Pacificap Entertainment (PFEH) 10QSB 2006 Q3 Quarterly report (small business)

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10QSB

(Mark One)

[X]      Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2006

[   ]      Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____________ to ______________

For the Period Ended September 30, 2006

Commission file number 000-31048

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(Name of Small Business Issuer in Its Charter)

Nevada	33-0766069
(State of Incorporation)	(IRS Employer Identification No.)

9150 Wilshire Boulevard

Suite 242

Beverly Hills, CA 90212

(Address of Principal Executive Offices)

(310) 246-0090

Issuer's Telephone Number

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 [ ]

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

Yes [ ] No  [x] 

As of November 15, 2006, the Company had 156,908,892 shares of its par value $0.001 common stock issued and outstanding.

Transitional Small Business Disclosure Format (check one):

Yes [ ]No [X]

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A Development Stage Company)

Quarterly Report on Form 10-QSB for the

Quarterly Period Ending September 30, 2006

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
September 30, 2006 and December 31, 2005	3
Condensed Consolidated Statements of Losses:
Three and Nine Months Ended September 30, 2006 and 2005 and For
the Period July 29, 1997 (Date of Inception) through September 30, 2006	4
Condensed Consolidated Statements of Deficiency in Stockholders’ Equity
For the period July 29, 1997 (Date of Inception) through September 30, 2006	5-12
Condensed Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 2006 and 2005
For the Period July 29, 1997 (Date of Inception) through September 30, 2006	13-15
Notes to Unaudited Condensed Consolidated Financial Information:
September 30, 2006	16-30
Item 2. Management’s Discussion and Analysis of Results of
Operation and Financial Condition	31-35
Item 3. Controls and Procedures	36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	37
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds	37
Item 3. Defaults Upon Senior Securities	37
Item 4. Submission of Matters to a Vote of Security Holders	37
Item 5. Other Information	37
Item 6. Exhibits	37
SIGNATURES	38

2

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS.

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)
	September 30, 2006			December 31,  2005
ASSETS
Current assets:
Cash and cash equivalents	$	75,292		$	422
Total current assets		75,292			422
Property and equipment:
Office furniture, net of accumulated depreciation of $9,469 and $6,623 at September 30, 2006 and December 31, 2005, respectively		9,856			12,702
Other assets:
Prepaid interest		64,226			152,872
Capitalized film costs		750,000			750,000
Financing Costs, net of accumulated amortization and write off of $514,048 and $322,221 at September 30, 2006 and December 31, 2005, respectively		406,241			417,496
Total other assets		1,220,467			1,320,368
Total assets	$	1,305,615		$	1,333,492
LIABILITIES AND (DEFICIENCY IN) STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	2,539,147		$	1,773,536
Other accrued liabilities		380,000			380,000
Notes payable , current portion		2,605,797			2,230,145
Advances from related parties		454,337			358,119
Other advances		182,350			65,000
Total current liabilities		6,161,631			4,806,800
Notes payable, long-term portion		1,641,370			756,347
Derivative liability relating to convertible debentures		16,749,122			5,811,478
Warrant liability relating to convertible debentures		61,211			10,263
Total long term debt		18,451,703			6,578,088
Commitments and contingencies
Total liabilities		24,613,334			11,384,888
(Deficiency in) stockholders' equity:
Preferred stock, par value, $0.001 per share; 50,000,000 shares authorized; none issued and outstanding at September 30, 2006 and December 31, 2005		-			-
Common stock, par value, $0.001 per share; 300,000,000 shares authorized; 121,468,892 and 89,563,261 shares issued at September 30, 2006 and December 31, 2005, respectively		121,469			89,563
Additional paid-in-capital		42,502,527			42,501,950
Deficit accumulated during development stage		(65,931,715	)		(52,642,909	)
Total (deficiency in) stockholder's equity		(23,307,719	)		(10,051,396	)
Total liabilities and (deficiency in) stockholder's equity	$	1,305,615		$	1,333,492

See accompanying notes to the unaudited condensed consolidated financial statements

3

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(unaudited)

	For the three months ended September 30,						For the nine months ended September 30,						For the Period July 29, 1997 (Date of Inception) to September 30, 2006
	2006			2005			2006			2005
				Restated-See Note H						Restated-See Note H			Restated-See Note H
Costs and Expenses:
Selling, general and administrative	$	270,024		$	778,980		$	882,664		$	1,815,634		$	15,731,660
Acquisition of Pacificap Entertainment Holdings, Inc.		-			-			-			-			29,160,000
Acquisition of Cineports.com, Inc.		-			-			-			-			2,248,461
Impairment of film library		-			-			-			-			372,304
Impairment of investment		-			-			-			-			62,500
Depreciation		949			1,306			2,846			3,645			205,652
Total operating expenses		270,973			780,286			885,510			1,819,279			47,780,577
Loss from operations		(270,973	)		(780,286	)		(885,510	)		(1,819,279	)		(47,780,577	)
Other income (expenses), net		-			-			50,000			-			164,757
Interest income (expenses), net		(640,584	)		(717,144	)		(2,094,704	)		(1,988,323	)		(6,790,823	)
Unrealized gain (loss) related to adjustment of derivative and warrant liability to fair value of underlying securities		17,055,862			2,299,751			(10,358,592	)		(8,264,241	)		(10,956,858	)
Total other income (expenses)		16,415,278			1,582,607			(12,403,296	)		(10,252,564	)		(17,582,924	)
Income (loss) from continuing operations, before income taxes and discontinued operations		16,144,305			802,321			(13,288,806	)		(12,071,843	)		(65,363,501	)
Provision for income taxes		-			-			-			-			-
Income (loss) from continuing operations, before discontinued operations		16,144,305			802,321			(13,288,806	)		(12,071,843	)		(65,363,501	)
(Loss) from discontinued operations		-												(352,905	)
Income on disposal of discontinued operations, net		-			-			-			-			78,973
Net income (loss)	$	16,144,305		$	802,321		$	(13,288,806	)	$	(12,071,843	)	$	(65,637,433	)
Cumulative effect of accounting change		-			-									(294,282	)
Net income (loss) applicable to common shares	$	16,144,305		$	802,321		$	(13,288,806	)	$	(12,071,843	)	$	(65,931,715	)
Income (loss) per common share-basic	$	0.16		$	0.01		$	(0.14	)	$	(0.20	)
Income per common share-fully diluted		Note A			Note A
Weighted average shares outstanding-basic and fully diluted		101,919,109			87,283,023			93,917,417			61,817,710

See accompanying notes to the unaudited condensed consolidated financial statements

4

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A development stage company)

CONDENSED CONSOLIDATED STATEMENTS OF DEFICIENCY IN STOCKHOLDERS’ EQUITY

FOR THE PERIOD JULY 29, 1997 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006

(UNAUDITED)

	Preferred Shares		Stock Amount		Common Shares			Stock Amount		Common Stock subscription		Additional Paid in Capital		Deficit Accumulated During Development Stage			Treasury Stock			Total
Shares issued at date of inception (July 29, 1997) to founders in exchange for contribution of organization costs valued at $27.38 per shares, as restated		-	$	-		422		$	1	$	-	$	11,552	$	-		$	-		$	11,553
Net Loss		-		-		-			-		-		-		-			-			-
Balance at December 31, 1997		-	$	-		422		$	1	$	-	$	11,552	$	-		$	-		$	11,553
Shares issued December 22, 1998 to consultants in exchange for services valued at $.054 per shares		-		-		37,083			37		-		1,965		-			-			2,002
Shares issued December 22, 1998 to President in exchange for debt valued at $.054 per shares		-		-		277,778			278		-		14,722		-			-			15,000
Operating expenses incurred by principal shareholder		-		-		-			-		-		8,925		-			-			8,925
Net loss		-		-		-			-		-		-		(212,773	)		-			(212,773	)
Balance at December 31, 1998		-	$	-		315,283		$	316	$	-	$	37,164	$	(212,773	)	$	-		$	(175,293	)
Shares issued on April 13, 1999 for cash in connection with private placement at $30.08 per share		-		-		133			-		-		4,000		-			-			4,000
Shares issued on April 13, 1999 to consultants in exchange for services valued at $30.00per share		-		-		6,000			6		-		179,994		-			-			180,000
Shares issued May 28, 1999 in exchange for services valued at $.001 per share		855,000		855		-			-		-		-		-			-			855
Contribution of shares to treasury on September 30, 1999 by principal shareholder		-		-		(94,048	)		-		-		94		-			(94	)		-
Shares issued on November 12, 1999 for cash in connection with private placement at $3.00 per share		-		-		33,333			33		-		99,967		-			-			100,000
Release of shares held in treasury and acquisition of Cavalcade of Sports Network, Inc on December 16, 1999		-		-		94,048			-		-		282,050		-			94			282,144
Operating expenses incurred by principal shareholder		-		-		-			-		-		6,000		-			-			6,000
Net Loss		-		-		-			-		-		-		(438,045	)		-			(438,045	)
Balance at December 31, 1999		855,000	$	855		354,749		$	355	$	-	$	609,269	$	(650,818	)	$	-		$	(40,339	)

See accompanying notes to the unaudited condensed consolidated financial statements

5

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A development stage company)

CONDENSED CONSOLIDATED STATEMENTS OF DEFICIENCY IN STOCKHOLDERS’ EQUITY (Continued)

FOR THE PERIOD JULY 29, 1997 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006

(UNAUDITED)

	Preferred Shares			Stock Amount			Common Shares		Stock Amount		Common Stock Subscription		Additional Paid in Capital		Deficit Accumulated During Development Stage			Treasury Stock		Total
Balance Forward		855,000		$	855			354,749	$	355	$	-	$	609,269	$	(650,818	)	$	-	$	(40,339	)
Shares issued in March 2000 in exchange for debt at $37.50 per share		-			-			2,060		2		-		77,245		-			-		77,247
Shares issued March 28, 2000 in exchange for services at $37.50 per share		-			-			70		-		-		2,625		-			-		2,625
Shares issued April 27, 2000 in exchange for services at $37.50 per share		-			-			250		-		-		9,375		-			-		9,375
Shares issued May 8, 2000 in exchange for services at $37.50 per share		-			-			417		1		-		15,624		-			-		15,625
Shares issued May 17, 2000 in exchange for services at 37.50 per share		-			-			833		1		-		31,249		-			-		31,250
Shares issued June 2000 in exchange for debt at $37.59 per share		-			-			133		-		-		5,000		-			-		5,000
Shares issued June 2000 in exchange for services at $37.46 per share		-			-			589		1		-		22,082		-			-		22,083
Shares issued July 25, 2000 in exchange for debt at $37.88 per share		-			-			33		-		-		1,250		-			-		1,250
Shares issued August 2000, in exchange for services at $37.50 per share		-			-			2,167		2		-		81,248		-			-		81,250
Conversion of preferred stock on September 18, 2000		(855,000	)		(855	)		-		-		-		-		-			-		(855	)
Shares issued October 13, 2000, in exchange for services at $37.86 per share		-			-			35		-		-		1,325		-			-		1,325
Shares issued October 30, 2000 in exchange for services at $37.48 per share		-			-			667		1		-		24,999		-			-		25,000
Shares issued November 9, 2000 in exchange for services at $37.65 per share		-			-			83		-		-		3,125		-			-		3,125
Shares issued December 1, 2000 in exchange for services at $36.76 per share		-			-			17		-		-		625		-			-		625
Operating expenses incurred by principal shareholder		-			-			-		-		-		6,000		-			-		6,000
Net Loss		-			-			-		-		-		-		(856,968	)		-		(856,968	)
Balance at December 31, 2000		-		$	-			362,103	$	363	$	-	$	891,041	$	(1,507,786	)	$	-	$	(616,382	)

See accompanying notes to the unaudited condensed consolidated financial statements

6

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A development stage company)

CONDENSED CONSOLIDATED STATEMENTS OF DEFICIENCY IN STOCKHOLDERS’ EQUITY (Continued)

FOR THE PERIOD JULY 29, 1997 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006

(UNAUDITED)

	Preferred Shares		Stock Amount		Common Shares			Stock Amount			Common Stock Subscription		Additional Paid in Capital			Deficit Accumulated During Development Stage			Treasury Stock		Total
Balance Forward		-	$	-		362,103		$	363		$	-	$	891,041		$	(1,507,786	)	$	-	$	(616,382	)
Shares issued in January 2001, in exchange for services at $37.50 per share		-		-		6,667			7			-		249,993			-			-		250,000
Shares issued in April 2001, in exchange for services at $37.50 per share		-		-		4,000			4			-		149,996			-			-		150,000
Shares issued in April 2001, in exchange for advances from officers at $37.50 per share		-		-		3,333			3			-		124,997								125,000
Shares issued in 2001, in exchange for services at $37.50 per share		-		-		2,500			3			-		93,747			-			-		93,750
Shares issued in 2001, in exchange for services at $37.50 per share		-		-		1,000			1			-		37,499			-			-		37,500
Fractional shares		-		-		(5	)		-			-		-			-			-		-
Shares canceled in November 2001, for services that were not performed and shares were previously issued in October 2001		-		-		(667	)		(1	)		-		(24,999	)		-			-		(25,000	)
Shares issued in December 2001, to board of directors members for services at 37.50 per share		-		-		2,100			2			-		78,748			-			-		78,750
Operating expenses incurred by principal shareholder		-		-		-			-			-		6,000			-			-		6,000
Net loss		-		-		-			-			-		-			(1,257,584	)		-		(1,257,584	)
Balance at December 31, 2001		-	$	-		381,031		$	382		$	-	$	1,607,022		$	(2,765,370	)	$	-	$	(1,157,966	)

See accompanying notes to the unaudited condensed consolidated financial statements

7

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A development stage company)

CONDENSED CONSOLIDATED STATEMENTS OF DEFICIENCY IN STOCKHOLDERS’ EQUITY (Continued)

FOR THE PERIOD JULY 29, 1997 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006

(UNAUDITED)

	Preferred Shares		Stock Amount		Common Shares		Stock Amount		Additional Paid in Capital		Deficit Accumulated During Development Stage			Treasury Stock		Total
Balance Forward		-	$	-		381,031	$	382	$	1,607,022	$	(2,765,370	)	$	-	$	(1,157,966	)
Shares issued in January 2002, in exchange for investment at $37.50 per share		-		-		1,667		2		62,498		-			-		62,500
Shares issued in March 2002, in exchange for services at $37.50 per share		-		-		8,333		8		312,492		-			-		312,500
Shares issued in June 2002, in exchange for services at approximately $40.15 per share		-		-		18,890		19		758,356		-			-		758,375
Shares issued in June 2002, in exchange for debts at $37.50 per share		-		-		2,667		2		99,998		-			-		100,000
Shares issued in July 2002, in exchange for services at $10.84 per share		-		-		717		1		7,769		-			-		7,770
Shares issued in July 2002, in connection with acquisition of Cineports.com, Inc. at approximately $7.50 per share		-		-		159,653		160		1,197,237		-			-		1,197,397
Shares issued in August 2002, in exchange for services at approximately $10.84 per share		-		-		2,133		2		23,127		-			-		23,129
Shares issued in September 2002, in exchange for services at approximately $10.84 per share		-		-		10,000		10		108,410		-			-		108,420
Shares issued in October 2002, in exchange for services at approximately $11.69 per share		-		-		4,000		4		46,736		-			-		46,740
Shares issued in October 2002 for cash in connection with private placement at $6.94 per share		-		-		18,018		18		124,982		-			-		125,000
Shares issued in October 2002, in exchange for interest at approximately $11.68 per share		-		-		507		-		5,920		-			-		5,920
Shares issued in November 2002, in exchange for services at approximately $8.70 per share		-		-		1,667		2		14,498		-			-		14,500
Shares issued in November 2002 for cash in connection with private placement at $10.20 per share		-		-		1,000		1		10,199		-			-		10,200
Shares issued in November 2002 for cash in connection with private placement at $7.50 per share		-		-		4,000		4		29,996		-			-		30,000
Shares issued in November 2002, in exchange for debts at $37.49 per share		-		-		867		1		32,499		-			-		32,500
Shares issued in November 2002, in exchange for interest at $37.56 per share		-		-		217		-		8,150		-			-		8,150
Shares issued in December 2002, in exchange for services at approximately $12.26 per share		-		-		9,333		9		114,371		-			-		114,380
Warrants issued in connection with acquisition of Cineports		-		-		-		-		1,051,065		-			-		1,051,065
Options issued in exchange for services rendered		-		-		-		-		661,365		-			-		661,365
Net loss		-		-		-		-		-		(5,210,614	)		-		(5,210,614	)
Balance at December 31, 2002		-	$	-		624,700	$	625	$	6,276,690	$	(7,975,984	)	$	-	$	(1,698,669	)

See accompanying notes to the unaudited condensed consolidated financial statements

8

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A development stage company)

CONDENSED CONSOLIDATED STATEMENTS OF DEFICIENCY IN STOCKHOLDERS’ EQUITY (Continued)

FOR THE PERIOD JULY 29, 1997 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006

(UNAUDITED)

	Preferred Shares		Share Amount		Common Shares		Share Amount		Additional Paid in Capital			Deficit Accumulated during Development Stage			Treasury Stock		Total
Balance forward		-	$	-		624,700	$	625	$	6,276,690		$	(7,975,984	)	$	-	$	(1,698,669	)
Shares issued in January 2003 in exchange for services at approximately $4.63 per share		-		-		56,300		56		260,434			-			-		260,490
Shares issued in February 2003 in exchange for services at $2.10 per share		-		-		36,683		37		77,000			-			-		77,037
Shares issued in February 2003 for cash in connection with private placement at $1.20 per share		-		-		6,667		6		7,994			-			-		8,000
Shares issued in February 2003 in exchange for services at $1.50 per share		-		-		6,667		6		9,994			-			-		10,000
Shares issued in April, 2003 in exchange for services at $.90 per share		-		-		14,000		14		12,586			-			-		12,600
Shares issued in April 2003 in exchange for expenses paid by shareholders at $.90 per share		-		-		22,222		22		19,978			-			-		20,000
Shares issued in April 2003 in exchange for financing expenses at $.90 per share		-		-		22,960		23		20,641			-			-		20,664
Shares issued in April 2003 for cash in connection with private placement at $1.20 per share		-		-		4,333		4		4,996			-			-		5,000
Shares issued in May 2003 in exchange for financing expenses at $1.65 per share		-		-		2,591		3		4,272			-			-		4,275
Shares issued in May 2003 in exchange for services at $1.50 per share		-		-		17,667		18		25,882			-			-		25,900
Shares issued in May 2003 for cash in connection with private placement at $.90 per share		-		-		16,667		17		14,983			-			-		15,000
Shares issued in May 2003 in exchange for expenses paid by shareholders at $.90 per share		-		-		22,167		22		19,978			-			-		20,000
Shares issued in July 2003 in exchange for services at $2.10 per share		-		-		13,850		14		29,006			-			-		29,020
Shares issued in July 2003 in exchange for debts at $.70 per share		-		-		14,334		14		9,986			-			-		10,000
Shares issued in July 2003 in exchange for financing expenses at $3.60 per share		-		-		37,487		38		134,915			-			-		134,953
Shares issued in August 2003 in exchange for services at $3.14 per share		-		-		37,667		38		117,762			-			-		117,800
Shares issued in August 2003 in exchange for debts at $.81 per share		-		-		43,667		44		35,456			-			-		35,500
Shares issued in September 2003 in exchange for services at $1.80 per share		-		-		264,916		265		280,085			-			-		280,350
Fractional shares issued in September 2003 due to rounding resulted from reverse stock split		-		-		1,210		1		(1	)		-			-		-
Shares issued in October 2003 in exchange for financing expenses at $2.00 per share		-		-		50,000		50		99,950			-			-		100,000
Shares issued in October 2003 in exchange for services at $1.59 per share		-		-		2,405,000		2,405		3,826,895			-			-		3,829,300
Shares issued in November 2003 in exchange for services at $1.18 per share		-		-		43,000		43		50,707			-			-		50,750
Shares issued in November 2003 in exchange for interest expenses at $1.25 per share		-		-		10,000		10		12,490			-			-		12,500
Shares issued in November 2003 in exchange for financing expenses at $1.75 per share		-		-		14,000		14		24,486			-			-		24,500
Shares issued in December 2003 in exchange for services at $1.28 per share		-		-		29,500		29		37,871			-			-		37,900
Shares issued in connection with acquisition of Pacificap		-		-		18,000,000		18,000		29,142,000			-			-		29,160,000
Net loss		-		-		-		-		-			(35,405,841	)		-		(35,405,841	)
Balance at December 31, 2003		-			$	21,818,255	$	21,818		40,557,036		$	(43,381,825	)	$	-	$	(2,802,971	)

See accompanying notes to the unaudited condensed consolidated financial statements

9

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A development stage company)

CONDENSED CONSOLIDATED STATEMENTS OF DEFICIENCY IN STOCKHOLDERS’ EQUITY (continued)

FOR THE PERIOD JULY 29, 1997 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006

(UNAUDITED)

	Preferred Shares		Share Amount		Common Shares		Share Amount		Additional Paid in Capital		Deficit Accumulated during Development Stage			Total
Balance forward		-	$	-		21,818,255	$	21,818	$	40,557,036	$	(43,381,825	)	$	(2,802,971	)
Shares issued in January, 2004 in exchange for interest expense at approximately $1.01 per share		-		-		145,166		145		146,473		-			146,618
Shares issued in January, 2004 in exchange for services at approximately $1.01 per share		-		-		125,000		125		126,125		-			126,250
Shares issued in February, 2004 in exchange for services at approximately $0.66 per share		-		-		687,886		688		453,178		-			453,866
Shares issued in March, 2004 in exchange for services at approximately $0.52 per share		-		-		293,250		293		151,637		-			151,930
Shares issued in April, 2004 in exchange for services at approximately $0.40 per share		-		-		440,000		440		175,560		-			176,000
Shares issued in April, 2004 in exchange for services at approximately $0.39 per share		-		-		175,000		175		68,075		-			68,250
Shares issued in May, 2004 in exchange for services at approximately $0.34 per share		-		-		75,000		75		25,425		-			25,500
Shares issued in May, 2004 in exchange for services at approximately $0.30 per share		-		-		10,000		10		2,990		-			3,000
Shares issued in May, 2004 in exchange for services at approximately $0.24 per share		-		-		400,000		400		95,600		-			96,000
Shares issued in May, 2004 in exchange for services at approximately $0.25 per share		-		-		285,000		285		70,965		-			71,250
Shares issued in June, 2004 in exchange for settlement of interest at approximately $0.30 per share		-		-		10,000		10		2,990		-			3,000
Shares issued in July, 2004 in exchange for services at approximately $0.28 per share		-		-		1,038,538		1,039		289,750		-			290,789
Shares issued in July, 2004 in exchange for settlement of interest at approximately $0.28 per share		-		-		44,275		45		12,355		-			12,400
Shares issued in July, 2004 in exchange for services at approximately $0.22 per share		-		-		250,000		250		54,750		-			55,000
Shares issued in July, 2004 in exchange for services at approximately $0.28 per share		-		-		100,000		100		27,900		-			28,000
Shares issued in July, 2004 as payment towards convertible debentures		-		-		1,100,000		1,100		75,900		-			77,000
Shares issued in August. 2004 in exchange for services at approximately $0.02 per share		-		-		250,000		250		4,750		-			5,000
Shares issued in September, 2004 as payment towards convertible debentures		-		-		1,100,000		1,100		6,490		-			7,590
Shares issued in October, 2004 as payment towards convertible debentures		-		-		1,100,000		1,100		4,950		-			6,050
Shares issued in November, 2004 as payment towards convertible debentures		-		-		1,100,000		1,100		4,730		-			5,830
Shares issued in December, 2004 as payment towards convertible debentures		-		-		2,200,000		2,200		13,750		-			15,950
Shares issued in December, 2004 in exchange for services at approximately $0.02 per share		-		-		810,000		810		15,390		-			16,200
Shares issued in December, 2004 in exchange for interest at approximately $0.02 per share		-		-		197,025		197		3,742		-			3,939
Shares issued in December, 2004 in exchange for acquisition costs at approximately $0.02 per share		-		-		4,582,106		4,582		87,060		-			91,642
Net loss, as restated		-		-		-		-		-		(4,946,614	)		(4,946,614	)
Balance at December 31, 2004		-		-		38,336,501	$	38,337	$	42,477,571	$	(48,328,439	)	$	(5,812,531	)

See accompanying notes to the unaudited condensed consolidated financial statements

10

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A development stage company)

CONDENSED CONSOLIDATED STATEMENTS OF DEFICIENCY IN STOCKHOLDERS’ EQUITY (continued)

FOR THE PERIOD JULY 29, 1997 (DATE OF INCEPTION) THROUGH SEPE 30, 2006

(UNAUDITED)

	Preferred Shares		Share Amount		Common Shares		Share Amount		Additional Paid in Capital			Deficit Accumulated during Development Stage			Total
Balance forward		-		-		38,336,501	$	38,337	$	42,477,571		$	(48,328,439	)	$	(5,812,531	)
Shares issued in January, 2005 as payment towards convertible debentures		-		-		2,200,000		2,200		9,900			-			12,100
Shares issued in February, 2005 as payment towards convertible debentures		-		-		3,300,000		3,300		13,200			-			16,500
Shares issued in March, 2005 in exchange for services at approximately $0.01 per share		-		-		340,000		340		3,060			-			3,400
Shares issued in March, 2005 as payment towards convertible debentures		-		-		2,200,000		2,200		7,700			-			9,900
Shares issued in April, 2005 as payment towards convertible debentures		-		-		1,900,000		1,900		3,420			-			5,320
Shares issued in May, 2005 as payment towards convertible debentures	��	-		-		10,000,000		10,000		1,600			-			11,600
Shares issued in June, 2005 as payment towards convertible debentures		-		-		19,500,000		19,500		(7,692	)		-			11,808
Shares issued in July 2005 as payment towards convertible debentures		-		-		10,900,000		10,900		(6,506	)		-			4,394
Shares issued in December 2005 as payment towards convertible debentures		-		-		886,760		886		(303	)		-			583
Net Loss		-		-		-		-		-			(4,314,470	)		(4,314,470	)
Balance at December 31, 2005		-	$	-		89,563,261	$	89,563	$	42,501,950		$	(52,642,909	)	$	(10,051,396	)

See accompanying notes to the unaudited condensed consolidated financial statements

11

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY

For the period July 19, 1997 (Date of Inception) to September 30, 2006

	Preferred Shares		Share Amount		Common Shares		Share Amount		Common Stock Subscription		Additional Paid in Capital		Deficit Accumulated during Development Stage			Treasury Stock		Total
Balance forward		-		-		89,563,261		89,563		-		42,501,950		(52,642,909	)		-		(10,051,396	)
Shares issued in May 2006 as payment towards convertible debentures (Note C)		-		-		895,631		896				90		-			-		986
Shares issued in July 2006 as payment towards convertible debentures (Note C)						4,430,000		4,430				265							4,695
Shares issued in August 2006 as payment towards convertible debentures (Note C)						13,290,000		13,290				222							13,512
Shares issued in September 2006 as payment towards convertible debentures (Note C)						13,290,000		13,290				-							13,290
Net loss		-		-		-		-		-		-		(13,288,806	)		-		(13,288,806	)
Balance at September 30, 2006		-	$	-		121,468,892	$	121,469	$	-	$	42,502,527	$	(65,931,715	)	$	-	$	(23,307,719	)

See accompanying notes to the unaudited condensed consolidated financial statements

12

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the nine months ended September 30,						For the Period July 29, 1997(Date of Inception) to September 30, 2006
	2006			2005
				Restated-See note H
Cash flows from operating activities:
Net loss for the period from continuing operations	$	(13,288,806	)	$	(12,071,843	)	$	(65,657,784	)
Loss from discontinued operations		-			-			(352,905	)
Disposal of business segment, net		-			-			78,974
Adjustments to reconcile net losses to net cash (used in) operating activities:
Cumulative effect of accounting change		-			-			294,282
Depreciation		2,846			3,645			205,654
Organization and acquisition costs expensed		-			-			11,553
Common stock issued in exchange for services		-			3,400			8,530,733
Cumulative unrealized loss related to conversion of convertible debentures to common shares charged to interest expense		32,483			-			212,367
Cash payments made to principal relating to convertible debt								300,000
Common stock issued in exchange for previously incurred debt		-			-			233,498
Common stock issued in exchange for interest		-			-			45,906
Common stock issued in exchange for expenses paid by shareholders		-			-			192,500
Common stock issued in connections with acquisition of Pacificap		-			-			29,160,000
Common stock issued in connection with acquisition of Battleship VFX, Inc.		-			-			91,642
Common stock issued in exchange for financing expenses		-			-			284,392
Common stock issued in connection with acquisition of Cineports		-			-			1,197,396
Warrants issued in connection with acquisition of Cineports		-			-			1,051,065
Stock options issued in exchange for services rendered		-			-			661,365
Preferred stock issued in exchange for services		-			-			855
Conversion of preferred stock		-			-			(855	)
Reverse of notes payable liability in dispute		-			-			15,280
Accretion of convertible debentures		1,260,675			1,223,111			3,102,478
Unrealized loss related to adjustment of derivative and warrant liability to fair value of underlying securities		10,358,592			8,264,241			10,956,858
Amortization and write off of financing costs		196,254			197,706			514,048
Amortization of prepaid interest		88,647			108,032			335,775
Impairment of film library		-			-			372,304
Write-off of acquired asset		-			-			5,000
Write-off of un-collectable other receivable		-			-			30,000
Debt forgiveness from creditors		-			-			(139,992	)
Write-off of capitalized production costs		-			-			150,273
Write off of other investment previously paid with common stock		-			-			62,500
Expenses paid by principal shareholders		-			-			117,015

See accompanying notes to the unaudited condensed consolidated financial statements

13

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the nine months ended September 30,						For the Period July 29, 1997(Date of Inception) to September 30, 2006
	2006			2005
				Restated-See note H
(Increase) decrease in:
Other receivable		-			-			(30,000	)
Other assets		-			235,904			-
Capitalized film costs		-			-			(750,000	)
Increase (decrease) in:
Cash disbursed in excess of available funds		-			-			-
Accounts payable and accrued expenses, net		765,611			315,123			2,595,638
Net cash (used in) operating activities		(583,698	)		(1,720,681	)		(6,122,185	)
Cash flows from investing activities:
Acquisition of film library and footage production costs		-			-			(183,080	)
Acquisition of office furniture		-			(8,844	)		(19,325	)
Cash acquired in connection with acquisition		-			-			35,207
Net cash (used in) investing activities		-			(8,844	)		(167,198	)
Cash flows from financing activities:
Advances from related parties, net of repayments		96,218			62,769			409,749
Other advances, net		117,350			-			182,350
Proceeds from issuance of notes payable, net of repayments		-			(13,000	)		1,240,665
Proceeds from issuance of long-term convertible debt, net of costs and fees and restrictive escrow		445,000			1,601,000			4,259,711
Payments on long term convertible notes		-			(150,000	)
Proceeds from issuance of common stock		-			-			272,200
Net cash provided by financing activities		658,568			1,500,769			6,364,675
Net increase (decrease) in cash and equivalents		74,870			(228,756	)		75,292
Cash and cash equivalents at the beginning of the period		422			269,715			-
Cash and cash equivalents at the end of the period	$	75,292		$	40,959		$	75,292

See accompanying notes to the unaudited condensed consolidated financial statements

14

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the nine months ended September 30,				For the Period July 29, 1997(Date of Inception) to September 30,
	2006		2005		2006
			Restated-See note H
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest	$	-	$	-	$	96,807
Cash paid during the period for taxes		-		-		-
Common stock issued in exchange for services		-		3,400		8,530,733
Common stock issued in exchange for previously incurred debt		-		-		233,498
Cumulative unrealized loss related to conversion of convertible debentures to common shares charged to interest expense		32,483		-		212,367
Common stock issued in exchange for interest expense		-		-		45,906
Common stock issued in exchange for accrued interest		-		-		146,617
Common stock issued in exchange for expenses paid by shareholders		-		-		192,500
Common stock issued in connections with acquisition of Pacificap		-		-		29,160,000
Common stock issued in connection with acquisition of Battleship VFX, Inc.		-		-		91,642
Common stock issued in exchange for financing expenses		-		-		284,392
Common stock issued in connection with acquisition of Cineports		-		-		1,197,396
Warrants issued in connection with acquisition of Cineports		-		-		1,051,065
Stock options issued in exchange for services rendered		-		-		661,365
Preferred stock issued in exchange for services		-		-		855
Conversion of preferred stock		-		-		(855	)
Write off of acquired asset		-		-		5,000
Write off of un-collectable other receivable		-		-		30,000
Debt forgiveness from creditors		-		-		(139,992	)
Write off of capitalized production costs		-		-		150,273
Write off of other investment previously paid with common stock		-		-		62,500
Impairment of film library		-		-		372,304
Expenses paid by principal shareholders		-		-		117,015
Common stock issued in exchange for shareholder advances		-		-		45,500
Capitalized financing costs in connection with issuance of long-term convertible notes payable		185,000		243,435		671,290
Prepaid interest expense in connection with issuance of long-term convertible notes payable		-		400,000		400,000
Unrealized loss on adjustment of derivative and warrant liability to fair value of underlying securities		10,358,592		8,264,241		10,956,858
Acquisition:
Assets acquired		-		-		379,704
Goodwill		-		-		490,467
Liabilities assumed		-		-		(588,027	)
Common stock Issued		-		-		(282,144	)
Net cash paid for acquisition	$	-	$	-	$	-
Liabilities disposed of in disposition of business, net	$	-	$	-	$	79,374
Net cash received in disposition of business	$	-	$	-	$	-
Acquisition of Pacificap:
Assets acquired		-		-		-
Liabilities assumed		-		-		-
Acquisition costs		-		-		29,160,000
Common stock issued		-		-		(29,160,000	)
Net cash paid for acquisition	$	-	$	-	$	-

See accompanying notes to the unaudited condensed consolidated financial statements

15

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(Unaudited)

NOTE A-SUMMARY OF ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows.

General

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Accordingly, the results from operations for the three and nine month periods ended September 30, 2006, are not necessarily indicative of the results that may be expected for the year ended December 31, 2006. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, 2005 financial statements and footnotes thereto included in the Company's SEC Form 10-KSB.

Business and Basis of Presentation

Pacificap Entertainment Holdings, Inc. (the “Company”), formerly Cavalcade of Sports Media, Inc., is in the development stage and its efforts in the past have been principally devoted to developing a sports entertainment business, which will provide 24 hours per day broadcasting from a library of nostalgic sports films and footage to paid subscribers. To date the Company has generated no revenues, has incurred expenses, and has sustained losses. Consequently, its operations are subject to all risks inherent in the establishment of a new business enterprise. For the period from inception through September 30, 2006, the Company has accumulated losses of $65,931,715.

The consolidated financial statements include the accounts of Pacificap Entertainment Holdings, Inc. and its wholly-owned subsidiaries, Cavalcade of Sports Network, Inc, Cineports.com, Inc., Sports Broadcasting Network, Inc. and Ethnic Broadcasting Company, Inc. Significant intercompany transactions and accounts have been eliminated in consolidation.

Reclassifications

Certain reclassifications have been made in prior year’s financial statements to conform to classifications used in the current year.

Stock Based Compensation

Effective January 1, 2006, the beginning of the Company’s first fiscal quarter of 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified-prospective transition method. Under this transition method, stock-based compensation expense was recognized in the consolidated financial statements for granted, modified, or settled stock options. Compensation expense recognized included the estimated expense for stock options granted on and subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R, and the estimated expense for the portion vesting in the period for options 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 123. Results for prior periods have not been restated, as provided for under the modified-prospective method.

16

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(Unaudited)

NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)

Stock Based Compensation (Continued)

SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.

Upon adoption of SFAS 123(R), the Company is using the Black-Scholes option-pricing model as its method of valuation for share-based awards granted beginning in fiscal 2006, which was also previously used for the Company’s pro forma information required under SFAS 123. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and certain other market variables such as the risk free interest rate.

The following table shows the effect on net earnings and earnings per share had compensation cost been recognized based upon the estimated fair value on the grant date of stock options for the nine months ended September 30, 2005, in accordance with SFAS 123, as amended by SFAS No. 148 “Accounting for Stock-Based Compensation - Transition and Disclosure:

	September 30,
	2005
Net loss	$	(12,071,843)
Deduct: stock-based compensation expense, net of tax		-
Pro forma net loss	$	(12,071,843)
Net earning per common share — basic (and fully diluted):
As reported	$	(0.20)
Deduct: stock-based compensation expense, net of tax		-
Pro forma	$	(0.20)

The Company had no employee stock options issued and outstanding at September 30, 2006. All prior awards of stock options were vested at the time of issuance in prior years.

Net Income (loss) Per Common Share

The Company computes earnings per share under Financial Accounting Standard No. 128, "Earnings Per Share" ("SFAS 128"). Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the year. Dilutive common stock equivalents consist of shares issuable upon conversion of convertible preferred shares and the exercise of the Company's stock options and warrants (calculated using the treasury stock method). For the three months ended September 30, 2006, common stock equivalents derived from shares issuable in conversion of the Callable Secured Convertible Notes are not considered in the calculation of the weighted average number of common shares outstanding because they would be anti-dilutive, thereby decreasing the net loss per share.

17

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(Unaudited)

NOTE A-SUMMARY OF ACCOUNTING POLICIES (continued)

Revenue Recognition

The Company recognizes revenue in accordance with American Institute of Certified Public Accountants Statements of Position (SOP) 00-2, Accounting by Producers or Distributors of Films. SOP 00-2 requires that the following conditions must be met before the Company can recognize revenue from a sale or licensing arrangement of a film:

·      Persuasive evidence of a sale or licensing arrangement with a customer exists.

·      The film is complete and, in accordance with the terms of the arrangement, has been delivered or is available for immediate and unconditional delivery.

·      The license period of the arrangement has begun and the customer can begin its exploitation, exhibition, or sale.

·      The arrangement fee is fixed or determinable.

·      Collection of the arrangement fee is reasonably assured.

If the Company does not meet any one of the preceding conditions, the Company should defer recognizing revenue until all of the conditions are met.

Capitalized Film Costs

The Company follows the policy of capitalizing the costs of producing a film and bringing that film to market, and reporting the film costs as a separate asset on its balance sheet. The Company accounts for interest costs related to the production of a film in accordance with the provisions in FASB Statement No. 34, Capitalization of Interest Cost. Production overhead includes allocable costs of individuals or departments with exclusive or significant responsibility for the production of films. Production overhead does not include administrative and general expenses, the costs of certain overall deals, or charges for losses on properties sold or abandoned. For an episodic television series, ultimate revenue for an episodic television series can include estimates from the initial market and secondary markets. Until the Company can establish estimates of secondary market revenue, the Company follows the policy of capitalizing costs for each episode produced that does not exceed an amount equal to the amount of revenue contracted for that episode. Film costs in excess of this limitation on an episode-by-episode basis will be expensed as incurred, and such amounts will not be restored as film cost assets in subsequent periods. The Company expenses all capitalized costs for each episode as it recognizes the related revenue for each episode. Once the Company can establish estimates of secondary market revenue, the Company will capitalize subsequent film costs.

The Company amortizes film costs using the individual-film-forecast-computation method, which amortizes such costs in the same ratio that current period actual revenue (numerator) bears to estimated remaining unrecognized ultimate revenue as of the beginning of the current fiscal year (denominator). If an event or change in circumstance indicates that the Company should assess whether the fair value of a film is less than its unamortized film costs, the Company will determine the fair value of the film (the determination of which is affected by estimated future exploitation costs still to be incurred) and charge to operations the amount by which the unamortized capitalized costs exceeds the film's fair value. As of September 30, 2006 and December 31, 2005, the Company capitalized film costs in the amount of $750,000. All capitalized film costs were in production costs, the Company had no released, completed and not released, or in development or preproduction costs capitalized at September 30, 2006 and December 31, 2005. In the quarter ended March 31, 2006, the Company completed filming of its first movie, accordingly the $750,000 of capitalized costs of this completed film are expected to be amortized before the end fiscal 2006.

18

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(Unaudited)

NOTE A-SUMMARY OF ACCOUNTING POLICIES (continued)

Manufacturing Costs

The Company follows the policy of charging manufacturing and/or duplication costs of products for sale, such as videocassettes and digital video discs, to expense on a unit-specific basis when the related product revenue is recognized. The Company will at each balance sheet date, evaluate inventories of such products for net realizable value and obsolescence exposures, with appropriate adjustments recorded as necessary. The Company follows the policy of charging the cost of theatrical film prints to expense over the period benefited. The Company incurred no manufacturing costs during the periods ended September 30, 2006 and 2005, and for the period from July 29, 1997 (date of inception) to September 30, 2006.

Exploitation Costs and Advertising

The Company accounts for advertising costs in accordance with the provisions of SOP 93-7, Reporting on Advertising Costs. All other exploitation costs, including marketing costs, are expensed as incurred. The Company incurred no advertising costs during the periods ended September 30, 2006 and 2005, and for the period from July 29, 1997 (date of inception) to September 30, 2006.

Recent Accounting Pronouncements

In July 2006, the FASB issued Interpretation No. 48 (FIN 48). “Accounting for uncertainty in Income Taxes”. FIN 48 clarifies the accounting for Income Taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition and clearly scopes income taxes out of SFAS 5, “Accounting for Contingencies”. FIN 48 is effective for fiscal years beginning after December 15, 2006. We have not yet evaluated the impact of adopting FIN 48 on our consolidated financial position, results of operations and cash flows.

In September 2006 the Financial Account Standards Board (the “FASB”) issued its Statement of Financial Accounting Standards 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. FAS 157 effective date is for fiscal years beginning after November 15, 2007. The Company does not expect adoption of this standard will have a material impact on its financial position, operations or cash flows.

In September 2006 the FASB issued its Statement of Financial Accounting Standards 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”. This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The effective date for an employer with publicly traded equity securities is as of the end of the fiscal year ending after December 15, 2006. The Company does not expect adoption of this standard will have a material impact on its financial position, operations or cash flows

19

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(Unaudited)

NOTE A-SUMMARY OF ACCOUNTING POLICIES (continued)

In September 2006, the SEC issued Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (‘SAB 108’).  SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year financial statement misstatements should be considered in quantifying a current year misstatement.  SAB 108 is effective for financial statements covering the first fiscal year ending after November 15, 2006.  The Company does not anticipate any material impact to its financial condition or results of operations as a result of the adoption of SAB 108.

20

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(Unaudited)

NOTE B - CONVERTIBLE PROMISSORY NOTES PAYABLE

A summary of convertible promissory notes payable at September 30, 2006 and December 31, 2005 is as follows:

	September 30,  2006	December 31, 2005
Convertible notes payable (“First Convertible Notes”); interest rate 10% per annum,; due two years from the date of the note; note holder has the option to convert unpaid note principal to the Company’s common stock at the lower of (i) $0.35 or (ii) 30% of the average of the three lowest intraday trading prices for the common stock on a principal market for the twenty days before, but not including conversion date. The Company granted the note holder a security interest in substantially all of the Company’s assets and intellectual property and registration rights.	$1,487,632	$1,111,980
Convertible notes payable (“Second Convertible Notes”); interest rate 10% per annum (default interest 15% per annum); due three years from the date of the note; note holder has the option to convert unpaid note principal the Company’s common stock at the lower of (i) $0.02 or (ii) 30% of the average of the three lowest intraday trading prices for the common stock on a principal market for the twenty trading days before but not including conversion date. The Company granted the note holder a security interest in substantially all of the Company’s assets and intellectual property and registration rights.	1,607,717	756,347
Convertible notes payable (“Third Convertible Notes”); interest rate 10% per annum (default interest 15% per annum); due three years from the date of the note; note holder has the option to convert unpaid note principal the Company’s common stock at the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the twenty trading days before but not including conversion date. The Company granted the note holder a security interest in substantially all of the Company’s assets and intellectual property and registration rights	27,626	-
Convertible notes payable (“Fourth Convertible Notes”); interest rate 10% per annum (default interest 15% per annum); due three years from the date of the note; note holder has the option to convert unpaid note principal the Company’s common stock at the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the twenty trading days before but not including conversion date. The Company granted the note holder a security interest in substantially all of the Company’s assets and intellectual property and registration rights	6,027	-
	3,129,002	1,868,327
Less current maturities	(1,487,632)	(1,111,980)
Long term portion	$1,641,370	$756,347

21

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30,, 2006

(Unaudited)

NOTE B - CONVERTIBLE PROMISSORY NOTES PAYABLE (continued)

First Convertible Note

The Company entered into a Securities Purchase Agreement with four accredited investors on June 10, 2004 for the issuance of an aggregate of $2,000,000 of convertible notes (“Convertible Notes”), and attached to the Convertible Notes were warrants to purchase 2,000,000 shares of the Company’s common stock. The Convertible Notes accrues interest at 10% per annum, payable and due two years from the date of the note. The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.35 or (ii) 50% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date. Effective August 31, 2005; the terms of the notes were changed for the remaining outstanding debt to a conversion rate from 50% of the average the day lowest intraday trading prices to a 40% rate. Effective January 23, 2006, the terms of the notes were again changed for the remaining outstanding debt from a conversion rate of 40% (effective August 31, 2005) of the average day lowest intraday trading prices to a 30% rate. As of September 30, 2006, the Company issued to the investors Convertible Notes in a total amount of $2,000,000 in exchange for net proceeds of $1,356,565. The proceeds that the Company received was net of prepaid interest of $400,000 calculated at 10% per annum for the aggregate of $2,000,000 of convertible notes for two years, and related fees and costs of $243,435. Prepaid interest and capitalized financing costs were amortized over the maturity period (two years) of the convertible notes.

Second Convertible Note

The Company entered into a Securities Purchase Agreement with four accredited investors on December 17, 2004 for the issuance of an aggregate of $2,800,000 of convertible notes (“Second Convertible Notes”), and attached to the Second Convertible Notes were warrants to purchase 2,800,000 shares of the Company’s common stock. The Second Convertible Notes accrues interest at 10% per annum (15% if the Company is in default under the terms of the note agreement), payable and due three years from the date of the note. The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 60% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date. On August 31, 2005; the Securities Purchase Agreement was amended to increase the aggregate from $2,800,000 to $3,250,000 of convertible notes (“Second Convertible Notes”), attached warrants were increased from 2,800,000 shares of the Company’s common stock to 3,250,000 shares. The conversion rate to the noteholder was changed from a 60% of the average of the three lowest intraday trading prices for the common stock on the principal market for the 20 trading dates before but not including conversion date to a rate of 40%.

On January 23, 2006; the Securities Purchase Agreement was again amended to increase the aggregate from $3,250,000 to $3,430,000 of convertible notes (“Second Convertible Notes”), attached warrants were increased from 3,250,000 shares of the Company’s common stock to 3,430,000 shares. The conversion rate to the noteholder was changed from 40% of the average of the three lowest intraday trading prices for common stock on the principal market for the 20 trading dates before but not including conversion date to a rate of 30%. On January 23, 2006, the Company issued to the investors an aggregate of $180,000 of secured convertible notes, and attached to the secured convertible notes were warrants to purchase 180,000 shares of our common stock. The Company received net proceeds of $120,000, net of related fees and costs of $60,000. Capitalized financing costs were amortized over the maturity period (three years) of the convertible notes.

22

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(Unaudited)

NOTE B - CONVERTIBLE PROMISSORY NOTES PAYABLE (continued)

As of September 30, 2006, the Company issued to the investors a Second Convertible Note in the aggregate amount of $3,430,000, in exchange for net proceeds of $2,939,146, net of related fees and costs of $490,854. The capitalized financing costs are amortized over the maturity period (three years) of the convertible notes. Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing, which will include the common stock underlying the secured convertible notes and the warrants.

Third Convertible Note

The Company entered into a Securities Purchase Agreement with four accredited investors on June 1, 2006 for the issuance of an aggregate of $250,000 of convertible notes (“Third Convertible Notes”), and attached to the Third Convertible Notes were warrants to purchase 10,000,000 shares of the Company’s common stock. The Third Convertible Notes accrues interest at 10% per annum (15% if the Company is in default under the terms of the note agreement), payable and due three years from the date of the note. The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date.

As of September 30, 2006, the Company issued to the investors a Third Convertible Note in the amount of $250,000, in exchange for net proceeds of $155,000, net of related fees and costs of $95,000. The capitalized financing costs are amortized over the maturity period (three years) of the convertible notes. Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing, which will include the common stock underlying the secured convertible notes and the warrants.

Fourth Convertible Note

The Company entered into a Securities Purchase Agreement with four accredited investors on August 28, 2006 for the issuance of an aggregate of $200,000 of convertible notes (“Fourth Convertible Notes”), and attached to the Third Convertible Notes were warrants to purchase 10,000,000 shares of the Company’s common stock. The Third Convertible Notes accrues interest at 10% per annum (15% if the Company is in default under the terms of the note agreement), payable and due three years from the date of the note. The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date.

These transactions, to the extent that it is to be satisfied with common stock of the Company would normally be included as equity obligations. However, in the instant case, due to the indeterminate number of shares which might be issued under the embedded convertible host debt conversion feature, the Company is required to record a liability relating to both the detachable warrants and embedded convertible feature of the notes payable (included in the liabilities as a “derivative liability)”.

23

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(Unaudited)

NOTE B - CONVERTIBLE PROMISSORY NOTES PAYABLE (continued)

The accompanying financial statements comply with current requirements relating to warrants and embedded derivatives as described in FAS 133, EITF 98-5 and 00-27, and APB 14 as follows:

·      The Company allocated the proceeds received between convertible debt and detachable warrants based upon the relative fair market values on the dates the proceeds were received.

·      Subsequent to the initial recording, the increase in the fair value of the detachable warrants, determined under the Black-Scholes option pricing formula and the increase in the intrinsic value of the embedded derivative in the conversion feature of the convertible debentures are accrued as adjustments to the liabilities at year end and at the end of each quarter.

·      The expense relating to the increase in the fair value of the Company’s stock reflected in the change in the fair value of the warrants and derivatives (noted above) is included as an other comprehensive income item of an unrealized gain or loss arising from convertible financing on the Company’s balance sheet.

·      Accreted principal of $3,102,478 and $1,841,803 as of September 30, 2006 and December 31, 2005, respectively.

The following table summarizes the various components of the convertible debentures as of September 30, 2006 and December 31, 2005:

	September 30, 2006			December 31, 2005
Convertible debentures	$	3,129,002		$	1,868,327
Warranty liability		61,211			10,263
Derivative liability		16,749,122			5,811,478
		19,939,335			7,690,068
Cumulative adjustment of derivative and warrant liability to fair value		(10,956,858	)		(598,266	)
Cumulative unrealized loss related to conversion of convertible debentures to common shares charged to interest expense		(212,367	)		(179,884	)
Cumulative accretion of principal related to convertible debentures		(3,102,478	)		(1,841,803	)
Cumulative pay down of convertible debentures		(300,000	)		(300,000	)
Total convertible debentures	$	5,367,632		$	4,770,115

During the year ended December 31, 2004, the Company repaid convertible notes principal of $300,000 in cash, and an aggregate of $112,420 with the Company’s common stock. An adjustment of $5,280 to increase the principal amount resulted from the reconciliation of the outstanding balance with the noteholders at December 31, 2004. During the year ended December 31, 2005, principal of the convertible notes in an aggregate amount of $72,204 was converted to the Company’s common stock. An adjustment of $541 to decrease the principal amounted resulted from the reconciliation of the outstanding balance with the noteholders at December 31, 2005. During the nine months ended September 30, 2006, principal of the convertible notes in an aggregate amount of $32,482 was converted to the Company’s common stock. The principal amount of outstanding convertible notes payable was $5,367,632 and $4,770,115 at September 30, 2006 and December 31, 2005, respectively.

24

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(Unaudited)

NOTE C - NOTES PAYABLE

Notes payable at September 30, 2006 and December 31, 2005 are as follows:

	September 30, 2006	December 31, 2005
12 % convertible subordinated payable, unsecured and due December 31, 2000; Noteholder has the option to convert unpaid note principal together with accrued and unpaid interest to the Company’s common stock thirty (30) days following the effectiveness of the registration of the Company’s common stock under the Securities Act of 1933 at a rate of $1.25 per share. In the event the unpaid principal amount of the notes, together with any accrued and unpaid interest, are not converted, or paid in full by December 31, 2000, then interest accrues at 18% per annum until paid in full. The Company is in default under the terms of the Note Agreements. (a)	$ 467,000	$ 467,000
12 % convertible subordinated payable, unsecured and due December 31, 2001; Noteholder has the option to convert unpaid note principal together with accrued and unpaid interest to the Company’s common stock thirty (30) days following the effectiveness of the registration of the Company’s common stock under the Securities Act of 1933 at a rate of $1.25 per share. In the event the unpaid principal amount of the notes, together with any accrued and unpaid interest, are not converted, or paid in full by December 31, 2001, then interest accrues at 18% per annum until paid in full. The Company is in default under the terms of the Note Agreements.	342,500	342,500
12 % convertible subordinated payable, unsecured and due December 31, 2002; Noteholder has the option to convert unpaid note principal together with accrued and unpaid interest to the Company’s common stock thirty (30) days following the effectiveness of the registration of the Company’s common stock under the Securities Act of 1933 at a rate of $1.25 per share. In the event the unpaid principal amount of the notes, together with any accrued and unpaid interest, are not converted, or paid in full by December 31, 2002, then interest accrues at 18% per annum until paid in full. The Company is in default under the terms of the Note Agreements.	31,250	31,250
Note payable on demand to accredited investor; interest payable monthly at 18% per annum; unsecured; guaranteed by the Company’s President	52,415	52,415
Note payable on demand to accredited investor; interest payable monthly at 18% per annum; unsecured; guaranteed by the Company’s President	100,000	100,000
Note payable on demand to an investor; interest payable monthly at 10% per annum; unsecured	75,000	75,000
Note payable on demand to an investor; interest payable monthly at 10% per annum; unsecured	50,000	50,000
	1,118,165	1,118,165
Less: current portion	(1,118,165)	(1,118,165)
	$                 -	$                  -

25

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(Unaudited)

NOTE C - NOTES PAYABLE (Continued)

(a) During the year ended December 31, 2004, one of the note holders claimed that the common shares that the noteholder received in prior years in connection with conversion of $10,000 of notes payable had low market value and demanded the Company to issue additional shares. As of September 30, 2006 and December 31, 2005, the Company has not yet resolved the issue with the noteholder and has accounted for the $10,000 of notes payable as notes payable outstanding. During the year ended December 31, 2003, the Company issued an aggregate of 127,038 shares of its common stock to note holders in exchange for notes payable and unpaid accrued interest. As of December 31, 2005 and 2004, the conversion of debt to equity has not been completed and the additional numbers of shares to be issued are still to be determined. The Company accounted the 127,038 shares issued to notes holders during the year ended December 31, 2003 as financing expenses at the fair market value of the time the shares were issued. In January 2004, the Company issued an aggregate of 145,166 shares of its common stock to note holders in exchange for accrued interest. The shares were valued at $146,617, which approximately the fair market value at the day the shares were issued.

NOTE D - CAPITAL STOCK

The Company has authorized 50,000,000 shares if preferred stock, with a par value of $.001 per share. As of September 30, 2006 and December 31, 2005, the Company has no preferred stock issued and outstanding. The company has authorized 300,000,000 shares of common stock, with a par value of $.001 per share. On September 4, 2003, the Company effected a one one-for-thirty reverse stock split of its authorized and outstanding shares of common stock, $.001 par value. Total authorized shares and par value remain the unchanged. All references in the financial statements and notes to financial statements, numbers of shares and share amounts have been retroactively restated to reflect the reverse split. The Company has 121,468,892 and 89,563,261 shares of common stock issued and outstanding as of September 30, 2006 and December 31, 2005, respectively.

The Company’s predecessor was Tren Property Corp., an inactive company with no significant operations incorporated under the laws of the State of Delaware in July 1997. The Company issued 422 shares of common stock to the initial shareholders in exchange for initial organization costs. The stock issued was valued at $11,553, which represents the fair value of the services received.

In April 1998, the shareholders of Tren Property Corp. exchanged all of their outstanding shares on a share for share basis for shares of the common stock of Gemma Global, Inc., an inactive company with no significant operations, organized under the laws of the State of Nevada (“Company”). Tren Property Corp. changed its name to Gemma Global, Inc.

In December 1998, the Company issued 37,083 shares of common stock to non-employees in exchange for legal and financial advisory services rendered to the Company. The stock issued was valued at approximately $2,002 per share, which represents the fair value of the services received, which did not differ materially from the value of the stock issued.

In December 1998, the Company issued 277,778 shares of common stock in exchange for a $15,000 loan payable to the Company’s principal shareholder and Chief Executive Officer.

In March 1999, the Company was renamed Pioneer 2000, Inc. In December 1999 the Company was renamed Cavalcade of Sports Media, Inc.

In April 1999, the Company issued 133 shares of common stock in exchange for $4,000 in connection with a private placement memorandum.

26

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(unaudited)

NOTE D - CAPITAL STOCK (continued)

In April 1999, the Company issued 6,000 shares of common stock to a non-employee in exchange for financial advisory services rendered to the Company. The stock issued was valued at $180,000, which represents the fair value of the stock issued, which did not differ materially from the value of the services received.

In May 1999, the Company authorized and issued a series of 855,000 shares of the Company’s preferred stock as convertible preferred stock (“1999 Global Group Series”) to the Company’s management and advisors who had been unsuccessful in developing the Company’s shoe apparel business segment in exchange for those individuals continuing to devote their services to developing the shoe business segment. The stock issued was valued at approximately $.001 per share, which represents the fair value of the stock issued, which did not differ materially from the value of the services rendered.

In December 1999, the Company issued 33,333 shares of common stock in exchange for $75,000 and payment of $ 25,000 of Company expenses, in connection with a private placement to accredited investors.

In connection with the acquisition of Cavalcade of Sports Network, Inc. in December 1999, the Company assumed $380,000 of liability representing advances by private investors to Cavalcade of Sports Network, Inc. Subject to the Company registering its common stock, the Company has agreed to offer shares of the Company’s common stock to the investors in exchange for the advances based upon the price per share of the registration.

In September 2000, the holders of the Company's preferred stock elected to convert their shares to common stock of Global Group International, Inc. The Company cancelled all previously issued and outstanding 855,000 shares of the convertible preferred stock.

During the year ended December 31, 2000, the Company issued 2,226 shares of common stock in exchange for debts assumed by the Company in connection with its acquisition of Cavalcade of Sports Network, Inc. The Company valued the shares issued at $83,497, which approximated the fair value of the shares at the dates of issuance.

During the year ended December 31, 2000, the Company issued 5,128 shares of the Company’s common stock to consultants in exchange for services provided to the Company. The Company valued the shares issued at $192,283, which approximated the fair value of the shares issued during the periods the services were rendered. The compensation cost of $192,283 was charged to income during the year ended December 31, 2000.

During the year ended December 31, 2001, the Company issued 15,600 shares of the Company’s common stock to consultants in exchange for services provided to the Company. The Company valued the shares issued at $585,000, which approximated the fair value of the shares issued during the periods the services were rendered. The compensation cost of $585,000 was charged to income during the year ended December 31, 2001.

During the year ended December 31, 2001, the Company issued 3,333 shares of the Company’s common stock to the President of the Company in exchange for monies advanced to the Company. The Company valued the shares issued at $125,000, which approximated the fair value of the shares at the date of issuance.

27

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(unaudited)

NOTE D - CAPITAL STOCK (continued)

In connection with the acquisition of Cineports, the Company issued an aggregate of 159,653 shares of the Company’s restricted common stock to Cineports’s shareholders in July 2002. The shares were valued at $1,197,396, which did not differ materially from the fair value of the shares issued during the period the acquisition occurred.

During the year ended December 31, 2002, the Company issued an aggregate of 55,073 shares of common stock to consultants for services in the amount of $1,385,814. All valuations of common stock issued for services were based upon the value of the services rendered, which did not differ materially from the fair value of the Company's common stock during the period the services were rendered. In addition, the Company issued 3,533 shares of common stock in exchange for $132,500 of previously incurred debt and 724 shares for $14,070 of previously accrued interest. The Company also issued an aggregate of 23,018 shares of common stock in exchange for $165,200 net of costs and fees and 1,667 shares for $62,500 of investment. The Company determined the value of the investment was impaired and recorded an impairment loss of $62,500 during the year ended December 31, 2002.

In January 2003, the Company issued an aggregate of 56,300 shares of common stock to consultants for services in the amount of $260,490. All valuations of common stock issued for services were based upon the value of the services rendered, which did not differ materially from the fair value of the Company's common stock during the period the services were rendered.

In February 2003, the Company issued an aggregate of 43,350 shares of common stock to consultants for services in the amount of $87,037. All valuations of common stock issued for services were based upon the value of the services rendered, which did not differ materially from the fair value of the Company's common stock during the period the services were rendered. In addition, the Company issued an aggregate of 6,667 shares of common stock in exchange for $8,000 net of costs and fees.

In April 2003, the Company issued an aggregate of 14,000 shares of common stock to consultants for services in the amount of $12,600. All valuations of common stock issued for services were based upon the value of the services rendered, which did not differ materially from the fair value of the Company's common stock during the period the services were rendered. In addition, the Company issued an aggregate of 4,333 shares of common stock in exchange for $5,000 net of costs and fees. The Company also issued an aggregate of 22,222 shares of common stock to shareholders in exchange for operating expenses of $20,000 previously paid by the shareholders.

In May 2003, the Company issued an aggregate of 17,667 shares of common stock to consultants for services in the amount of $25,900. All valuations of common stock issued for services were based upon the value of the services rendered, which did not differ materially from the fair value of the Company's common stock during the period the services were rendered. In addition, the Company issued an aggregate of 16,667 shares of common stock in exchange for $15,000 net of costs and fees. The Company also issued an aggregate of 22,167 shares of common stock to shareholders in exchange for operating expenses of $20,000 previously paid by the shareholders.

In July 2003, the Company issued an aggregate of 13,850 shares of common stock to consultants for services in the amount of $29,020. All valuations of common stock issued for services were based upon value of the services rendered, which did not differ materially from the fair value of the Company’s common stock during the period the services were rendered. In addition, the Company issued an aggregate of 14,334 shares of common stock in exchange for $10,000 of previously incurred debt.

28

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(unaudited)

NOTE D - CAPITAL STOCK (continued)

In August 2003, the Company issued an aggregate of 37,667 shares of common stock to consultants for services in the amount of $117,800. All valuations of common stock issued for services were based upon value of the services rendered, which did not differ materially from the fair value of the Company’s common stock during the period the services were rendered. In addition, the Company issued an aggregate of 43,667 shares of common stock in exchange for $35,500 of previously incurred debt.

In September 2003, the Company issued an aggregate of 264,916 shares of common stock to consultants for services in the amount of $280,350. All valuations of common stock issued for services were based upon value of the services rendered, which did not differ materially from the fair value of the Company’s common stock during the period the services were rendered.

In October 2003, the Company issued an aggregate of 2,405,000 shares of common stock to consultants for services in the amount of $3,829,300. All valuations of common stock issued for services were based upon value of the services rendered, which did not differ materially from the fair value of the Company’s common stock during the period the services were rendered.

In November 2003, the Company issued an aggregate of 43,000 shares of common stock to consultants for services in the amount of $50,750. All valuations of common stock issued for services were based upon value of the services rendered, which did not differ materially from the fair value of the Company’s common stock during the period the services were rendered. In addition, the Company issued an aggregate of 10,000 shares of common stock in exchange for $12,500 of accrued interest.

In December 2003, the Company issued an aggregate of 29,500 shares of common stock to consultants for services in the amount of $37,900. All valuations of common stock issued for services were based upon value of the services rendered, which did not differ materially from the fair value of the Company’s common stock during the period the services were rendered.

The Company also issued an aggregate of 18,000,000 shares of its common stock pursuant to a Plan and Agreement of Reorganization (“Plan”) with Pacificap Entertainment Holdings, Inc. (“Pacificap”). The Company accounted the shares issued at the fair market value at the date of acquisition, which approximately $29,160,000. The Company charged the acquisition costs of $29,160,000 to operations for the year ended December 31, 2003 and the Company changed its name to Pacificap Entertainment Holdings, Inc. subsequent to the acquisition (see Note B).

During the year ended December 31, 2003, the Company issued an aggregate of 127,038 shares of common stock to its note holders in exchange for financing expenses of $284,392.

In January 2004, the Company issued an aggregate of 145,166 shares of common stock to its note holders in exchange for $146,618 of accrued interest. The Company also issued an aggregate of 125,000 shares of common stock to consultants in exchange for services in the amount of $126,250. All valuations of common stock issued for services were based upon value of the services rendered, which did not differ materially from the fair value of the Company’s common stock during the period the services were rendered.

In February 2004, the Company issued an aggregate of 537,886 shares of common stock to consultants in exchange for services in the amount of $326,366. All valuations of common stock issued for services were based upon value of the services rendered, which did not differ materially from the fair value of the Company’s common stock during the period the services were rendered. The Company also issued an aggregate of 150,000 to a shareholder in exchange for $127,500 of expenses previously paid by the shareholder on behalf of the Company.

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PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(unaudited)

NOTE D - CAPITAL STOCK (continued)

In March 2004, the Company issued an aggregate of 293,250 shares of common stock to consultants in exchange for services in the amount of $151,930. All valuations of common stock issued for services were based upon value of the services rendered, which did not differ materially from the fair value of the Company’s common stock during the period the services were rendered.

In April 2004, the Company issued an aggregate of 615,000 shares of common stock to consultants in exchange for services in the amount of $244,250. All valuations of common stock issued for services were based upon value of the services rendered, which did not differ materially from the fair value of the Company’s common stock during the period the services were rendered.

In May 2004, the Company issued an aggregate of 770,000 shares of common stock to consultants in exchange for services in the amount of $195,750. All valuations of common stock issued for services were based upon value of the services rendered, which did not differ materially from the fair value of the Company’s common stock during the period the services were rendered. The Company also issued an aggregate of 10,000 shares of common stock to a noteholder in exchange for interest expense of $3,000.

In July 2004, the Company issued an aggregate of 1,388,538 shares of common stock to consultants in exchange for services in the amount of $373,789. All valuations of common stock issued for services were based upon value of the services rendered, which did not differ materially from the fair value of the Company’s common stock during the period the services were rendered. The Company also issued an aggregate of 44,275 shares of common stock to a noteholder in exchange for interest expense of $12,400. Additionally, the Company issued an aggregate of 1,100,000 shares of common stock in exchange for convertible notes payable of $77,000 .

In August 2004, the Company issued an aggregate of 250,000 shares of common stock to a consultant in exchange for services in the amount of $5,000. All valuations of common stock issued for services were based upon value of the services rendered, which did not differ materially from the fair value of the Company’s common stock during the period the services were rendered.

In September 2004, the Company issued an aggregate of 1,100,000 shares of common stock in exchange for convertible note payable of $7,590.

In October 2004, the Company issued an aggregate of 1,100,000 shares of common stock in exchange for convertible note payable of $6,050.

In November 2004, the Company issued an aggregate of 1,100,000 shares of common stock in exchange for convertible note payable of $5,830.

In December 2004, the Company issued an aggregate of 2,200,000 shares of common stock in exchange for convertible note payable of $15,950. The Company issued an aggregate of 810,000 shares of common stock to a consultant in exchange for services in the amount of $16,200. All valuations of common stock issued for services were based upon value of the services rendered, which did not differ materially from the fair value of the Company’s common stock during the period the services were rendered. The Company issued an aggregate of 197,025 shares of common stock to in exchange for accrued interset in the amount of $3,939. Additioannly, the Company issued an aggregate of 4,582,106 shares of its common stock, valued at $91,642, in connection with an acquisition agreement with Battelship VFX, Inc. (‘Battleship’). The Company acquired no tangile assets and assumed no liabilities of Battleship. The Company also entered into a consulting agreement with Battleship’s sole owner. The Company has accounted for the common shares issued as acquisition costs and has charged $91,642 to operations during the year ended December 31, 2004.

30

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(unaudited)

NOTE D - CAPITAL STOCK (continued)

In January 2005, the Company issued an aggregate of 2,200,000 shares of common stock in exchange for convertible note payable of $12,100.

In February 2005, the Company issued an aggregate of 3,300,000 shares of common stock in exchange for convertible note payable of $16,500.

In March 2005, the Company issued an aggregate of 2,200,000 shares of common stock in exchange for convertible note payable of $9,900. The Company issued an aggregate of 340,000 shares of common stock to consultants in exchange for services in the amount of $3,400. All valuations of common stock issued for services were based upon value of the services rendered, which did not differ materially from the fair value of the Company’s common stock during the period the services were rendered.

In April 2005, the Company issued an aggregate of 1,900,000 shares of common stock in exchange for convertible note payable of $5,320.

In May 2005, the Company issued an aggregate of 10,000,000 shares of common stock in exchange for convertible note payable of $11,600.

In June 2005, the Company issued an aggregate of 19,500,000 shares of common stock in exchange for convertible note payable of $11,808.

In July 2005, the Company issued an aggregate of 10,900,000 shares of common stock in exchange for convertible note payable of $4,394.

In December 2005, the Company issued an aggregate of 886,760 shares of common stock in exchange for convertible note payable of $583.

In May 2006, the Company issued an aggregate of 895,631shares of common stock in exchange for convertible note payable of $986.

In July 2006, the Company issued an aggregate of 4,430,000 shares of common stock in exchang for convertible note payable of $4,696.

In August 2006, the Company issued an aggregate of 13,290,000 shares of common stock in exchange for convertible note payable of $13,512

In September 2006, the Company issued an aggregate of 13,290,000 shares of common stock in exchange for convertible note payable of $13,290.

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PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(unaudited)

NOTE E - STOCK OPTIONS AND WARRANTS

Stock Options

The Company did not grant any stock options during the nine months ended September 30, 2006 or the year ended December 31, 2005. All previously granted stock options expired as of December 31, 2004.

Warrants

The Company granted an aggregate of 1,850,000 and 3,400,000 warrants during the year ended December 31, 2005 and 2004, respectively, in connection with issuance of convertible notes payable. During the nine month period ended September 30, 2006, the Company granted additional 20,180,000 warrants in connection with issuance of convertible notes payable (see Note B). The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company’s common stock, after giving effect to 1:30 reverse split in common stock in September 2003.

Warrants Outstanding				Warrants Exercisable
Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighed Average Exercise Price	Number Exercisable	Weighted Average Exercise Price
$ 0.24	2,000,000	2.77	$ 0.24	2,000,000	$ 0.24
$ 0.02	3,430,000	3.60	0.02	3,430,000	0.02
$ 0.01	10,000,000	4.92	0.01	10,000,000	0.01
$0.005	10,000,000	4.91	0.005	10,000,000	0.005
	25,430,000	4.57	$ 0.03	25,430,000	$ 0.03

Transactions involving warrants issued to non-employees are summarized as follows:

	Number of Shares			Weighted Average Price Per Share
Outstanding at January 1, 2004	206,091			36.00
Granted	3,400,000			0.15
Exercised	-			-
Canceled or expired	(206,091	)		36.00
Outstanding at December 31, 2004	3,400,000		$	0.15
Granted	1,850,000			0.02
Exercised	-			-
Canceled or expired				-
Outstanding at December 31, 2005	5,250,000		$	0.10
Granted	20,180,000			0.0075
Exercised	-			-
Canceled or expired				-
Outstanding at September 30, 2006	25,430,000		$	0.03

32

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(unaudited)

NOTE F - RELATED PARTY TRANSACTIONS

The Company’s President has advanced funds to the Company for working capital purposes since the Company’s inception in July 1997. No formal repayment terms or arrangements exist. The amount of the advances due the Company’s President at September 30, 2006 and December 31, 2005 were $449,247 and $353,029, respectively, net of cash repayments.

The Company’s Chairman of the Board paid $90,090 of office expenses on behalf of the Company during the year ended December 31, 2003. No formal repayment terms or arrangements exist. The Company has repaid the Chairman of the Board from time to time, and the net amount of the advances due at September 30, 2006 and December 31, 2005 was $5,090.

NOTE G - ASSET PURCHASE AGREEMENT

On December 21, 2005, the Company entered into an “Asset Purchase Agreement” with Collectible Concepts Group, Inc., (“CCGI”) pursuant to which the Company agreed to sell its library of nostalgic sporting events, vintage cartoons and classic films to CCGI. The closing of the transaction was contingent upon the cataloguing of the library, which was completed on January 20, 2006, at which time the transaction is deemed closed. The Company received an initial payment of $50,000 in January 2006. The Company shall also be paid, with interest, within three years of the date hereof on December 21, 2010 (“the “Maturity Date”), the principal sum of $200,000, at the rate of six percent (6%) per annum. Due to lack of working capital and production activities in prior years, the Company has impaired the film library sold to CCGI during the year ended December 31, 2002. For the nine months ended September 30, 2006, the Company accounted for the $50,000 cash consideration received as other income. At September 30, 2006, the Company management has determined that the collectibility of the remaining purchase price due from CCGI can not be reasonably assured. Accordingly, income will be recognized as collected in future period.

NOTE H - RESTATEMENT

During the year ended December 31, 2005, it was determined the correct application of accounting principles had not been applied in the 2005 and 2004 accounting for convertible debentures and detachable warrants (see Note B). The original accounting for the debentures and detachable warrants, the Company recognized an imbedded beneficial conversion feature present in the convertible note and allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid in capital. Accordingly, the proceeds attributed to the common stock, convertible debt and warrants have been restated to reflect the relative fair value method. The accounting principles on the aforementioned transactions are currently reflected in the accompanying September 30, 2006 financial statements in accordance with SFAS 154. The necessary corrections to apply the impact to the previously issued September 30, 2005 financial statements are as follows:

For the nine months ended September 30, 2005:

	September 30, 2005 financial statement balance prior to restatement			September 30, 2005 financial statement post restatement			Amount change in September 30, 2005 financial statements
Net loss	$	(3,591,637	)	$	(12,071,843	)	$	(8,480,206	)
Loss per share-basic and fully diluted	$	(0.06	)	$	(0.20	)	$	(0.14	)

33

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A development stage corporation)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION

SEPTEMBER 30, 2006

(Unaudited)

NOTE H - RESTATEMENT (continued)

For the three months ended September 30, 2005:

	September 30, 2005 financial statement balance prior to restatement			September 30, 2005 financial statement post restatement		Amount change in September 30, 2005 financial statements
Net Income (loss)	$	(1,509,678	)	$	802,321	$	2,311,999
Income (Loss) per share-basic and fully diluted	$	(0.02	)	$	0.01	$	0.03

The resulting effects on the prior period adjustments on the September 30, 2005 cash flows by area are as follows:

	September 30, 2005 financial statement balance prior to restatement			September 30, 2005 financial statement post restatement			Amount change in September 30, 2005 financial statements
Net cash from operating activities	$	(1,720,681	)	$	(1,720,681	)	$	-0-
Net cash from investing activities		(8,844	)		(8,844	)		-0-
Net cash from financing activities		1,500,769			1,500,769			-0-

NOTE I - GOING CONCERN MATTERS

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements the Company has incurred losses from operations of $65,931,715 from date of inception (July 29, 1997) to September 30, 2006. In addition, the Company is currently in default under the terms of the Capital Notes and notes payable obligations (Note C). These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.

The Company is actively pursuing additional equity financing through discussions with investment bankers and private investors. There can be no assurance the Company will be successful in its effort to secure additional equity financing. If operations and cash flows continue to improve through these efforts, management believes that the Company can continue to operate. However, no assurance can be given that management’s actions will result in profitable operations or the resolution of its liquidity problems. The Company’s existence is dependent upon management’s ability to develop profitable operations and resolve its liquidity problems. Management anticipates the Company will attain profitable status and improve its liquidity through the continued developing, marketing and selling of its services and additional equity investment in the Company. The accompanying consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto set forth in Item 1 of this Quarterly Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from Management’s expectations. Factors that could cause differences include, but are not limited to, expected market demand for the Company’s services, fluctuations in pricing for products distributed by the Company and services offered by competitors, as well as general conditions of the entertainment marketplace.

As previously reported, we are in a development stage and have not yet conducted any business so as to become an income producing entity. We intend to continue utilizing capital raised from the sale of Capital Notes and or equity. Our annual report (10-KSB) dated May 18, 2006 includes a detailed Plan of Operations for this year. That annual report can be accessed on EDGAR.

The following discussion contains forward-looking statements that are subject to significant risks and uncertainties about us, our current and planned products, our current and proposed marketing and sales, and our projected results of operations. Several important factors could cause actual results to differ materially from historical results and percentages and results anticipated by the forward-looking statements. The Company has sought to identify the most significant risks to its business, but cannot predict whether or to what extent any of such risks may be realized nor can there be any assurance that the Company has identified all possible risks that might arise. Investors should carefully consider all of such risks before making an investment decision with respect to the Company's stock. The following discussion and analysis should be read in conjunction with the financial statements of the Company and notes thereto. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment from our Management.

RESULTS OF OPERATIONS

As a development stage company, we have yet to earn revenues from operations. We may experience fluctuations in operating results in future periods due to a variety of factors., including our ability to obtain additional financing in a timely manner and on terms favorable to us, our ability to successfully develop our business model, the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations and infrastructure and the implementation of marketing programs, key agreements, and strategic alliances, and general economic conditions specific to our industry. As a result of limited capital resources and no revenues from operations from its inception, the Company has relied on the issuance of equity securities to non-employees in exchange for services. The Company's management enters into equity compensation agreements with non-employees if it is in the best interest of the Company under terms and conditions consistent with the requirements of Financial Accounting Standards No. 123R. In order to conserve its limited operating capital resources, the Company anticipates continuing to compensate non-employees for services during the next twelve months. This policy may have a material effect on the Company's results of operations during the next twelve months.

Revenues

We have generated no operating revenues from operations from our inception. We believe we will begin earning revenues from operations in the remaining of 2006 from actual operation as we transition from a development stage company to that of an active, operating company. Potential revenue includes the sale of or distribution rights of our “American Cannibal” movie.

35

Costs And Expenses

From our inception through September 30, 2006, we have not generated any revenues. We have incurred losses from operations in the amount of $47,780,577 during this period. These losses stem from expenses associated principally with equity-based compensation to consultants who have provided marketing, public relations and investor services, acquisition costs and professional service (legal and accounting) fees.

Liquidity And Capital Resources

As of September 30, 2006, we had a working capital deficit of $6,086,339. As a result of our operating losses from our inception through September 30, 2006, we generated a cash flow deficit of $6,122,185 from operating activities from our inception on July 29, 1997 through September 30, 2006. Cash flows used in investing activities was $167,198 during this period. We met our cash requirements during this period through the private placement of $272,200 of common stock, $4,259,711 (net of repayments) and $1,240,665 from the issuance of convertible and capital notes, respectively, and $592,099 from advances from our officers, principal shareholders and third parties.

While we have raised capital to meet our working capital and financing needs in the past, additional financing is required in order to meet our current and projected cash flow deficits from operations and development and to acquire rights to movie projects. We are discussing possible joint venture arrangements to share or finance costs, and pre selling advertising and or sponsorships to raise working capital. We currently have no commitments for financing. There is no guarantee that we will be successful in raising the funds required.

We believe that our existing and planned capital resources will be sufficient to fund our current level of operating activities, capital expenditures and other obligations through the next 12 months. However, if during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations liquidity and financial condition.

By adjusting our operations and development to the level of capitalization, we believe we have sufficient capital resources to meet projected cash flow deficits. However, if during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations liquidity and financial condition.

The independent auditor's report on our December 31, 2005 financial statements states that our recurring losses and default under our debt obligations raise substantial doubts about our ability to continue as a going concern.

We entered into a Securities Purchase Agreement with four accredited investors on June 10, 2004 for the issuance of an aggregate of $2,000,000 of convertible notes, and attached to the Convertible Notes were warrants to purchase 2,000,000 shares of our common stock. The Convertible Notes accrues interest at 10% per annum, payable and due two years from the date of the note. The noteholder has the option to convert any unpaid note principal to our common stock at a rate of the lower of (i) $0.35 or (ii) 50% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date. As of September 30, 2006 we are in default with certain provisions of the Agreement, therefore the rate in effect as of September 30, 2006 is 15% per annum. As of May 12, 2006, $479,885 has been converted or paid down and $1,520,115 was remaining. Effective August 31, 2005; the terms of the notes were changed for the remaining outstanding debt to a conversion rate from 50% to 40%of the average of the three lowest intraday trading prices. Effective January 23, 2006; the terms of the notes were changed for the remaining outstanding debt to a conversion rate from 40% to 30%of the average of the three lowest intraday trading prices.

36

We entered into a Securities Purchase Agreement with four accredited investors on December 17, 2004 for the issuance of an aggregate of $2,800,000 of convertible notes, and attached to the Convertible Notes were warrants to purchase 2,800,000 shares of our common stock. The Convertible Notes accrues interest at 10% per annum subject to certain default previsions which increases the rate to 15% per annum, payable on quarterly beginning in 2005 on March 31^st, June 30^th, September 30^th and December 31^st.and with note maturity due three years from the date of the note. The noteholder has the option to convert any unpaid note principal to our common stock at a rate of the lower of (i) $0.02 or (ii) 50% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date. As of September 30, 2006 we are in default with certain provisions of the Agreement, therefore the rate in effect as of September 30, 2006 is 15% per annum. Effective August 31, 2005; the terms of the notes were changed for the remaining outstanding debt to a conversion rate from 50% to 40% of the average of the three lowest intraday trading prices. Effective January 23, 2006, the terms of the notes were changed for the remaining outstanding debt to a conversion rate from 40% to 30%of the average of the three lowest intraday trading prices.

We entered into a Securities Purchase Agreement with four accredited investors on September 19, 2005 for the issuance of an aggregate of $450,000 of convertible notes, and attached to the Convertible Notes were warrants to purchase 450,000 shares of our common stock. The Convertible Notes accrues interest at 10% per annum subject to certain default previsions which increases the rate to 15% per annum, payable on quarterly beginning in 2006 on March 31^st, June 30^th, September 30^th and December 31^st.and with note maturity due three years from the date of the note. The noteholder has the option to convert any unpaid note principal to our common stock at a rate of the lower of (i) $0.02 or (ii) 40% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date. Effective January 23, 2006; the terms of the notes were changed for the remaining outstanding debt to a conversion rate from 40% to 30%of the average of the three lowest intraday trading prices.

As of December 31, 2005, we issued to the investors Convertible Notes under the agreement described above in a total amount of $3,250,000 in exchange for net proceeds of $2,758,146. The proceeds that we received are net of related fees and costs of $491,854. Capitalized financing costs were amortized over the maturity period (three years) of the convertible notes. As of September 30, 2006, we have accrued interest, at a default rate of 15% per annum of approximately $745,598.

We entered into a Securities Purchase Agreement with four accredited investors on January 23, 2006 for the issuance of an aggregate of $180,000 of secured convertible notes, and attached to the secured convertible notes were warrants to purchase 180,000 shares of our common stock. The Convertible Notes accrues interest at 10% per annum subject to certain default previsions which increases the rate to 15% per annum, payable on quarterly beginning in 2006 on March 31^st, June 30^th, September 30^th and December 31^st.and with note maturity due three years from the date of the note. The noteholder has the option to convert any unpaid note principal to our common stock at a rate of the lower of (i) $0.02 or (ii) 30% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date.

As of September 30, 2006, we issued to the investors Convertible Notes under the agreement described above in the amount of $180,000 in exchange for net proceeds of $120,000. The proceeds that we received is net of related fees and costs of $60,000. Capitalized financing costs were amortized over the maturity period (three years) of the convertible notes. As of September 30, 2006, we have accrued interest, at a default rate of 15% per annum of approximately $20,195.

We entered into a Securities Purchase Agreement with four accredited investors on June 1, 2006 for the issuance of an aggregate of $250,000 of secured convertible notes, and attached to the secured convertible notes were warrants to purchase 10,000,000 shares of our common stock. The Convertible Notes accrues interest at 10% per annum subject to certain default previsions which increases the rate to 15% per annum, payable on quarterly beginning in 2006 on March 31^st, June 30^th, September 30^th and December 31^st.and with note maturity due three years from the date of the note. The noteholder has the option to convert any unpaid note principal to our common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date.

As of September 30, 2006, we issued to the investors Convertible Notes under the agreement described above in the amount of $250,000 in exchange for net proceeds of $155,000. The proceeds that we received are net of related fees and costs of $95,000. Capitalized financing costs were amortized over the maturity period (three years) of the convertible notes. As of September 30, 2006, we have accrued interest, at a default rate of 15% per annum of approximately $12,534.

We entered into a Securities Purchase Agreement with four accredited investors on August 28, 2006 for the issuance of an aggregate of $200,000 of secured convertible notes, and attached to the secured convertible notes were warrants to purchase 10,000,000 shares of our common stock. The Convertible Notes accrues interest at 10% per annum subject to certain default previsions which increases the rate to 15% per annum, payable on quarterly beginning in 2006 on March 31^st, June 30^th, September 30^th and December 31^st.and with note maturity due three years from the date of the note. The noteholder has the option to convert any unpaid note principal to our common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date.

37

As of September 30, 2006, we issued to the investors Convertible Notes under the agreement described above in the amount of $200,000 in exchange for net proceeds of $170,000. The proceeds that we received are net of related fees and costs of $30,000. Capitalized financing costs were amortized over the maturity period (three years) of the convertible notes. As of September 30, 2006, we have accrued interest, at a default rate of 15% per annum of approximately $2,712.

In connection with the sale of the secured convertible notes, we granted the investors registration rights and security interests in all of our assets. Several events of default have occurred regarding all of the secured convertible notes, including failure to increase the number of shares of authorized common stock, failure to have a sufficient number of shares reserved for issuance upon conversion of the secured convertible notes and warrants, and failure to have an effective registration statement for the shares underlying secured convertible the notes and warrants. As a result of these defaults, we are obligated to pay the note holders the principal amount of the notes together with interest and certain other amounts. We do not have the capital resources to pay the amounts required under these agreements. The secured convertible note holders have informed us that they do not intend to take any action at this time due to the default. We do not, however, have any legally binding commitment from the note holders to waive the default provision of the debenture. These events of default, taken as a whole, are reasonably likely to have a material impact on our short-term and long-term liquidity. The investors have been willing in the past to provide us with capital as needed to sustain our day-to-day operations and to forego enforcing default provisions, however, no assurance can be given that they will provide such capital in the future or continue to forego enforcing default provisions, which they are under no obligation to do so. In the event that we need additional capital in the future for our day-to-day operations, and the investors do not provide such funds, we will have to seek capital from new investors. As a result of these events of default and that all of our assets are secured by the current investors, it is highly unlikely that we would be able to obtain additional capital from other investors. If we are unable to obtain additional capital, we would likely be required to curtail or cease our operations. As all of our assets are secured by our existing lendors, of which we are currently in default, we do not anticipate filing for bankruptcy protection, as all of our assets would be transferred to our lendors pursuant to our existing security agreements.

The securities purchase agreements we entered into in June 2004, December 2004, September 2005, January 2006, June 2006 and August 2006 were with the same four institutional investors.

Since our inception, we have been seeking additional third-party funding. During such time, we have retained a number of different investment banking firms to assist us in locating available funding; however, we have not yet been successful in obtaining any of the long-term funding needed to make us into a commercially viable entity. Although we are continuing with our efforts to obtain funding to maintain our operations, we cannot assure you that we will be successful or that any funding we receive will be received timely or on commercially reasonable terms. Due to our working capital deficiency, and if we do not receive adequate financing, we will be unable to pay our vendors, lenders and other creditors if we cease our operations, since the net realizable value of our non-current assets will not generate adequate cash. We currently have no commitments for financing. There is no guarantee that we will be successful in raising the funds required.

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Until such time, if at all, as we receive adequate funding, we intend to continue to defer payment of all of our obligations which are capable of being deferred, which actions have resulted in some vendors demanding cash payment for their goods and services in advance, and other vendors refusing to continue to do business with us. In the event that we are successful in obtaining third-party funding, we do not expect to generate a positive cash flow from our operations for at least several years, if at all, due to anticipated expenditures for research and development activities, administrative and marketing activities, and working capital requirements and expect to continue to attempt to raise further capital through one or more further private placements.

Product Research And Development

We do not anticipate performing research and development for any products during the next twelve months.

Number Of Employees

From our inception through the period ended September 30, 2006, we have relied on the services of outside consultants for services and have had only three employees. In order for us to attract and retain quality personnel, we anticipate we will have to offer competitive salaries to future employees. We anticipate that it may become desirable to add full and or part time employees to discharge certain critical functions during the next 12 months. These positions include a President, CFO, EVP of Operations and a Senior Sales and Marketing executive. This projected increase in personnel is dependent upon our ability to generate revenues and obtain sources of financing. There is no guarantee that we will be successful in raising the funds required or generating revenues sufficient to fund the projected increase in the number of employees.

Trends, Risks And Uncertainties

We have sought to identify what we believe to be the most significant risks to our business, but we cannot predict whether, or to what extent, any of such risks may be realized nor can we guarantee that we have identified all possible risks that might arise. Investors should carefully consider all of such risk factors before making an investment decision with respect to our Common Stock.

Cautionary Factors That May Affect Future Results

Our annual report (10-KSB) filed in May 2006 includes a detailed list of cautionary factors that may affect future results. Management believes that there have been no material changes to those factors listed, however other factors besides those listed could adversely affect us. That annual report can be accessed on EDGAR.

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ITEM 3 - CONTROLS AND PROCEDURES.

(a) Evaluation of disclosure controls and procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of September 30, 2006. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is 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.

(b) Changes in internal control over financial reporting.

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-QSB that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.

ITEM 2 - UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

We are currently in default pursuant to secured convertible notes issued pursuant to securities purchase agreements dated June 10, 2004, and December 17, 2004, as amended (the “SPAs”). Pursuant to the SPAs, we are obligated to have two times the number of shares that the secured convertible notes are convertible into registered pursuant to an effective registration statement. We filed a registration statement on Form SB-2, as amended, that was declared effective by the Securities and Exchange Commission on July 16, 2004. As a result of the drop in our stock price, the shares of common stock underlying the secured convertible notes that were registered on the SB-2 are not sufficient to cover the conversion of the secured convertible notes issued pursuant to the June 10, 2004 SPA.

In addition, pursuant to the December 17, 2004 SPA, we were required to file a registration statement within 45 days of closing and have the registration statement effective within 105 days of closing. On January 31, 2006, we filed a registration statement on Form SB-2 registering shares underlying the convertible notes. However, the registration statement did not register two times the number of shares issuable upon conversion of all outstanding secured convertible notes as required. This registration statement is currently being review and has not been declared effective.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5 - OTHER INFORMATION

None.

ITEM 6 - EXHIBITS

31.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended

31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended

32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)

32.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)

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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.

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

Date: November 20, 2006	By: /s/ EDWARD LITWAK
	Edward Litwak
	President, Principal Executive Officer, Principal Accounting Officer and Chief Financial Officer

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