerships to meet cash flow needs and other obligations. Cash transfers were made between and among us and both consolidated and unconsolidated partnerships.

The receivable and payable balances among affiliated entities on June 30, 2006 and the amounts due (to) or from related affiliated partnerships are as follows:


Movie Balance
(Payable)/
Receivable		 Net Balance*
Santa Trap  
 
Santa Trap LLC (19,169
)
  
Family Film Partners VII LP 134,830
$ 115,661
Popstar  
 
Ghostown LP (642,707
)
  
Downtown LP 749,729
107,022
Black Beauty  
 
Black Beauty LLP 296,542
 
American Black Beauty LP (132,847
)
 163,695
Supercross  
 
Tag Studios 3,807,254
 
Supercross The Movie LP (2,846,044
)
 961,210
Cinderella LLC 153,795
153,795
Receivable from Affiliates  
$ 1,501,383
Miracle Dogs  
 
Animal Partners LP (609,324
)
 $ (609,324
)
Red Riding Hood  
 
Red Riding Hood LLC 1,253,154
 
Fairy Tale Partners III LP (1,303,285
)
 (50,131
)
Motocross Kids  
 
Motocross Kids LP (1,201,451
)
 (1,201,451
)

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Movie Balance
(Payable)/
Receivable		 Net Balance*
Steve Austin Partnerships  
 
Steve Austin Productions LLC (502,542
)
  
Austin Family Entertainment LLC (6,725
)
 (509,267
)
Family Film Partners VIII (2,920
)
 (2,920
)
Funny Money (522,387
)
 (522,387
)
Amounts Payable to Affiliates  
$ (2,895,480
)
* The information presented under this column shows the aggregate amounts receivable from and payable to various entities established for the purpose of film production projects. These amounts represent intercompany balances between these entities which are updated and reconciled on a continual basis.

NOTE 5 – FINANCING ACTIVITIES

On March 30, 2005, the Company entered into a Securities Purchase Agreement with Satellite Strategic Finance Associates, LLC and an affiliated investor under which the Company issued $1,000,000 in aggregate principal amount of Senior Secured Notes and Warrants to purchase 500,000 shares of its common stock in a private placement to accredited investors under Regulation D of the Securities Act of 1933, as amended. The Company received gross proceeds of $1,000,000, which were intended for the film production and general working capital requirements. The aggregate principal amount of the Notes was $1,150,000 with a 15% yield funded as original issuance discount. The Company also entered into a Registration Rights Agreement and a Security Agreement with the investors and its subsidiary, TAG Entertainment USA, Inc. co-signed the Security Agreement and agreed to guaranty its obligations pursuant to the financing agreements. Pursuant to the Security Agreement, the Company granted the investors a first priority lien on all of its assets, other than certain previously issued liens, in order to secure its obligations. The Notes were to mature on March 30, 2006 and are sooner payable in full in the event the Company consummates a subsequent financing event, with certain exceptions, or upon the occurrence of an event of default. The warrants are exercisable at $1.00 per share, subject to adjustment upon certain events, including as a result of its sale of equity securities at a price below the exercise price. The warrants are exercisable at any time on or before March 30, 2010. In connection with the issuance of the Notes and the related warrants, the Company allocated the net proceeds between the instruments based on the relative fair value of the warrants and the Notes. The fair value of the warrants was determined using the Black-Scholes pricing model and the following assumptions: contractual terms of five years, an average risk free interest rate of 2.5%, a dividend yield of 0%, and a volatility of 95.3%. Accordingly, the Company recorded an increase in additional paid-in capital and note payable discount of $638,000 in connection with the issuance of the Notes and warrants.

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

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In this financing, the Company issued 5,000 shares of Preferred Stock, convertible at the option of the holder into an initial aggregate amount of 2,000,000 shares of common stock, par value $.001 per share, at an initial conversion price of $2.50 per share, and warrants to purchase an initial aggregate amount of 2,000,000 shares of common stock at an initial exercise price of $2.50 per share, which are immediately exercisable and expire in seven years. However, the decline in the market price of its common stock has resulted in an adjustment of the conversion price to the floor amount of $1.00. Accordingly, the holders of the outstanding shares of Series A Preferred Stock are able to convert these shares into an aggregate of 5,000,000 shares of the Company's common stock.

In connection with the issuance of the Preferred Stock and the related warrants, the Company allocated the net proceeds between the instruments based on the relative fair value of the warrants and the Preferred Stock before valuation of the beneficial conversion feature. The fair value of the warrants was determined using the Black-Scholes pricing model and the following assumptions: contractual terms of seven years, an average risk free interest rate of 2.5%, a dividend yield of 0%, and a volatility of 115%. Accordingly, the Company recorded an increase in additional paid-in capital and a discount against the Preferred Stock of $2,586,000 in connection with the issuance of the Preferred Stock and warrants. The discount related to the warrants is being amortized and charged to interest expense over the three year maturity period. Amortization of $430,000 was recorded as interest expense during the six months ended June 30, 2006.

The Company evaluated the beneficial conversion feature of the Preferred Stock by measuring the effective conversion price after the discount for the warrants against the current market price of TAG’s common stock of $3 per share at closing. In recognition of the intrinsic value of the conversion feature, the company recorded an additional discount of $2,414,000 against the Preferred Stock with a corresponding increase in additional paid-in-capital. The discount is being amortized over three years and charged against retained earnings.

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

As part of its previous financing efforts for operations, the Company has recorded financing costs totaling $89,000 for the six months ended June 30, 2006. Deferred financing expenses totaled $292,000 at June 30, 2006 and are included with other current assets ($158,000) and other assets ($134,000).

NOTE 6 – COMMITMENTS AND CONTINGENCIES

Litigation

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

On January 17, 2006, a complaint was filed against TAG Entertainment, Inc. and Steve Austin by Park Avenue Entertainment, LLC claiming that we materially breached an agreement between the two companies to produce a motion picture. The complaint was filed in the Superior Court of the State of California, County of Los Angeles, Central District, with the caption Park Avenue Entertainment LLC et al. vs. TAG Entertainment, Inc.; Steve Austin et al. The Company has been advised that plaintiffs are seeking a default judgment against the defendants; however, the defendants are currently contesting any such action on the grounds of defective service. The claimants are seeking damages in the amount of $2,135,000 based on production fees and participation rights that they are allegedly entitled to under the production contract. The Company has previously disputed plaintiffs’ allegations and notified them that the Company may assert claims against them concerning their failure to properly perform under the agreement. The Company is currently reviewing the allegations made in the complaint and the claims being asserted and the Company intends to defend this action

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vigorously. Management is unable to determine at this time whether this claim will have a material adverse impact on its financial condition, results of operations or cash flow.

The Company and its Chief Executive Officer are involved in a dispute with Mr. Jeff Franklin and F.W.E.. Inc. regarding the production of two motion pictures and business dealings between the Company’s Chief Executive Officer, and Mr. Franklin. The disputes concern the production and distribution relationship regarding the films Funny Money and American Black Beauty. In each case, Mr. Franklin has alleged that the Company has not properly performed its obligations in connection with the production of these motion pictures. The Company has disputed the allegations of Mr. Franklin, has notified him of its potential claims against him and F.W.E. and has been engaged in protracted negotiations with him and F.W.E. in order to achieve a global settlement of the disagreements between the parties. Messrs. Franklin and Austin continue to negotiate and discuss their respective positions and the Company is currently unable to determine at this time whether this claim will have a material adverse impact on its financial condition, results of operations or cash flow.

The Company is involved in various claims and other legal proceedings that arise from time to time in the ordinary course of business. The Company does not believe any of them will have a material adverse affect on the Company’s financial position or results of operations. Litigation is inherently unpredictable and excessive verdicts do occur. Although the Company believes it has valid defenses in these matters, the Company could in the future incur judgments or enter into settlements of claims that could have a material adverse affect on the Company’s financial position or results of operations in any particular period.

Consulting Agreements

In March 2006, the company entered into a consulting agreement with Relevant Entertainment Group to assist in identifying, packaging and producing new motion picture and television projects. In consideration for the services of Relevant, the company issued 100,000 shares of common stock valued at $78,000 and warrants to purchase an additional 250,000 shares of common stock valued at $100,000. The warrants are exercisable at $0.75 per share for a period of five years and vest as follows: warrants to purchase 125,000 shares vested on the date of issuance and the balance vests in equal installments over a period of twelve months commencing in April 2006. The Company agreed to pay Relevant a percentage of the fees received from projects that are successfully produced pursuant to this agreement.

The fair value of the warrants was determined using the Black-Scholes pricing model and the following assumptions: contractual terms of five years, an average risk free interest rate of 4.5%, a dividend yield of 0%, and a volatility of 151.26%.

In April 2006, the Company entered into a production agreement with UFO Productions, LLC pursuant to which it will seek to produce new motion pictures. The Company’s agreement with UFO Productions, LLC provides for the parties to co-produce six new motion pictures for the Sci-Fi Network. Pursuant to this agreement, the Company issued warrants to purchase 100,000 shares of its common stock to UFO Productions which are exercisable at $1.00 per share for a period of seven years, valued at $42,000.

The fair value of the warrants was determined using the Black-Scholes pricing model and the following assumptions: contractual terms of seven years, an average risk free interest rate of 4.5%, a dividend yield of 0%, and a volatility of 151.26%.

NOTE 7 – STOCKHOLDERS’ EQUITY

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

During the six months ended June 30, 2006, the Company issued 125,000 shares of common stock valued at $125,000 to purchase a partnership interest.

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Item 2.    Management’s Discussion and Analysis or Plan of Operation.

Overview

This management’s discussion and analysis of financial condition contains forward-looking statements that involve risks and uncertainties. This management's discussion and analysis contains information that we believe is relevant to an assessment and understanding of our results of operations and financial condition. You should read the following discussion in conjunction with the audited financial statements and the notes to such financial statements included in our Annual Report on Form 10-KSB as well as the unaudited financial statements and related notes contained in this Quarterly Report on Form 10-QSB. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those discussed in our Annual Report on Form 10-KSB and in other portions of this report.

Nature of Operations

TAG Entertainment Corp. is a Delaware corporation headquartered in Santa Monica, California. We are engaged in the development, production and distribution of motion pictures and the management of studio facilities. We also acquire the copyrights and/or distribution rights to already completed films for media exhibition. In order to finance film production, we have raised funds through the establishment of single purpose limited partnerships and through the sale of equity or debt securities. TAG Entertainment USA, Inc. (‘‘TAG USA’’), our wholly-owned subsidiary, serves as the sole general partner of the following four limited partnerships: Majestic Film Partners, LP, Majestic Film Partners II, LP, Majestic Film Partners III, LP and Majestic Film Partners IV, LP (the ‘‘Majestic Limited Partnerships’’). TAG USA is also the distributor of films produced by numerous other limited partnerships as well as assists in facilitating the production and distribution of films produced by limited partnerships for which it receives an overhead and/or production fee. Five of these other limited partnerships have as their general partner an entity owned and controlled by Steve Austin, our Chief Executive Officer.

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

Our primary operating expenses include the following: direct operating expenses, which include amortization of production or acquisition costs, participation and residual expenses, distribution and marketing expenses; which primarily include the costs of theatrical ‘‘prints and advertising’’ and of video and DVD duplication and marketing; and general and administration expenses, which include salaries and other overhead.

Merger

On November 22, 2004, TAG USA was acquired by Power Marketing, Inc., a Delaware corporation. In the transaction, TAG USA merged with a subsidiary of Power Marketing, Inc. and became a wholly-owned subsidiary of Power Marketing, Inc., now operating as a separate entity. As a

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result of this transaction, the stockholders and other security holders of TAG USA became the owners of approximately 90% of our outstanding shares of common stock. In connection with the merger, Power Marketing changed its corporate name to TAG Entertainment Corp., obtained the new trading symbol TAGE.OB and all of the officers and directors of Power Marketing resigned and Mr. Austin, who was the majority shareholder, Chief Executive Officer and sole director of TAG USA became our Chief Executive Officer, Chief Financial Officer and sole director. The transaction was treated as a reverse merger and a recapitalization of the company for reporting purposes. We appointed five additional directors to our board during 2005; however, as of March 20, 2006, two of our independent directors resigned. The holders of approximately 1,122,000 shares of common stock of TAG USA that did not consent in writing to our acquisition of TAG USA were entitled to exercise appraisal rights under the California Corporations Code. As described in greater detail in our Annual Report on Form 10-KSB for the year ended December 31, 2005, we are the respondent in a proceeding commenced by the holder of an aggregate of 50,000 shares of common stock of TAG USA that has elected to its exercise dissenters’ rights under the California Corporations Code. We continue to negotiate with the claimant to resolve this matter.

Going Concern and Management Plans

Our financial statements have been presented on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have experienced recurring losses and negative cash flows from operations and have a working capital deficit, which raises substantial doubt about our ability to continue as a going concern and our independent auditors have included a ‘‘going concern’’ explanatory paragraph in their report on our financial statements for the year ended December 31, 2005. We are currently devoting efforts to raising additional capital and achieving profitable operations. Our ability to continue as a going concern is dependent upon our ability to develop additional sources of capital. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties. We closed on a bridge financing in the amount of $1,000,000 on March 30, 2005. On May 4, 2005, we completed a $5,000,000 preferred stock financing and retired the bridge loan.

On March 30, 2005, we entered into a Letter of Intent to acquire a privately held company, Myriad Pictures, Inc., which is engaged in the film production and distribution business. The letter of intent provided for a purchase price of approximately $4,000,000, including an earnout payment of up to $2,000,000. In connection with the execution of the letter of intent, we provided Myriad with a short term loan of $250,000, bearing interest at the rate of 3% per annum, which Myriad was to use for working capital and to pay for its acquisition costs pending the closing (the ‘‘Myriad Loan’’). The Myriad Loan is secured by a lien on the assets of Myriad. As of February 23, 2006, we notified Myriad that we were terminating negotiations and the letter of intent, effective immediately. Pursuant to its terms, the Myriad Loan (less certain expenses) is repayable by March 30, 2006 and we have not received repayment as of the date hereof.

In order to satisfy future cash requirements, management is actively pursuing and has entered into discussions regarding additional financing to support the proposed acquisition, related expansion plans, and ongoing operations. We currently have no firm agreements with any third parties for any future transactions and future financings.

Critical Accounting Policies

Accounting Principles, Estimates and Reclassifications

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (‘‘GAAP’’). The preparation of the financial statements in accordance with GAAP requires management to make estimates and assumptions that affect 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 and other estimates. In preparing the financial statements for comparative purposes, prior period financial information has been reclassified to conform with classifications of the current period.

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Principles of Consolidation

The accompanying consolidated financial statements include the accounts of TAG, TAG USA and of the Majestic Limited Partnerships, of which TAG USA is the sole general partner. The General Partner has the full and exclusive control of the management and operation of the business of each partnership. In its capacity as General Partner, TAG USA participates in 1% of the losses of the limited partnerships but shares in 60% of any profits. All significant inter-company balances and transactions have been eliminated in consolidation.

Minority Interests

We consolidate the Majestic Limited Partnerships, of which TAG USA is the sole general partner. The amount of minority interest represents the aggregate net limited partnership capital of each partnership offset by 99% of accumulated Majestic Limited Partnership losses.

Revenue Recognition

Revenue from the sale or licensing of films and television programs is recognized upon meeting all recognition requirements of SOP 00-2. Revenue from the theatrical release of feature films is recognized at the time of exhibition based on our participation in box office receipts. Revenue from the sale of videocassettes and digital video disks (‘‘DVDs’’) in the retail market is recognized on the ‘‘street date’’ when it is available for sale to the customer. Revenues from televisions licensing are recognized when the feature film or television program is available to the licensee for telecast. Revenues from sales to international territories are recognized when the feature film or television program is available to the distributor for exploitation and no conditions for delivery exist.

Production fees are earned on films where we have been engaged as producer by limited partnerships formed to finance the movie. In certain cases, such fees are fixed in amount and are earned and billed during the production process. In other cases, we earn a fee based on the revenues of the film and therefore recognizes our fee when revenues are determined and reported by the distributors of the film.

On certain films, we earn management fees in connection with our role as production manager for the limited partnerships where our Chief Executive Officer has assigned to TAG his management fee rights during the production period.

We bill overhead fees to limited partnerships for reasonable, direct and allocable costs arising during the management of film the projects.

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

Sponsorship income is recognized pursuant to the terms stipulated in the agreement.

Cash payments received which may include minimum guarantees may be recorded as deferred revenue until all conditions of revenue recognition have been met.

Cash Equivalents

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

Capitalized Film Costs

Capitalized film costs consist of investments in films, which include the unamortized costs of completed films which we have produced or for which we have acquired distribution rights or film libraries.

For films we produced, capitalized costs include all direct production and financing costs, and production overhead. For acquired films, these capitalized costs consist of minimum guarantee payments to acquire the distribution rights.

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Costs of acquiring and producing films and of acquired libraries are amortized using the individual-film-forecast method, whereby these costs are amortized and participation and residual costs are accrued in the proportion that the current year’s revenue bears to management’s estimate of ultimate revenue at the beginning of the current year expected to be recognized from the exploitation, exhibition or sale of the films.

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

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

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

Films in development include costs of acquiring film rights to original screenplays and costs to adapt such projects. Such costs are capitalized and, upon commencement of production, are transferred to production costs. Projects in development are written off at the earlier of the date determined not to be recoverable or when abandoned, or three years from the date of the initial investment.

Equipment

Equipment is carried at cost and is depreciated on the straight-line basis over their estimated useful lives of three to eight years. Repairs and maintenance are expensed as incurred. When assets are retired or otherwise disposed of, the property accounts are relieved of costs and accumulated depreciation and any existing gain or loss is credited or charged to operations.

Stock-Based Compensation

Prior to the January 1, 2006 adoption of Statement of Financial Accounting Standards (‘‘SFAS’’) No. 123R, ‘‘Share-Based Payment,’’ the Company accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, ‘‘Accounting for Stock Issued to Employees,’’ and related interpretations. Accordingly, under APB Opinion No. 25, no compensation expense was recognized because the exercise price of the Company’s employee stock options was equal to the market price of the underlying stock on the date of grant. The Company applied the disclosure provisions of SFAS No. 123, ‘‘Accounting for Stock Based Compensation,’’ as amended by SFAS No. 148, ‘‘Accounting for Stock Based Compensation – Transition and Disclosure,’’ as if the fair value method had been applied in measuring compensation expense.

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

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estimate the amount of expected forfeitures when calculating stock-based compensation expense, rather than accounting for forfeitures as incurred, which was the Company’s previous method. Compensation expense will be recognized over the requisite service (vesting) period using the straight-line attribution method.

Valuation of the Our Common Stock

Unless otherwise disclosed, all stock-based transactions entered into by us have been valued at the market value of our common stock on the date the transaction was entered into or have been valued using the Black-Scholes to estimate the fair market value.

Concentrations of Risk

Our financial instruments that are exposed to concentrations of credit risk consist of cash and receivables. We invest our cash in banks with high credit ratings; however, certain account balances have been maintained at levels in excess of federally insured limits. We have not experienced a loss in such accounts.

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

At June 30, 2006, our receivables included $1.2 million to be collected from an international film distributor for sub-distribution rights on a film completed and delivered during 2005. In addition, we issued a note for production funding provided to the investor partnership that owns the underlying rights to this film. The note receivable balance was $1.4 million at June 30, 2006. The receivable from distributor represents a minimum guarantee under a distribution contract with us to be collected from receipts in various foreign markets. The note receivable, which originally matured during the fourth quarter of 2005, was extended until the fourth quarter of 2006. The amount due of $1,035,000 bears interest at 12% per annum and will be collected from the partnership after payment of distribution and production fees and expenses related to the film. While estimates of gross receipts, including video and DVD sales, support the stated values of these amounts, the collection of these balances is subject to inherent risks associated with the worldwide performance of the film and general conditions in the various foreign markets. During the six months ended June 30, 2006 the Company also advanced in the form of a note receivable at total of $342,000 for the movie ‘‘Deal’’ which is due on December 31, 2006.

Income Taxes

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

Earnings per Common Share

We compute earnings per common share in accordance with Statement of Financial Accounting Standards No. 128, ‘‘Earnings per Share’’ (SFAS No. 128). The Statement requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital

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structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding. The computation of diluted EPS is similar to the basic EPS computation except the denominator is increased to include the number of additional shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, the numerator is adjusted for any changes in income or loss that would result from the assumed conversions of those potential shares. However, such presentation is not required if the effect is anti-dilutive. The diluted EPS amounts for the three and six months ended June 30, 2006 and 2005, do not reflect the impact of common share equivalents arising from warrants and options totaling 7,713,000 and 5,567,000 at June 30, 2006 and 2005, respectively, as the effects would be anti-dilutive in those periods.

Results of Operations: Three Months Ended June 30, 2006 compared to June 30, 2005

Revenue

Gross revenues for the three months ended June 30, 2006 and 2005 were $740,000 and $278,000, respectively, an increase of $462,000 or 166%. The increase in revenues was principally attributable to the increase in production and fees arising from film projects where TAG was engaged to manage filming and related production activities on behalf of certain investor partnerships. Production, management and overhead fees for the three months ended June 30, 2006 increased by $366,000 from $150,000 during the three months ended June 30, 2005 to $516,000 for the three months ended June 30, 2006. This increase was due to increased production and administrative support activity during the quarter on film projects. Distribution fees for the three months ended June 30, 2006 increased by $45,000 from $0 during the three months ended June 30, 2005 to $45,000 for the three months ended June 30, 2006.

In addition, sponsorship revenues increased as a result of arrangements made by us with corporate sponsors on two film projects. Sponsorship fees for the three months ended June 30, 2006 were $135,000 for the three months ended June 30, 2006 compared to $0 the three months ended June 30, 2005.

The increases in revenue were offset by a reduction in film revenue of $84,000 as a result of us not being able to obtain a key sales report from a major distributor. The distributor notified us in August that it had been acquired and as a result of the transition in to the new company the statement, which is normally due 30 days after the end of a calendar quarter or July 31, 2006, would not be available before August 31, 2006. As a result, we were not able to incorporate sales results from this particular distributor.

Expenses

Operating expenses for the three months ended June 30, 2006 were $555,000 compared to $1,058,000 for the three months ended June 30, 2005, a decrease of $503,000. The decrease in expenses is primarily attributed to decreased amortization of film costs ($34,000), studio rent expenses ($10,000) and selling, general and administrative expenses ($459,000). Film and amortization costs for the three months ended June 30, 2006 were $18,000 compared to $52,000 for the three months ended June 30, 2005. The decrease in film amortization is directly related to decreased revenues on films either TAG or consolidated limited partnerships previously financed and produced. Studio rent expenses for the three months ended June 30, 2006 were $0 compared to $10,000 for the three months ended June 30, 2005. The decrease in studio rent expense was the result of the Company not pursing studio rental activities in 2006 and our termination of this lease during the fiscal year ended 2005. Selling, general and administrative expenses for the three months ended June 30, 2006 were $537,000 compared to $996,000 for the three months ended June 30, 2005, a decrease of $459,000. The decrease in selling, general and administrative expenses is primarily attributed to a decrease in legal expenses of $128,000 related to the Company becoming public, decrease in accounting/auditing fess of $43,000, decrease in consulting fees of $159,000 related to our becoming public and failed acquisition costs, decrease in marketing and investor relations costs of $94,000 related to our cost cutting endeavors, a

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decrease of $72,000 in travel and entertainment, a decrease in rent expense of $44,000 as a result of a new less expensive office facility, decrease in overall corporate office expenses of approximately $105,0000 related to our cost cutting endeavors. The decreases in operating expenses were offset by an increase in bad debt allowance of $142,000 from a major distributor. The distributor notified us that it had been acquired and as a result of the transition in to the new company the distributor's sales report, which is due 30 days after the end of a calendar quarter, or July 31, 2006, would not be available before August 31, 2006. The company elected to establish a reserve for certain accounts receivable due from this distributor. And, the company also elected to write off two small projects in development totaling $43,000.

Interest expense was $291,000 for the three months ended June 30, 2006 compared to $984,000 for the three months ended June 30,2005, a decrease of $693,000, and included amortization of the convertible preferred stock discount associated with related warrants and interest on our convertible preferred stock.. This decrease was primarily attributable to the recording of deferred interest payable on the Satellite financing transaction in May of 2005.

Results of Operations: Six Months Ended June 30, 2006 compared to June 30, 2005

Revenue

Gross revenues for the six months ended June 30, 2006 and 2005 were $1,531,000 and $659,000, respectively, an increase of $872,000 or 132%. The increase in revenues was principally attributable to the increase in production and fees arising from film projects where TAG was engaged to manage filming and related production activities on behalf of certain investor partnerships. Production, management and overhead fees for the six months ended June 30, 2006 increased by $662,000 from $300,000 during the six months ended June 30, 2005 to $962,000 for the six months ended June 30, 2006. This increase was due to increased production and administrative support activity during the six months on film projects. Distribution fees for the six months ended June 30, 2006 increased by $74,000 from $0 during the six months ended June 30, 2005 to $74,000 for the six months ended June 30, 2006.

In addition, sponsorship revenues increased as a result of arrangements made by us with corporate sponsors on two film projects. Sponsorship fees for the six months ended June 30, 2006 were $270,000 for the six months ended June 30, 2006 compared to $0 the six months ended June 30, 2005.

The increase in gross revenues was offset by a decrease in film revenue of $134,000 which was attributable to lesser sales of films by distributors. This was a result of us not obtaining a sales report from a key distributor which notified us that it had been acquired and as a result of the transaction, the statement, which was due July 31, 2006, would not be available before August 31, 2006. As a result, we were unable to incorporate sales results from this distributor.

Expenses

Operating expenses for the six months ended June 30, 2006 were $1,197,000 compared to $1,905,000 for the six months ended June 30, 2005, a decrease of $708,000. The decrease in expenses is primarily attributed to decreased amortization of film costs ($110,000), studio rent expenses ($43,000) and selling, general and administrative expenses ($555,000). Film and amortization costs for the six months ended June 30, 2006 were $86,000 compared to $196,000 for the six months ended June 30, 2005. The decrease in film amortization is directly related to decreased revenues on films either TAG or consolidated limited partnerships previously financed and produced. Studio rent expenses for the six months ended June 30, 2006 were $0 compared to $43,000 for the six months ended June 30, 2005. The decrease in studio rent expense was the result of the Company not pursing studio rental activities in 2006 and our termination of this lease during the fiscal year ended 2005.The decrease in selling, general and administrative expenses is primarily attributed to a decrease in legal expenses of $266,000 related to the Company becoming public, a decrease in accounting/auditing fees of $107,000, a decrease in consulting expense of $118,000, a decrease in temporary staffing of $72,000, a decrease in marketing and investor relations cost of $67,000 related to our cost cutting measures, a decrease in travel and entertainment expense of $45,000, and a decrease in overall corporate office expenses of approximately $66,000 related to our cost cutting endeavors. The decreases in operating

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expenses were offset by an increase in bad debt allowance of $142,000 from a major distributor. The distributor notified us in August that it had been acquired and as a result of the transition in to the new company. The company elected to establish a reserve for certain accounts receivable due from this distributor. And, the company also elected to write off two small projects in development totaling $43,000.

Interest expense was $581,000 for the six months ended June 30, 2006 compared to $984,000 for the six months ended June 30,2005, a decrease of $403,000, and included amortization of the convertible preferred stock discount associated with related warrants and interest on our convertible preferred stock.. This decrease was primarily attributable to the recording of deferred interest payable on the Satellite financing transaction in May of 2005.

Financial Condition, Liquidity, and Capital Resources

As of June 30, 2006, we had $126,000 in cash and cash equivalents and we have an additional need for cash to fund our working capital requirements and business model objectives. Since inception, we have financed our operations primarily through the sale of equity securities and issuance of debt instruments.

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

On May 4, 2005, we consummated a subsequent financing transaction with the holders of the secured notes, pursuant to which the secured notes were repaid in full and we fulfilled our obligations under the Security Agreement and Guaranty we entered in connection with our secured note financing. In this financing transaction, we completed a private placement of shares of TAG’s Series A Convertible Preferred Stock, par value $.001 per share, and warrants to purchase shares of TAG’s common stock. The placement was made pursuant to a Securities Purchase Agreement, dated May 3, 2005 and the gross proceeds of this transaction were $5,000,000. We repaid out of the gross proceeds the secured note we issued to the investor in the bridge financing completed March 30, 2005. After payment of the note and offering expenses in the amount of approximately $370,000, we received net proceeds of approximately $3,480,000 from this financing. We have used the net proceeds for the production, acquisition and distribution of feature films and general working capital.

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

Net cash from operating activities for the six month period ending June 30, 2006 was a positive $449,000 which primarily resulted from collections on accounts receivable balances.

Net cash used in investing activities for six months ended June 30, 2006 was $381,000 compared to $221,000 in the prior period. In the six months ended June 30, 2006, we purchased a partnership interest in a movie project (‘‘Deal’’) and also made an advance to this same project in the amount of $342,000 and purchased computer equipment in the amount of $4,000 and this was offset by a

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$165,000 collection on the note receivable due from Supercross. In the six months ended June 30, 2005, we loaned $250,000 to Myriad Pictures, Inc., in connection with a proposed acquisition. As of February 23, 2006, we notified Myriad that we were terminating negotiations and the letter of intent, effective immediately and have requested repayment of our loan, which was due (less certain expenses) by March 30, 2006. We have not yet received repayment of this loan and were advised by Myriad that an accounting of their expenses related to the failed acquisition will be provided by May 31, 2006.

Net cash provided by financing activities for the six months ended June 30, 2006 was $0 compared to $4,636,000 for the six months ended June 30, 2005, which primarily consisted of proceeds from debt and preferred stock financings offset by financing costs.

In 2005, we invested $260,000 in a limited liability company created to produce a film with the working title of Pool Hall Prophets. In March 2005, the limited liability company agreed to pay us a special distribution equal to our initial capital contribution plus 10% for a total of $286,000. As of June 30, 2006, the limited liability company paid an amount of $260,000 on our behalf into a new film production entity established for the production of a new film (‘‘Deal’’). We expect the balance of $26,000 to be paid on the next distribution. We retain a minority interest in the company and may receive further disbursements from operating cash in the future subject to the limited liability company’s prior obligations and the results of its operations.

Our subsidiary, TAG USA, entered into production and distribution agreements with Wild Stallion Productions LP, an unaffiliated third party that holds the rights to the motion picture Wild Stallion. These arrangements provide TAG USA with the rights to produce and distribute the motion picture. In July 2005, TAG USA agreed to guarantee a loan in the amount of $250,000 made by an individual lender to Wild Stallion Productions in order to induce the lender to make this loan. The loan proceeds have been used by Wild Stallion for the production of the motion picture. This loan, which bears interest at the rate of 10% per annum, was due on August 15, 2005 and has not been repaid by the limited partnership. The lender, however, has provided us with a forbearance from enforcing his rights under the debt obligation until further notice.

We have received a collection notice in the amount of approximately $369,000 from Mr. R. Michael Webb on behalf of Webb Development Pension Trust on August 11, 2006. The collection notice seeks repayment of the loan made by the creditor to Supercross the Movie, LLC, which loan was guaranteed by TAG Entertainment, Inc. as well as the personal assets of Steve Austin. The loan was initially made in July 2004. We are currently negotiating a resolution of this matter with this creditor. However, no assurances can be given that we will be able to reach a mutually acceptable arrangement to resolve this matter.

At June 30, 2006 our receivables included $1.2 million to be collected from an international film distributor for sub-distribution rights on the film Supercross, which film was completed and delivered during 2005. In addition, we issued a note for production funding provided to the investor partnership that owns the underlying rights to this film. The note receivable balance was $1.4 million at June 30, 2006. The receivable represents a minimum guarantee under a distribution contract with us to be collected from receipts in various foreign markets. The note receivable, which originally matured during the fourth quarter of 2005 was extended until the fourth quarter of 2006. The amount due bears interest at 12% per annum and will be collected from the partnership after payment of distribution and production fees and expenses related to the film. During the six months ended June 30, 2006 the Company also advanced in the form of a note receivable at total of $342,000 for the movie ‘‘Deal’’ which is due on December 31, 2006.

We will continue to evaluate our intangible assets, including goodwill, acquired product rights, and other intangible assets, whenever events or circumstances occur which indicate that these assets might be impaired. We have acquired limited partnership interests in five limited partnerships from the holders of such interests in consideration for shares of our common stock. We have issued an aggregate of 800,000 shares of our common stock in such transactions and acquired limited partnership interests valued at $938,000. We will recognize an impairment charge based on the amounts of these investments if we determine, in accordance with generally accepted accounting

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principles, that the carrying value of these assets exceeds the undiscounted future cash flows expected from such assets as well as upon the eventual disposition of such assets. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. We review these assets on a quarterly basis to determine whether an impairment charge is appropriate.

In March 2006, we entered into separate production agreements with two entities pursuant to which we will seek to produce new motion pictures. Our agreement with UFO Productions, LLC provides for the parties to co-produce six new motion pictures for the Sci-Fi Network. Pursuant to this agreement, we issued warrants to purchase 100,000 shares of our common stock to UFO Productions which are exercisable at $1.00 per share for a period of seven years, valued at $42,000. We also agreed to share the fees derived from projects that are successfully produced pursuant to this agreement with UFO Productions. Pursuant to our agreement with Relevant Entertainment Group, we will utilize their services to assist us in identifying, packaging and producing new motion picture and television projects. In consideration for the services of Relevant, we issued them 100,000 shares of common stock and warrants to purchase an additional 250,000 shares of common stock. The warrants are exercisable at $0.75 per share for a period of five years and vest as follows: warrants to purchase 125,000 shares vested on the date of issuance and the balance vests in equal installments over a period of twelve months commencing in March 2006. We agreed to pay to Relevant a percent of the fees we receive from projects that are successfully produced pursuant to this agreement.

As described below in Item 1 of Part II of this Quarterly Report under the caption ‘‘Legal Proceedings,’’ and in our Annual Report on Form 10-KSB for the year ended December 31, 2005, we are party to various other claims, including claims made or threatened against certain limited partnerships. As described therein, although we believe we have valid defenses in these matters, we may incur judgments or enter into settlements of claims that could have a material adverse effect on our financial position or results of operations in any particular period. No assurances can be given that management’s assessment of these claims will ultimately prove to be accurate or that other facts adverse to our position currently not known to management will not be uncovered, in which case the ultimate resolution of some or all of these claims could potentially have a material adverse effect on our financial condition. Further, the occurrence of intervening events may also result in management reconsidering their assessment of the impact of these matters. Regardless of the ultimate liability to any of these claimants, these disputes may impose financial and administrative challenges that may require the application of our resources and the time and attention of our management.

Cash Requirements and Need for Additional Funds

As of June 30, 2006 our cash balance was approximately $126,000 and we have an immediate additional need for cash to fund our working capital requirements and business model objectives. With the completion of the $5 million preferred stock financing in 2005, we received net proceeds of approximately $3.5 million after retirement of the $1 million bridge loan and payment of closing costs. We used these proceeds to fund our near term working capital requirements and business model objectives. In connection with the execution of our business strategy and related expansion plans, we intend to either undertake private placements of our securities, either as a self-offering or with the assistance of registered broker-dealers, or negotiate a private sale of its securities to one or more institutional investors. However, we currently have no firm agreements with any third-parties for such transactions and no assurances can be given that we will be successful in raising sufficient capital from any of these proposed financings. Further, we cannot assure you that any additional financing will be available or, even if it is available that it will be on terms acceptable to us. Any inability to obtain required financing on sufficiently favorable terms could have a material adverse effect on our business, results of operations and financial condition. If we are unsuccessful in raising additional capital and increasing revenues from operations, we will need to reduce costs and operations substantially. Further, if expenditures required to achieve our plans are greater than projected or if revenues are less than, or are generated more slowly than projected, we will need to raise a greater amount of funds than currently expected.

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Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements, except as described herein. Except as described in Note 4 to the financial statements included in this Quarterly Report on Form 10-QSB, we do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of our capital resources.

Item 3.    Controls and Procedures.

Disclosure Controls

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the chief executive officer (who also currently serves as our chief financial officer), of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). The evaluation included certain internal control areas in which we have made and are continuing to make changes to improve and enhance controls, as described in greater detail below. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accurately recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Internal Controls

During the period ended June 30, 2006, two consultants that were providing internal accounting and financial services for us ended their engagement with us. In addition, two of our independent directors resigned from their service on our board of directors during the six months ended June 30, 2006, including the person that we had designated as our Audit Committee Financial Expert. Due to these changes, we intend to retain new accounting personnel and are seeking to fill the vacancies created by the board resignations. Inherent with changes in accounting personnel is a change in the internal control environment over our financial reporting and these changes, along with the resignation of our board members may materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.

There were no other changes in our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during our fiscal quarter ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

We do not expect that disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within its company have been detected. These inherent limitations

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include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Part II

Item 1.    Legal Proceedings.

We are not currently a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on TAG, except as described below and as disclosed in our Annual Report on Form 10-KSB for the year ended December 31, 2005 and as described in Note 5 to the financial statements included with this Quarterly Report on Form 10-QSB.

Certain limited partners in the entity Funny Money the Movie, L.P. and Supercross, LP have demanded that these limited partnerships agree to rescind their purchase of limited partnership interests. In addition, these limited partners have claimed that TAG, due to its contractual relationship with the limited partnerships, has responsibility for the actions of the limited partnership. We have denied any responsibility for the actions taken in the name of the limited partnership and believe we would have meritorious defenses to any claim asserted against us. Although a lawsuit was filed by these limited partners against the limited partnerships and TAG, a settlement agreement was entered into among the claimants, the limited partnerships, the general partners and us. Pursuant to this agreement, the respondents agreed to repurchase the limited partnership interests held by the claimants. Although we are a party to the settlement agreement, the limited partnerships and/or their general partners are making the agreed-upon payments to the claimants. Upon full satisfaction of these obligations, the claimants will dismiss the pending litigation and provide the respondents with a general release.

We have received a collection notice in the amount of approximately $369,000 from Mr. R. Michael Webb on behalf of Webb Development Pension Trust on August 11, 2006. The collection notice seeks repayment of the loan made by the creditor to Supercross the Movie, LLC, which loan was guaranteed by TAG Entertainment, Inc. as well as the personal assets of Steve Austin. The loan was initially made in July 2004. We are currently negotiating a resolution of this matter with this creditor. However, no assurances can be given that we will be able to reach a mutually acceptable arrangement to resolve this matter.

We are involved in various claims and other legal proceedings that arise from time to time in the ordinary course of business, including claims asserted by guilds and unions representing creative talent. Based on the facts of which we are currently aware, management does not believe that any of these matters will have a material adverse effect on our financial position or results of operations. Litigation is inherently unpredictable and excessive verdicts do occur. Although we believe we have valid defenses in these matters, we may incur judgments or enter into settlements of claims that could have a material adverse effect on our financial position or results of operations in any particular period. No assurances can be given that management’s assessment of these claims will ultimately prove to be accurate or that other facts adverse to our position currently not known to management will not be uncovered, in which case the ultimate resolution of some or all of these claims could potentially have a material adverse effect on our financial condition. Further, the occurrence of intervening events may also result in management reconsidering their assessment of the impact of these matters.

We and TAG USA have been involved in various claims made or threatened against certain limited partnerships. Although these claims concern the actions of the specific limited partnerships, we have been involved in these proceedings due to the interests arising out of our production and

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distribution activities on behalf of these limited partnerships and, in certain situations, where an affiliate of our Chief Executive Officer serves as general partner of the limited partnership entity. In certain situations, these arrangements have led to limited partners asserting claims against and seeking redress from us. Regardless of the ultimate liability to any of these claimants, these disputes may impose financial and administrative challenges that may require the application of our resources and the time and attention of our management. Further, based on our production relationship with certain limited partnerships, cash resources were used to satisfy obligations of the limited partnerships and although we expect reimbursement from the limited partnerships, this cannot be assured. These situations have negatively impacted our cash position and distracted management from focusing on our business. With respect to claims, adverse decisions or settlements may occur in one or more of these matters and it is not possible to estimate the possible loss or losses, if any. Based on the facts of which we are currently aware, management believes that the resolution of these claims will not have a materially adverse effect on our condition. However, no assurances can be given that such belief will ultimately prove to be accurate or that other facts adverse to our position currently not known to management will not be uncovered, in which case the ultimate resolution of some or all of these claims could potentially have a material adverse effect on our financial condition.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

Disclosure of issuances of unregistered equity securities during the six months ended June 30, 2006 is contained in Note 6 and Note 7 to the financial statements included with this Form 10-QSB.

Item 3.    Defaults Upon Senior Securities

We are obligated to pay dividends to the holders of our shares of Series A Preferred Stock at the rate of 6% per annum on January 1, April 1, July 1 and October 1 of each calendar year. Although we were unable to timely pay the accrued dividends due on July 1, 2006, we made the required dividend payment on August 31, 2006.

As described in our Quarterly Report on Form 10-QSB for the quarter ended March 31, 2006, we have not maintained the effectiveness of our registration statement on Form SB-2, which was filed in compliance with the registration rights agreement that we entered into with the holders of our Series A Preferred Stock of our Series A Preferred Stock. Accordingly, the holders of our Series A Preferred Stock may require us to pay as liquidated damages an amount equal to $75,000 for each 30 day period during which we are not in compliance with our obligations. Further, the Certificate of Designations of Series A Preferred Stock provides that a default under the transaction agreements, including the Registration Rights Agreement, gives the holders the right to demand the redemption of the outstanding shares of Series A Preferred Stock at a price equal to 101% of the stated value for each share redeemed. Due to these events, the holders of our Series A Preferred Stock may exercise such right as to all 5,000 shares of Series A Preferred Stock issued.

We are seeking waivers or forbearance agreements from the holders of our Series A Preferred Stock. If we are unable to obtain such concessions, the holders may demand we pay the amounts specified under the Certificate of Designations of Series A Preferred Stock and the liquidated damages payments under the Registration Rights Agreement. Although we have not received any demand for payment from the holders of our Series A Preferred Stock, no assurances can be given that we will be successful in obtaining any waiver or forbearance from the holders or that the holders will not demand payment at any time.

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

None.

Item 5.    Other Information

None.

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Item 6.    Exhibits

The exhibits designated with an asterisk (*) are filed herewith.


Exhibit Number Description of Document
31.1* Certification of Chief Executive Officer and Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15(d)-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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


Date: September 1, 2006 TAG ENTERTAINMENT CORP.
  By: /s/ Steve Austin
    Steve Austin
President and Chief Executive Officer,
Chief Financial Officer

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