Edgar Filing: Film & Music Entertainment, Inc.

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

FORM 10-QSB
(Mark One)

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

For the quarterly period ended March 31, 2005

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ______________ to _______________

0-51164
----------------------
(Commission file number)

FILM AND MUSIC ENTERTAINMENT, INC.
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)

Nevada 01-0802246
--------------------------- ------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

5670 Wilshire Blvd., Suite 1690, Los Angeles, California 90036
---------------------------------------------------------------
(Address of principal executive offices)

(323) 904-5200
-------------------------
(Issuer's telephone number)

N/A
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)

Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
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 [ ]

State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: As
of November 1, 2005 - 125,170,398 shares of common stock

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

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

FILM AND MUSIC ENTERTAINMENT, INC.

Index

Page
Number
-----

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 2005
(unaudited) F-2

Consolidated Statements of Operations for the
three months ended March 31, 2005 and 2004 (unaudited) F-3

Consolidated Statement of Stockholders' Equity for the
three months ended March 31, 2005 (unaudited) F-4

Consolidated Statements of Cash Flows for the
three months ended March 31, 2005 and 2004 (unaudited) F-5

Notes to Consolidated Financial Statements (unaudited) F-6-F-10

Item 2. Management's Discussion and Analysis or Plan of Operations 11

Item 3. Controls and Procedures 16

PART II. OTHER INFORMATION

Item 1. Legal Proceedings 16

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17

Item 3. Defaults Upon Senior Securities 17

Item 4. Submission of Matters to a Vote of Security Holders 17

Item 5. Other Information 17

Item 6. Exhibits 18

SIGNATURES 19

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Film and Music Entertainment, Inc. and Subsidiaries

Consolidated Balance Sheet

March
31, 2005
-----------
(unaudited)
ASSETS

CURRENT ASSETS
Cash and cash equivalents $ 2,087,718
Restricted cash 40,518
Loan receivable from Miracle Entertainment, Inc. 50,000
Other current assets (including amounts due from
related party of $7,339) 83,771
Investment in equity securities 1,317,755
-----------

TOTAL CURRENT ASSETS 3,579,762

PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $8,622 36,773
REAL ESTATE INVESTMENTS 430,000
FILM COSTS 75,000

-----------
TOTAL ASSETS $ 4,121,535
===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable $ 57,163
Accrued expenses (including amounts due from
related party of $2,848) 175,297
Production advances 39,785

-----------
TOTAL CURRENT LIABILITIES 272,245
-----------

COMMITMENT AND CONTINGENCIES (Note 8) -

STOCKHOLDER'S EQUITY
Common stock, $0.001 par value; 250,000,000 shares
authorized; 125,220,398 shares issued and outstanding 125,220
Additional paid-in capital 21,139,867
Accumulated deficit (17,415,797)

-----------
TOTAL STOCKHOLDERS' EQUITY 3,849,290

-----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,121,535
===========

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

F-2

Film and Music Entertainment, Inc. and Subsidiaries

Consolidated Statements of Operations

Three Months Ended
---------------------------
March March
31, 2005 31, 2004
------------ ------------
(unaudited) (unaudited)

REVENUE $ 4,925 $ -

OPERATING EXPENSES
Production costs - 61,307
Advertising costs 27,392 6,437
Compensation expense 47,346 39,794
Consulting expense 6,750 1,920
General and administrative expenses 149,053 38,343

------------ ------------
TOTAL OPERATING EXPENSES 230,541 147,801
------------ ------------

LOSS FROM OPERATIONS (225,616) (147,801)
------------ ------------

OTHER INCOME (EXPENSE)
Investment income 4,414 -
Unrealized loss on marketable equity securities (110,361) -
Gain on disposition of real estate 208,500 -

------------ ------------
TOTAL OTHER INCOME (EXPENSE) 102,553 -
------------ ------------

LOSS BEFORE PROVISION FOR INCOME TAXES (123,063) (147,801)

PROVISION FOR INCOME TAXES - -
------------ ------------

NET LOSS $ (123,063) $ (147,801)
============ ============

NET LOSS PER SHARE - BASIC AND DILUTED $ (0.00) $ (0.00)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED 131,170,398 99,355,398
============ ============

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

F-3

Film and Music Entertainment, Inc. and Subsidiaries

Consolidated Statement of Stockholders' Equity

(unaudited)

Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
----------- ----------- ----------- ----------- -----------

Balance, December 31, 2004 140,970,398 140,970 21,596,617 (17,292,734) 4,444,853

Shares canceled in connection with transfer of
real estate investment to former owner (15,750,000) (15,750) (456,750) (472,500)
Net loss - - - (123,063) (123,063)

----------- ----------- ----------- ------------- -----------
Balance, March 31, 2005 125,220,398 $ 125,220 $ 21,139,867 $ (17,415,797) $ 3,849,290
=========== =========== ============ ============= ===========

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

F-4

Film and Music Entertainment, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Three Months Ended
--------------------------
March March
31, 2005 31, 2004
------------ ------------
(unaudited) (unaudited)

CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (123,063) $ (147,801)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation expense 2,380 -
Unrealized loss on marketable equity securities 110,361 -
Gain on disposition of real estate (208,500) -
Purchase of marketable equity securities (768,167) -

Changes in operating assets and liabilities:
Other current assets (75,337) -
Accounts payable (27,325) 16,920
Accrued expenses 248 131,734
Production advances (2,537) 17,430

------------ ------------
Net cash used in operating activities (1,091,940) 18,283
------------ ------------

CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds received from Miracle Entertainment - 6,554
------------ ------------
Net cash provided by financing activities - 6,554
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,091,940) 24,837

CASH AND CASH EQUIVALENTS, Beginning of period 3,179,658 112,079
------------ ------------

CASH AND CASH EQUIVALENTS, End of period $ 2,087,718 $ 136,916
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:

Interest paid $ - $ -
============ ============
Income taxes paid $ - $ -
============ ============

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

F-5

FILM AND MUSIC ENTERTAINMENT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1 - Basis of Presentation

The unaudited consolidated financial statements have been
prepared by Film and Music Entertainment, Inc. (the "Company"),
pursuant to the rules and regulations of the Securities and
Exchange Commission. The information furnished herein reflects
all adjustments (consisting of normal recurring accruals and
adjustments) which are, in the opinion of management, necessary
to fairly present the operating results for the respective
periods. Certain information and footnote disclosures normally
present in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the
United States of America have been omitted pursuant to such rules
and regulations. These consolidated financial statements should
be read in conjunction with the audited consolidated financial
statements and footnotes for the year ended December 31, 2004
included in the Company's Annual Report on Form 10SB. The
results of the three months ended March 31, 2005 are not
necessarily indicative of the results to be expected for the full
year ending December 31, 2005.

Stock Options
-------------

SFAS No. 123, "Accounting for Stock-Based Compensation,"
establishes and encourages the use of the fair value based method
of accounting for stock-based compensation arrangements under
which compensation cost is determined using the fair value of
stock-based compensation determined as of the date of grant and
is recognized over the periods in which the related services are
rendered. The statement also permits companies to elect to
continue using the current intrinsic value accounting method
specified in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-
based compensation. The Company has elected to use the intrinsic
value based method and has disclosed the pro forma effect of
using the fair value based method to account for its stock-based
compensation issued to employees. For options granted to
employees where the exercise price is less than the fair value of
the stock at the date of grant, the Company recognizes an expense
in accordance with APB 25. For non-employee stock based
compensation the Company recognizes an expense in accordance with
SFAS No. 123 and values the equity securities based on the fair
value of the security on the date of grant. For stock-based
awards the value is based on the market value for the stock on
the date of grant and if the stock has restrictions as to
transferability a discount is provided for lack of tradability.
Stock option awards are valued using the Black-Scholes option-
pricing model.

The pro forma information regarding the effects on operations
that is required by SFAS 123 and SFAS 148 are not presented since
there is no pro forma expense to be shown for the three months
ended March 31, 2005 and 2004.

Note 2 - Loss Per Share

The Company reports earnings (loss) per share in accordance with
SFAS No. 128, "Earnings per Share." Basic earnings (loss) per
share is computed by dividing income (loss) available to common
shareholders by the weighted average number of common shares
available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is
increased to include the number of additional common shares that
would have been outstanding if the potential common shares had
been issued and if the additional common shares were dilutive.
Diluted earnings (loss) per share has not been presented since
the effect of the assumed conversion of options and warrants to
purchase common shares would have an anti-dilutive effect. At
March 31, 2005 there were 81,407,000 options outstanding that
have been excluded from the computation of diluted net loss per
share because the effect would have been anti-dilutive.

F-6

FILM AND MUSIC ENTERTAINMENT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 3 - Investments in Marketable Equity Securities

The Company invests some of its excess cash in marketable equity
securities. The marketable equity securities comprise of common
stock of publicly traded companies. These investments are
classified as trading securities as they are held principally for
the purpose of selling in the near term. They are reported at
fair value with unrealized gains and losses included in earnings.
The fair value is determined by using the securities quoted
market price as obtained from stock exchanges on which each
securities trades.

Investment income, principally dividends, is recorded when
earned. Realized capital gains and losses are calculated based on
the cost of securities sold, which is determined by the
"identified cost" method.

The unrealized gains/(losses) in the Company's portfolio of
marketable equity securities as of March 31, 2005 is as follows:

Historical costs basis $1,440,286
Unrealized gains 30,339
Unrealized losses (152,870)
----------
Fair value $1,317,755
==========

Note 4 - Loan Receivable from Miracle Entertainment, Inc.

As of December 31, 2003, Miracle Entertainment, Inc. owed the
Company, $66,317. This amount was considered a short-term
loan, non-interest bearing and unsecured. During June 2004, the
Company executed a secured promissory note with Miracle
Entertainment Inc. The repayment terms call for two equal
payments of $25,000. The first payment is due April 15, 2005.
The second payment is due December 15, 2005. The promissory note
is non-interest bearing and is secured by 5,000,000 shares of the
Company's stock. As of the March 31, 2005 the market value of
the shares of the Company's stock exceeded the carrying value of
the note of $50,000. Therefore, no write down of the note was
deemed necessary.

Note 5 - Property and Equipment

The cost of property and equipment at March 31, 2005 consisted of
the following:

March 31,
2005

Computers $ 3,330
Automobile 32,065
Furniture and fixtures 10,000
----------
45,395
Less accumulated depreciation (8,622)
----------
$ 36,773
==========

Depreciation expense for the three months ended March 31, 2005
and 2004 was $2,380 and $0, respectively.

F-7

FILM AND MUSIC ENTERTAINMENT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 6 - Real Estate Investments

On February 3, 2005, the Company entered into an agreement with a
stockholder whereby the stockholder agreed to surrender to
Company 15,750,000 shares of the Company's common stock owned by
the stockholder and the Company agreed to give up any rights to a
hypothecated money interest relating to certain real estate
located in Cochise County, Arizona that the Company has recorded
on its books at $264,000. The Company removed the real estate
investment of $264,000 from its books and canceled 15,750,000
shares of its common stock valued at $0.03 per share or $472,500.
The Company recognized a gain of $208,500 as a result of this
transaction.

Note 7 - Stockholders' Equity

Common stock
------------

During the three months ended March 31, 2005, the Company has the
following transactions in its common stock:
* canceled 15,750,000 shares of its common stock valued at
$472,500 for a certain parcel of real estate; and

Note 8 - Commitments and Contingencies

Litigation
----------

In the ordinary course of business, the Company is generally
subject to claims, complaints, and legal actions. At March 31,
2005, management believes that the Company is not a party to any
action which would have a material impact on its financial
condition, operations, or cash flows.

Miracle Entertainment, Inc. et. al v. Filmstar Releasing
Corporation et. al., Los Angeles Superior Court, Case No.
BC302233:

This is a complaint for unlawful conversion, breach of contract
and fraud, commenced in September, 2003 by Miracle Entertainment,
Inc., a company of which John Daly was Chairman, against a firm
and several individuals who had previously contracted to raise
funds for productions sponsored by Miracle Entertainment. A
counter-claim was filed by the defendants in March, 2004, adding
the Company as a defendant.

On May 2, 2005 a confidential Settlement Agreement and Mutual
Release was executed between the Company and remaining litigants
on terms acceptable to all the parties resulting in no liability
and complete release of claims against the company.

Carol Lefko v. Film and Music Entertainment, Inc., Celebration
Pictures, Inc., John Daly and Peter Beale, Los Angeles Superior
Court, Case No. BC318753.

F-8

FILM AND MUSIC ENTERTAINMENT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Company since the film never went into pre-production. The
Company is informed and believes that Kevin Lewis and Peter
Beale, in their individual capacity, were to be co-producers of
the film "Host." Mr. Lewis was also to be the director of the
film and that any agreement with plaintiff is between plaintiff
and Mr. Lewis. The Company maintains that no contract exists
between Ms. Lefko and either FAME or Celebration or both. The
Company maintains that Ms. Lefko has never been employed by any
of these entities, as indicated by Company records and that
neither the Company nor Celebration Pictures, Inc. ever hired any
casting director.

All the Defendants except Beale filed their general denial with
affirmative defenses on September 1, 2004. Film And Music
responded to plaintiff's first set of written discovery. The
trial took place on July 13 and 14, 2005 and the court denied any
liability on the part of the defendants to the plaintiff. The
Company does not expect Ms. Lefko to appeal.

Sunset Towers Partnership v. First Miracle Group. Los Angeles
Superior Court, Case No. SC072450.

This is a motion to amend a judgment entered against First
Miracle Group by its former landlord in the amount of $300,000 to
include Celebration Productions, Inc. and Film and Music
Entertainment, Inc. Sunset Towers is claiming that Celebration
and the Company are in fact successors in interest of Miracle
Entertainment, Inc. and are therefore liable for the judgment.

The Company and Celebration have filed an opposition to the
motion denying any theory that the Company and/or Celebration are
successors-in-interest of First Miracle Group and/or Miracle
Entertainment, Inc. in as much as only a portion of Miracle's
assets were acquired by the Company and fair consideration in the
amount of $3,000,000 worth of the Company's stock; that the
Company and Miracle are separate, distinct publicly traded
companies, with separate shareholders, boards, officers and
businesses with the single exception that Mr. Daly was at the
time of acquisition a Board member and officer of both companies;
that neither the Company or Celebration had the opportunity to
defend the litigation from which the judgment derived; and that
neither the Company nor Celebration expressly assumed the
liability of Miracles obligation under the judgment.

The motion was heard on May 17, 2005 and the Court denied the
plaintiff's motion, finding on the evidence presented that
Miracle Entertainment did not transfer all of its assets to the
Company and that the Company was not the successor-in-interest of
Miracle. On July 8, 2005 Sunset Towers filed a motion to appeal.
The Company has no reason to believe an appeal will overturn the
earlier findings in its favor.

Note 9 - Subsequent Events

The Company executed a Letter of Intent in January 2006 with 100%
Entertainment and Red Hot Entertainment to produce low budget
Science Fiction films in High Definition. The Letter calls for
the Company to arrange 50% of the budget of the features for
which the Company shall receive distribution fees world-wide
along with 50% of the profits. The Company shall have mutual
script and cast approval and in addition to the first feature,
the Company has the option to co-produce an additional 10 films
over four years.

On December 15, 2005 the Company foreclosed on the security of
2,500,000 shares of the Company's common stock held as collateral
against the balance of the note of $25,000. As of the December
15, 2005 the market value of the foreclosed upon shares of the

F-9

FILM AND MUSIC ENTERTAINMENT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Company's stock exceeded the remaining carrying value of the note
of $25,000 by $275,000. Therefore, Company recognized a gain in
this amount.

On November 23, 2005, the Company issued 2,450,000 share of its
common stock for the exercise of stock options. The exercise
price was paid by reducing accrued expenses by $1,225.

F-10

Item 2. Management's Discussion and Analysis or Plan of Operations

General

The following discussion of our financial condition and results
of operations should be read in conjunction with (1) our interim
unaudited consolidated financial statements for the three months
ended March 31, 2005 and 2004 and their explanatory notes
included as part of this Form 10-QSB, and (2) our annual audited
consolidated financial statements and explanatory notes for the
years ended
December 31, 2004 and 2003 included on Form 10-SB filed with the
Securities and Exchange Commission on August 4, 2005.

Overview

Film and Music Entertainment, Inc. is a holding company which,
through its subsidiaries, develops, produces, sells and
distributes films and associated entertainment.

Our wholly-owned Celebration Productions, Inc. subsidiary,
provides comprehensive production services for filmed
entertainment. Celebration Productions has provided production
service relating to the development of the film "The Harder They
Fall" and "The Disappeared" and production supervisory services
to the films "Played" and "Moonpie". Revenue is recognized from
productions as earned and such revenue will usually be partially
from specific contractual fees and from contingent compensation
paid as profits are earned. Our wholly-owned Celebration
Pictures, Inc. provides sales and distribution services for North
America for our and third party productions. In 2005, Celebration
Pictures has been provided these services on two films, "The
Aryan Couple" and "Waking Up Dead". Revenues are recognized in
accordance with AICPA SOP 00-2. Our wholly-owned subsidiary,
Celebration International Pictures, Ltd (BVI), provides sales and
distribution services for the rest of the world excluding North
America for our and third party productions. The Company ceased
its sales and distribution efforts in "Waking Up Dead as of
October 13, 2005 and has retained a lien against future earnings
of the film for all money spent in the marketing of the film.
The Company also has two non-operating subsidiaries, East Mojave
Corporation and Myrob Properties, Inc., in which are held certain
real estate assets of the company.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and
results of operations are based upon our condensed consolidated
financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial

statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and
liabilities.

On an ongoing basis, we evaluate our estimates, including those
related to impairment of production costs, estimates of film
revenue, any potential losses from pending litigation. We base
our estimates on historical experience and on various other
assumptions that we believe 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. Actual results may
differ from these estimates under different assumptions or
conditions; however, we believe that our estimates, including
those for the above-described items, are reasonable.

We capitalize films in development as capitalized film costs in
accordance with AICPA SOP 00-2. These costs are transferred to
film inventories at the point that the film is scheduled for
production. On a quarterly basis we review each film in
development and/or production as to whether the capitalized costs
are in excess of their fair market value, and if so, we write off
the excess and reflect the write-off in costs of revenue. If
after three years in development a film has not been scheduled
for production it is written off and reflected in the costs of
revenue.

Under SOP 00-2 the costs of the film, including the capitalized
costs, contingent compensation and residual costs (if any) are
amortized and included in costs of revenue in the proportion the
revenue for that period for the film bears to the estimated total
revenue from all markets and territories under the individual-
film-forecast-computation method. We review are estimates
quarterly and they are revised if necessary. A revision will
result in an increase or decrease to the percentage of
amortization of the capitalized film costs relative to a previous
period. Should the revision result in estimated revenues proving
insufficient to cover the unamortized film costs remaining on
that film, the difference will be written down to the fair market
value based upon its then net present value.

Results of Operations

Three Months Ended March 31, 2005 Compared to March 31, 2004.

We have received minimum revenue from operations to date. We
believe that the main sources of our revenue will be revenues
from domestic and foreign theatrical distribution, DVD and home
video, pay-per-view, pay cable and basic cable distribution and
free broadcast television. We have begun to receive income from
foreign sales of the movie "The Aryan Couple" under our contract
with AV Pictures Ltd. We anticipate this income will continue
through next year. The film has generated a minimal amount of
theatrical income in the US from festival showings in the first
quarter of 2005. Management expects income from US theatrical
revenues to increase substantially in the fourth quarter of this
year as the film moves from festival showings to a wider release.
Management also anticipates revenues to commence from "Waking Up
Dead" in the fourth quarter of 2005.

Revenues: Revenue for the three-month interim period ended March
31, 2005 was $4,925, as compared to $0 for the corresponding
interim period in fiscal 2004.

Our revenues for the three-months interim period ended March 31,
2005 were principally derived from the screening of The Aryan
Couple.

We had no revenues for the three months ended March 31, 2004 as
the Company was in the process of solidifying contracts for
productions.

Operating Expenses and loss from operations: Operating Expenses
and loss from operations for the three-month interim ended March
31, 2005 were $230,541 and $225,616, respectively, as compared to
$147,801 and $147,801 for the corresponding interim period in
fiscal 2004.

The decrease in production costs relates to the write-off of a
production during the first quarter of 2004. The increase in
advertising cost relates to the increased advertising for The
Aryan Couple during the first quarter of 2005. The increase of
in compensation expense is mainly attributable to payments for
the services of John Daly, which were $0 for the period in 2004.
The increase in general and administrative expense relates
primarily to the increased costs relating to compliance and legal
expense relating in the court cases in which the company was
involved.

Other Income(Expense): Other Income(Expense) for the three-
months ended March 31, 2005 was $102,553 as compared with $0 for
the three-months ended June 30, 2004. This increase was entirely
due to a gain of $208,500 realized on the disposition of real
estate to a stockholder in return for 15,750,000 shares of the
Company's common stock offset by an unrealized loss on our
marketable security portfolio.

Liquidity and Capital Resources

Historical Sources of Cash: For the period January 1, 2005
through March 31, 2005 we principally financed our operations
through cash on hand derived from the sale of the common shares
for cash amounting $5,000,000 in April 2004

Cash Position and Sources and Uses Of Cash: Our cash and cash
equivalents position as of March 31, 2005 was $2,087,718 as
compared to $3,179,658 as of December 31, 2004. The decrease in
our cash and cash equivalents for the three-month interim period
ended March 31, 2005 was attributable to the purchase of $768,167
in equity securities.

Our operating activities used cash in the amount of $1,091,940
for the three-month interim period ended March 31, 2005, as
compared to cash provided by operating activities of $18,283 for
the corresponding interim period in fiscal 2004. The $1,091,940
in cash used in operating activities for the three-month interim
period ended March 31, 2005 reflected our net loss of $123,063
for that period, adjustments for non-cash deductions, such as
depreciation, unrealized gains and losses on equity securities
and gain on the disposal of real estate. In addition, we
purchased $768,167 in equity securities which is a use of cash
from operations. The $18,283 of cash provided by operating
activities for the three-month interim period ended March 31,
2004 reflected our net loss of $147,801 for that period and
increased by changes in other operating assets and liabilities.

Capital Resources Going Forward: We have approximately
$2,088,000 of cash on hand as of March 31, 2005 to fund our
operations going forward. The Company also has on hand
approximately $1,318,000 of marketable equity securities as of
this date which the Company is holding as reserves for future
operations. Our plan of operation for the twelve month period
following the date of this quarterly report is for the Company
and its subsidiaries to continue to develop, produce, sell and
distribute motion pictures. The Company primarily uses third
party investor funds for such activities; however the Company may
provide limited funds for such activities where Management deems
it prudent. We currently have budgeted approximately $1,100,000
in costs for the twelve month period following the date of this
quarterly report, including approximately $200,000, in costs
relating to the development, production, sales and distribution
of films and $900,000 in general, sales and marketing expenses.
The Company attempts to cash flow most costs relating to film
production and distribution from third party direct investments.
Occasionally, the Company may front certain costs to expedite a

project to achieve certain goals. The Company attempts to
structure any such expenditure so that they are recouped from any
further funding in the specific project. If no such further
finding occurs the Company may not be able to recoup these
expenditures. To date, the Company has limited such expenditures
as to be non-material.

Our assets are reasonably liquid with a substantial majority
consisting of cash and cash equivalents, and investment
securities. Both our total assets as well as the individual
components as a percentage of total assets may vary significantly
from period to period because of changes relating to production
and distribution schedules, sales revenues, customer demand,
seasonal, economic and market conditions. Our total net assets at
March 31, 2005 were $4,121,535 compared to $4,746,712 at December
31, 2004. The Company intends to increase employees by two in the
first quarter of 2006; however, these additions should not
substantially change its overhead structure. The only other
current plans affecting overhead would be the costs associated
with the addition of independent directors to the Board and D & O
Insurance and an anticipated reduction in headquarters' lease
expense as we intend to lease smaller premises at a lower rate
when the current lease ends on March 1, 2006. With these
additional expenses, the Company would still have sufficient
cash, cash equivalents and liquidateable investment securities to
cover operating expenses for the next 24 months.

We believe that cash generated by operations in conjunction with
our available working capital will be sufficient to continue our
business for the next twelve months. We believe that our capital
structure is adequate for our current operations. We continually
review our overall capital and funding needs to ensure that our
capital base can support the estimated needs of the business.
These reviews take into account current business needs as well as
the Company's future capital requirements. Based upon these
reviews, to take advantage of strong market conditions and to
fully implement our expansion strategy, we believe that we may
continue to increase our net capital by the proceeds of private
sales of our securities. For more information on the cash flows
of the Company, please see the statement of cash flows included
in the Company's financial statements appearing elsewhere herein.

Should our costs and expenses prove to be greater than we
currently anticipate, or should we change our current business
plan in a manner that will increase or accelerate our anticipated
costs and expenses, such as through an acquisition of new
products, the depletion of our working capital would be
accelerated. To the extent it become necessary to raise
additional cash in the future as our current cash and working
capital resources are depleted, we will seek to raise it through
the sell of the equity securities owned by the Company, public or
private sale of debt or equity securities, the procurement of
advances on contracts or licenses, funding from joint-venture or
strategic partners, debt financing or short-term loans, or a
combination of the foregoing. We may also seek to satisfy
indebtedness without any cash outlay through the private issuance
of debt or equity securities. We currently do not have any
binding commitments for, or readily available sources of,
additional financing. We cannot give you any assurance that we
will be able to secure the additional cash or working capital we
may require to continue our operations in such circumstances.

Our anticipated costs described above are estimates based upon
our current business plan. Our actual costs could vary
materially from those estimated. Further, we could also change
our current business plan resulting in a change in our
anticipated costs. See the discussion concerning forward-looking
statements.

To date we have financed our operations through the private
placement of equity securities. On May 4, 2004 we completed a
private placement of 50,000,000 shares of our Common Stock for a
total consideration of $5,000,000. We have not employed any
significant leverage or debt.

The Company has no plans to purchase any assets at this time.
However, the Company constantly reviews industry opportunities to
acquire income producing assets for possible acquisition.

Off-Balance Sheet Arrangements

There are no guarantees, commitments, lease and debt agreements
or other agreements that could trigger adverse change in our
credit rating, earnings, cash flows or stock price, including
requirements to perform under standby agreements.

Subsequent Events
-----------------

We executed a Letter of Intent in January 2006 with 100%
Entertainment and Red Hot Entertainment to produce low budget
Science Fiction films in High Definition. The Letter calls for us
to arrange 50% of the budget of the features for which the
Company shall receive distribution fees world-wide along with 50%
of the profits. We shall have mutual script and cast approval and
in addition to the first feature, we have the option to co-
produce an additional 10 films over four years.

On December 15, 2005 we foreclosed on the security of 2,500,000
shares of our common stock held as collateral against the balance
of the note of $25,000. As of the December 15, 2005 the market
value of the foreclosed upon shares of our stock exceeded the
remaining carrying value of the note of $25,000 by $275,000.
Therefore, we recognized a gain in this amount.

On November 23, 2005, the we issued 2,450,000 share of our common
stock for the exercise of stock options. The exercise price was
paid by reducing accrued expenses by $1,225.

FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-QSB, as
well as statements made by the company in periodic press
releases, oral statements made by the company's officials to
analysts and shareholders in the course of presentations about
the company, constitute "forward-looking statements." All
statements other than statements of historical facts included or
incorporated by reference in this report, including, without
limitation, statements regarding our future financial position,
business strategy, budgets, projected costs and plans and
objectives of management for future operations, are forward-
looking statements. In addition, forward-looking statements
generally can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "intend," "project,"
"estimate," "anticipate," "believe," or "continue" or the
negative thereof or variations thereon or similar terminology.
Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we cannot give any
assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ
materially from our expectations. All subsequent written and oral
forward-looking statements attributable to us, or persons acting
on our behalf, are expressly qualified in their entirety by the
cautionary statements. We assume no duty to update or revise our
forward-looking statements based on changes in internal estimates
or expectations or otherwise.

Item 3. Controls and Procedures

As required by SEC rules, we have evaluated the effectiveness of
the design and operation of our disclosure controls and
procedures at the end of the period covered by this report. This
evaluation was carried out under the supervision and with the
participation of our management, including our principal
executive officer and principal financial officer. Based on this
evaluation, these officers have concluded that the design and
operation of our disclosure controls and procedures are
effective. There were no changes in our internal control over
financial reporting or in other factors that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

Disclosure controls and procedures are our controls and other
procedures that are designed to ensure that information required
to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under
the Exchange Act is accumulated and communicated to our
management, including principal executive officer and principal
financial officer, as appropriate, to allow timely decisions
regarding required disclosure.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

Miracle Entertainment, Inc. et. al v. Filmstar Releasing
Corporation et. al., Los Angeles Superior Court, Case No.
BC302233:

Carol Lefko v. Film and Music Entertainment, Inc., Celebration
Pictures, Inc., John Daly and Peter Beale, Los Angeles Superior
Court, Case No. BC318753.

This is a complaint for breach of an alleged oral agreement
commenced July 20, 2004 between the plaintiff and the defendants
whereby the plaintiff would provide services as casting director
of a film to be called "Host" and produced by Celebration
Productions, Inc. which was added as a party to this lawsuit by
amendment in February 2005. The plaintiff alleges that she
performed the services but was not paid and is owed $12,000 for
breach of contract plus $60,000 for "waiting time." The
defendants have answered denying any liability, that no contract
existed and that no services could have been rendered to the
Company since the film never went into pre-production. The
Company is informed and believes that Kevin Lewis and Peter
Beale, in their individual capacity, were to be co-producers of
the film "Host." Mr. Lewis was also to be the director of the
film and that any agreement with plaintiff is between plaintiff
and Mr. Lewis. The Company maintains that no contract exists
between Ms. Lefko and either FAME or Celebration or both. The
Company maintains that Ms. Lefko has never been employed by any
of these entities, as indicated by Company records and that

neither the Company nor Celebration Pictures, Inc. ever hired any
casting director.

Sunset Towers Partnership v. First Miracle Group. Los Angeles
Superior Court, Case No. SC072450.

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

None

Item 3. Defaults Upon Senior Securities

None.

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

Not applicable

Item 5. Other Information

Not applicable

Item 6. Exhibits

(a) Exhibits

Regulation
S-B Number Exhibit
-----------------------------------------------------------------
31.1 Rule 13a-14(a) Certification of Chief Executive Officer

31.2 Rule 13a-14(a) Certification of Chief Financial Officer

32.1 Certification Pursuant to 18 U.S.C. Section 1350, as

Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002

SIGNATURES

In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

FILM AND MUSIC ENTERTAINMENT, INC.

January 23, 2006 By: /s/ John Daly
--------------------------------
John Daly
Chairman, President and CEO

January 23, 2006 By: /s/ Lawrence S. Lotman
-------------------------------
Lawrence S. Lotman
Chief Financial Officer