- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2008 or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _____________ to _____________

Commission file number 0-27063

FAMILY ROOM ENTERTAINMENT CORPORATION

(Exact Name of Registrant as Specified in its Charter)

New Mexico		85-0206160
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

c/o Sunset Gower Studios, 1438 North Gower Street,

Box 68, Building Courtyard 1 Suite 21, Hollywood, CA

(Address of Principal Executive Offices)

90028

(Zip Code)

(323) 993-7314 and/or (323) 993- 7317

(Registrant’s Telephone Number, Including Area Code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o

Non-accelerated filer o	Smaller reporting company x

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

o Yes x No

The number of shares outstanding of the Issuer’s common stock as of November 14, 2008 was 13,255,203

Family Room Entertainment Corporation

Unaudited Consolidated Condensed

Financial Statements

For the Three Months Ended

September 30, 2008 and 2007

Family Room Entertainment Corporation

Unaudited Consolidated Condensed

Financial Statements

C O N T E N T S

Consolidated Condensed Balance Sheets	1
Consolidated Condensed Statements of Operations	2
Consolidated Statements of Shareholders’ Deficit	3
Consolidated Statements of Cash Flows	4
Notes to Consolidated Financial Statements	5 – 35

Family Room Entertainment Corporation

Consolidated Condensed Balance Sheets

As of September 30 and June 30, 2008

						September 30, 2008		June 30, 2008
Assets						(unaudited)
	Cash and cash equivalents					$	31,655	$	48,843
	Accounts receivable (net of reserve of $123,000 and $73,000, respectively)						195,992		711,894
	Film costs, net						4,518,302		4,744,914
	Property and equipment, net						30,793		37,528
	Prepaid expenses and other current assets						10,541		7,660
	Deposits						18,270		18,270

					Total Assets	$	4,805,553	$	5,569,109


Liabilities and Shareholders' Deficit
	Liabilities
		Notes payable under film participation agreements				$	5,343,578	$	5,969,921
		Convertible notes payable, net of discount					2,340,533		2,199,701
		Accounts payable and accrued liabilities					300,619		259,443
		Notes payable					65,000		-
		Warrant liability					21,499		52,528
		Derivative liability					620,894		602,194
				Total Liabilities			8,692,123		9,083,787

	Equity and Shareholders' Deficit
		Preferred stock:$0.01 par value; 5,000,000 shares authorized;
			no shares issued and outstanding				-		-
		Common stock:$0.001 par value; 2,000,000,000 shares authorized;
			13,275,203 and 12,141,870 shares issued, respectively, and
			13,147,803 and 12,014,470 shares outstanding, respectively				13,274		12,141
		Additional paid-in capital					20,615,976		20,603,609
		Treasury stock, 127,400 shares at cost					(13,136)		(13,136)
		Accumulated deficit					(24,502,684)		(24,117,292)
				Total Equity and Shareholders' Deficit			(3,886,570)		(3,514,678)

					Total Liabilities and Shareholders' Deficit	$	4,805,553	$	5,569,109

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Family Room Entertainment Corporation

Consolidated Condensed Balance Sheets

As of September 30 and June 30, 2008

				2008		2007
Gross Margin				(unaudited)		(unaudited)
	Revenues			$	567,096	$	309,167
	Amortization of film costs				(270,917)		(147,643)
	Distribution costs				(205,197)		(1,833)

		Gross Margin			90,982		159,691

Selling, general and administrative expenses					(277,651)		(345,163)

		Income/(Loss) from Operations			(186,669)		(185,472)

Other Income and Expenses
	Interest income				85		1,532
	Change in value of warrant liability				31,029		(422,710)
	Change in value of derivative liability				(18,700)		553,649
	Interest expense				(211,137)		(94,015)
		Total Other Income and Expenses			(198,723)		38,456

			Net Income/(Loss)	$	(385,392)	$	(147,016)

Net earnings/(loss) per common share, basic and diluted				$	(0.03)	$	(0.01)

Weighted average number of shares, basic and diluted					12,973,899		9,854,466

Included in operating expenses is non-cash share-based compensation as follows:
	Selling, general and administrative expenses			$	13,500	$	-

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Family Room Entertainment Corporation

Consolidated Statements of Shareholders’ Deficit

For the Three Months Ended September 30, 2008 and 2007 and the Year Ended June 30, 2008

				Additional
	Common Stock			Paid-In		Treasury		Accumulated
	Shares	Amount		Capital		Stock		Deficit		Total
Balance at June 30, 2007	9,996,500	$	9,997	$	20,692,540	$	(87,653)	$	(23,275,354)	$	(2,660,470)

Purchase of common stock	-		-		-		(50,470)		-		(50,470)

Retirement of treasury shares	(522,684)		(522)		(124,465)		124,987		-		-

Net loss	-		-		-		-		(147,016)		(147,016)

Balance at September 30, 2007	9,473,816	$	9,475	$	20,568,075	$	(13,136)	$	(23,422,370)	$	(2,857,956)

				Additional
	Common Stock			Paid-In		Treasury		Accumulated
	Shares	Amount		Capital		Stock		Deficit		Total
Balance at June 30, 2007	9,996,500	$	9,997	$	20,692,540	$	(87,653)	$	(23,275,354)	$	(2,660,470)

Purchase of common stock	-		-		-		(50,470)		-		(50,470)

Retirement of treasury shares	(522,684)		(522)		(124,465)		124,987		-		-

Effect of reverse split (rounding)	1,387		-		-		-		-		-

Common stock issued for services	2,666,667		2,666		35,534		-		-		38,200

Net loss	-		-		-		-		(841,938)		(841,938)

Balance at June 30, 2008	12,141,870		12,141		20,603,609		(13,136)		(24,117,292)		(3,514,678)

Common stock issued for services	1,133,333		1,133		12,367						13,500

Net loss	-		-		-		-		(385,392)		(385,392)

Balance at September 30, 2008	13,275,203	$	13,274	$	20,615,976	$	(13,136)	$	(24,502,684)	$	(3,886,570)

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Family Room Entertainment Corporation

Consolidated Statements of Shareholders’ Deficit

For the Three Months Ended September 30, 2008 and 2007 and the Year Ended June 30, 2008

				2008		2007
Cash Flows From Operating Activities:				(unaudited)		(unaudited)
	Net loss			$	(385,392)	$	(147,016)
	Adjustment to reconcile net loss to net cash used:
		Depreciation expense			6,735		11,196
		Amortization of film costs			270,917		147,643
		Bad debt (reserve for doubtful accounts)			50,000		-
		Common stock issued for services and compensation			13,500		-
		Change in value of warrant liability			(31,029)		422,710
		Change in value of derivative liability			18,700		(553,649)
		Amortization of debt discount			140,832		59,947
		Other			(76)		-
	Change in operating assets and liabilities:
		(Increase) decrease in accounts receivable – new			(121,783)		(165,000)
		(Increase) decrease in accounts receivable – paid			587,685		-
		(Increase) decrease in film costs			(44,306)		(610,713)
		(Increase) decrease in other assets			(2,881)		(53,323)
		Increase (decrease) in accounts payable and accrued liabilities			41,176		158,633
			Net cash generated by/(used in) operating activities		544,078		(729,572)

Cash flows from investing activities:
	Purchase of property and equipment				-		(18,221)
			Net cash generated by/(used in) investing activities		-		(18,221)

Cash flows from financing activities:
	Proceeds from investor productions or revenue participation loans				-		200,000
	Payments on investor productions or revenue participation loans				(626,266)		(26,855)
	Purchase of common stock				-		(50,470)
	Proceeds from notes payable				65,000		-
	Proceeds from convertible notes payable				-		300,000
	Payment on convertible notes payable				-		(20,000)
			Net cash generated by/(used in) financing activities		(561,266)		402,675

Decrease in cash and cash equivalents					(17,188)		(345,118)

Cash and cash equivalents at beginning of year					48,843		668,773

Cash and cash equivalents at end of period				$	31,655	$	323,655

Supplementary disclosures of cash flow information
	Cash paid during the year for
		Interest		$	9,063	$	6,994
		Taxes		$	-	$	-

During the three months ended September 30, 2008, the Company entered into the following non-cash transactions:

·	Issued 1,133,333 shares of common stock for the payment of consulting services and compensation, valued at $13,500

During the three months ended September 30, 2007, the Company entered into the following non-cash transactions:

·	Returned 522,684 shares of its treasury stock to available for sale.

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Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

1. General

Family Room Entertainment Corp. (“FMYR” or the “Company”) is engaged in various aspects of the motion picture entertainment industry, including development, production, and production services. FMYR develops, produces and performs production related services for the motion picture entertainment industry mainly through the following three wholly-owned subsidiaries [Emmett/Furla Films]: (1) Emmett Furla Films Productions Corporation (“EFFP”), a California Corporation involved in motion picture development, production, and production related services for high budget motion pictures (in excess of $20,000,000 to $50,000,000). EFFP’s subsidiary, Good Entertainment Service, Inc. (“GESI”), a Delaware Corporation, was originally a production servicing company and produced one motion picture “Good Advice” in the year 2000. Currently GESI is the subsidiary that signs with the film and entertainment industry guilds when the contracted resource is a member of such guild; (2) Emmett Furla Films Distribution LLC, (EFFD) is a Delaware Limited Liability Company set up to contract with third parties for the worldwide distribution and/or exploitation of FMYR’s wholly owned and or controlled entertainment properties; and (3) EFF Independent, Inc. (“EFFI”) a California Corporation, is setup primarily to develop and provide production related services for low budget motion picture (less than $20,000,000).

Going Concern

As shown in the accompanying financial statements, the Company has incurred recurring losses from operations, and as of September 30, 2008, its total liabilities exceeded its total assets by $3,886,570. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management has instituted a cost reduction program that included a reduction in staffing, general overhead and related fringe costs and has instituted more efficient management techniques. In 2007, the Company relocated its offices in order to reduce rental costs, and moved again to smaller reduced offices in 2008 to substantially reduce its rental costs. In addition, the Company has movie projects in various stages of development, which should generate additional cash flow over the next several months. Additionally, the Company has been able to obtain additional capital through the issuance of debt or equity. The Company has an ongoing requirement for additional capital investment, and historically management has been able to obtain additional financing to meet its working capital needs. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

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Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

2. Summary of Significant Accounting Policies

Basis of Presentation and Organization

These unaudited consolidated financial statements represent the financial activity of Family Room Entertainment Corporation and its wholly owned subsidiaries, a publicly traded company quoted on the NASDAQ Over the Counter Bulletin Board (“OTCBB”). The consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements 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. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All intercompany transactions have been eliminated. The Company’s fiscal year ends on June 30 each year.

Unclassified Consolidated Balance Sheet

In accordance with the provisions of Statement of Position 00-2 (“SOP 00-2”), FMYR presents an unclassified consolidated balance sheet because FMYR has an operating cycle of approximately three years.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Key estimates include amortization of film costs and valuation of convertible debt and derivative instruments.

Revenue Recognition

Revenue from the distribution of motion pictures is recognized as earned under the criteria established by SOP 00-2. FMYR’s revenue cycle is generally one to three years, with the expectation that substantially all revenue will be recognized in the first two years of individual motion pictures. In accordance with SOP 00-2, FMYR considers revenue earned when all of the following have occurred:

•	FMYR has a valid sale or licensing agreement in place.

•	The motion picture is complete and in accordance with the agreement with the customer.

•	The motion picture has been delivered or is deliverable.

•	The license period has begun.

•	The revenue is fixed or determinable and collection is reasonably assured.

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Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

2. Summary of Significant Accounting Policies (continued)

Revenue Recognition (continued)

The Company recognizes revenue from various sources under the criteria established by SOP 00-2 as follows.

1.	Producers Fees – Producer fees are recognized upon receipt of the fees and delivery of the related services. If upon receipt of the fees all services have not been provided, the fees are deferred and recognized as the services are performed;

2.	Royalties – Royalty and profit participation are recognized when the amounts are known and the receipt of the royalties is reasonably assured. Accordingly, recognition generally occurs upon receipt (usually quarterly or semi-annually); and

3.	Distribution Revenues – Distribution Revenues are recognized when earned and appropriately reported by third (3rd) party Distribution companies and recorded Gross along with any distribution expenses charged by the Distributor and upon receipt of such revenues.

4.	Producer Development, Production Service Fees and Film Distribution Fees – As these services are provided, these fees are invoiced by FMYR to the third party financiers and producers and are recognized when the amount has been determined and receipt is reasonably assured.

Film Costs

Film costs include costs to 1) acquire rights or films, 2) project development (the process whereby underlying material, such as a book, manuscript or screenplay, are made ready for production into a motion picture by creating a finished screenplay which takes in to account the desires of the creative elements as well as the constraints of the budget and production schedule), 3) project packaging (the process whereby creative elements, such as directors and actors, are attracted to and agreements are made for them to perform their services in connection with the picture), and/or 4) produce feature motion pictures. Production costs mainly consist of acquisition costs, salaries, equipment and overhead. Production costs in excess of the amounts reimbursable by the actual production entity are capitalized. Once production on a particular film project commences, FMYR begins to derive producer fees. FMYR’s primary source of revenue is motion picture production fees. Production costs capitalized on a particular film project are amortized in the proportion that the revenue received during a period bears to the anticipated total gross revenues for that film.

Estimates of anticipated total gross revenues for all film projects are reviewed periodically and revised when necessary. Unamortized film production costs are also compared with net realizable value each reporting period on a film-by-film basis. If estimated gross revenues are not sufficient to recover the unamortized film production costs, the unamortized film production costs are written down to their estimated net realizable value.

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Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

2. Summary of Significant Accounting Policies (continued)

Exploitation Costs

All exploitation costs, including marketing costs, are expensed as incurred. During the three months ended September 30, 2008 and 2007, FMYR incurred exploitation costs of $0 and $8,780 respectively.

Participation Costs

Estimates of unaccrued ultimate participation costs, if any, are used in the individual film forecast computation to arrive at current period participation cost expense. Participation costs are determined using assumptions that are consistent with FMYR’s estimates of film costs, exploitation costs, and ultimate revenue. If, at any balance sheet date, the recognized participation costs liability exceeds the estimated unpaid ultimate participation costs for an individual film, the excess liability is reduced with an offsetting credit to unamortized film costs. To the extent that an excess liability exceeds unamortized film costs for a film, it is credited to income. Participation costs are not currently a factor on any of FMYR’s film projects.

Convertible Debt Financing and Derivative Liabilities

In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“SFAS 133”), the holder’s conversion right provision, interest rate adjustment provision, liquidated damages clause, cash premium option, and the redemption option (collectively, the debt features) contained in the terms governing the Company’s convertible notes are not clearly and closely related to the characteristics of such notes. Accordingly, the features qualified as embedded derivative instruments at issuance and, because they do not qualify for any scope exception within SFAS 133, they were required by SFAS 133 to be accounted for separately from the debt instrument and recorded as derivative financial instruments.

During the three-month periods ending September 30, 2008 and 2007, the Company recorded a gain of $12,323 and $130,939, respectively, which relates to the debt features and warrants, to reflect the change in fair value of the derivative and warrant liabilities.

At each balance sheet date, the Company adjusts the derivative financial instruments to estimated fair value and analyzes the instruments to determine their classification as a liability or equity. As of September 30, 2008 and June 30, 2008, the estimated fair value of the Company’s derivative liability was $620,894 and $602,194 respectively, as well as a warrant liability of $21,499 and $52,528 respectively. The estimated fair value of the debt features was determined using the probability weighted averaged expected cash flows / Lattice Model. The model uses several assumptions including: historical stock price volatility (utilizing a rolling 120 day period), risk-free interest rate (3.50%), remaining maturity, and the closing price of the Company’s common stock to determine estimated fair value of the derivative.

In valuing the debt features at September 30, 2008 FMYR used the closing price of $0.004 the conversion price as defined in the note agreement and the remaining term to maturity coinciding with each contract. For the three-month period ended September 30, 2008 there was a decrease in the market value of the Company’s common stock from $0.011 to $0.004.

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Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

2. Summary of Significant Accounting Policies (continued)

Convertible Debt Financing and Derivative Liabilities (continued)

In valuing the debt features at June 30, 2008 FMYR used the closing price of $0.011 the conversion price as defined in the note agreement and the remaining term to maturity coinciding with each contract. For the twelve-month period ended June 30, 2008 there was a decrease in the market value of the Company’s common stock from $0.10 to $0.011.

Cash Equivalents

FMYR considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.

Business Segment

The Company operates in a single business segment.

Property and Equipment

Property and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over estimated useful lives ranging from three to five years. These assets are periodically reviewed for impairment whenever changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Impaired assets and assets to be disposed of are reported at the lower of carrying values or fair values, less costs of disposal.

Income Taxes

The Company accounts for its income taxes using the Financial Accounting Standards Board Statements of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” which requires the establishment of a deferred tax asset or liability for the recognition of future deductible or taxable amounts and operating loss and tax credit carry forwards. Deferred tax expense or benefit is recognized as a result of timing differences between the recognition of assets and liabilities for book and tax purposes during the year.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are recognized for deductible temporary differences and operating loss, and tax credit carry forwards. A valuation allowance is established, when necessary, to reduce that deferred tax asset if it is “more likely than not” that the related tax benefits will not be realized.

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Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

2. Summary of Significant Accounting Policies (continued)

Interest

Costs associated with the maintenance of debt are charged to expense or capitalized to the extent debt is used for costs of film productions.

Net Loss per Common Share

Basic loss per common share amounts is based on the weighted average number of common shares outstanding during the respective periods. Dilutive loss per common share amounts is based on the weighted average common shares outstanding during the period and shares assumed issued upon conversion of stock options and other financial instruments convertible into common stock, when the effect of such conversions would have been dilutive to net loss. There is no assumed conversion of stock options, warrants or convertible debentures for 2008 or 2007 because the effect would be anti-dilutive.

Stock-Based Compensation

Stock-based compensation is accounted for under the standards prescribed by SFAS No. 123R, “Share-Based Payment.” This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The standard prescribes the expensing of the fair value of stock options granted to employees in the basic financial statements through the use of an option-pricing model. The expense recognized with respect to unvested awards is based on the grant-date fair value and vesting schedule of those awards. The statement applies to equity awards and to equity awards modified, repurchased, or cancelled after the effective date of adoption.

Comprehensive Income

Comprehensive income consists of net income and other gains and losses affecting stockholders’ deficit that, under generally accepted accounting principles in the United States of America, are excluded from net income, such as unrealized gains and losses on investments available for sale, foreign currency translation gains and losses and minimum pension liability. For the fiscal years ended June 30 2008 and 2007, FMYR’s financial statements include none of the additional elements that affect comprehensive income. Accordingly, net income and comprehensive income are identical.

Fair Value of Financial Instruments

FMYR includes fair value information in the notes to the financial statements when the fair value of its financial instruments is different from the book value. When the book value approximates fair value, no additional disclosure is made.

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Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

2. Summary of Significant Accounting Policies (continued)

Concentration of Credit Risk

Cash, accounts receivable and notes receivable are the primary financial instruments that subject FMYR to concentrations of credit risk. FMYR maintains its cash in banks selected based upon management’s assessment of the bank’s financial stability. Balances often exceed the federal depository insurance limit; however, FMYR has experienced no losses on deposits. At September 30, 2008 and June 30, 2008, the Company had no balances in excess of the limit.

Accounts receivable are primarily from transactions with customers in California. FMYR performs credit reviews of its customers and provides a reserve for accounts where collection is uncertain. Collateral is not required for credit granted. $156,258 of accounts receivable for September 30, 2008 of $195,992 (net of the reserve for doubtful accounts of $123,000) arose from one customer and $696,894 of accounts receivable at June 30, 2008, of $711,894 (net of the reserve for doubtful accounts of $73,000) arose from one customer.

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued FAS No. 141(R), “Applying the Acquisition Method.” FAS No. 141(R) provides guidance for the recognition of the fair values of the assets acquired upon initially obtaining control, including the elimination of the step acquisition model. The standard is effective for acquisitions made in fiscal years beginning after December 15, 2008, and is not expected to have a significant impact on the Company’s results of operations, financial condition or liquidity.

In December 2007, the FASB issued FAS No. 160, “Accounting for Noncontrolling Interests.” FAS No. 160 clarifies the classification of noncontrolling interests in consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and holders of such noncontrolling interests. Under the standard, noncontrolling interests are considered equity and should be reported as an element of consolidated equity, and net income will encompass the total income of all consolidated subsidiaries and there will be separate disclosure on the face of the income statement of the attribution of that income between the controlling and noncontrolling interests. FAS No. 160 is effective prospectively for fiscal years beginning after December 15, 2008, and is not expected to have a significant impact on the Company’s results of operations, financial condition or liquidity.

In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (“FAS 157”) which provides guidance for using fair value to measure assets and liabilities. It also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. FAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. FAS 157, as originally issued, was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), to partially defer FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”). FSP 157-2 defers the effective date of FAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at

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Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

2. Summary of Significant Accounting Policies (continued)

Recently Issued Accounting Pronouncements (continued)

fair value in the financial statements on a recurring basis (at least annually), to fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. The Company will adopt FAS 157 effective July 1, 2008, and the adoption of FAS 157 is not expected to have a material impact to its consolidated financial position or results of operations.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“FAS 161”). FAS 161 requires entities to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”) and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. FAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, and early adoption is permitted. The Company is in the process of reviewing the potential impact of FAS 161.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination of the Useful Life of Intangible Assets,” (“FSP No. 142-3”). The intent of this FSP is to improve consistency between the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), and the period of expected cash flows used to measure the fair value of the intangible asset under SFAS No. 141R. FSP No. 142-3 will require that the determination of the useful life of intangible assets acquired after the effective date of this FSP shall include assumptions regarding renewal or extension, regardless of whether such arrangements have explicit renewal or extension provisions, based on an entity’s historical experience in renewing or extending such arrangements. In addition, FSP No. 142-3 requires expanded disclosures regarding intangible assets existing as of each reporting period. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Early adoption is prohibited. The Company is currently evaluating the impact that FSP No. 142-3 will have on its financial statements.

In May 2008, the FASB issued Financial Accounting Standard (FAS) No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are prepared in conformance with generally accepted accounting principles. Unlike Statement on Auditing Standards (SAS) No. 69, “The Meaning of Present in Conformity With GAAP,” FAS No. 162 is directed to the entity rather than the auditor. The statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with GAAP,” and is not expected to have any impact on the Company’s results of operations, financial condition or liquidity.

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Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

2. Summary of Significant Accounting Policies (continued)

Recently Issued Accounting Pronouncements (continued)

In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Emerging Issues Task Force (EITF) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under the FSP, unvested share-based payment awards that contain rights to receive non-forfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years, and is not expected to have a significant impact on the Company’s results of operations, financial condition or liquidity.

Other recent accounting pronouncements issued by the FASB (including its EITF), the American Institute of Certified Public Accountants (“AICPA”) and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

3. Accounts Receivable

Accounts receivable at September 30, 2008 and June 30, 2008 consisted of the following:

	September 30, 2008		June 30, 2008

Accrued receivables – producer fees	$	318,992	$	734,894
Accrued distribution, royalties and other		-		50,000
Reserve for doubtful accounts		(123,000)		(73,000)
Total	$	195,992	$	711,894

At September 30, 2008, and June 30, 2008, one customer accounted for $ 156,258 and $696,894, respectively, of accounts receivable.

-13-

Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

4. Film Costs, Revenues and Amortization of Film Costs

Film costs and related amounts capitalized at September 30, 2008 and 2007, and related activity during the three months ended September 30, 2008 and 2007, and for the year ended June 30, 2008 are shown below. Substantially all film projects of the Company are intended for theatrical presentation.

Activity during the three months ended September 30, 2008:

	Released		In Production		Development and Production		Total

Net film cost balance at June 30, 2008	$	4,320,758	$	-	$	424,156	$	4,744,914

Production costs incurred during three months ending September 30, 2008		286		-		44,018		44,304

Transfers of film costs between categories for the three months ended September 30, 2008		-		-		-		-

Total film costs incurred and paid by FMYR during three months ended September 30, 2008		286		-		44,018		44,304

Net film cost balance before the three months ended September 30, 2008 amortization & write offs		4,321,044		-		468,174		4,789,218

Less film cost amortization & write offs during the three months ended September 30, 2008		(220,747)		-		(50,170)		(270,917)

Net film cost balance at September 30, 2008	$	4,100,297	$	-	$	418,004	$	4,518,301

-14-

Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

4. Film Costs, Revenues and Amortization of Film Costs (continued)

Activity during the three months ended September 30, 2007:

	Released		In Production		Development and Pre-Production		Total

Net film cost balance at June 30, 2007	$	50,000	$	6,384,250	$	170,955	$	6,605,205

Production costs incurred during three months ending September 30, 2007		11,443		156,576		442,694		610,713

Transfers of film costs between categories for the three months ended September 30, 2007		-		47,889		(47,889)		-

Total film costs incurred and paid by FMYR during three months ended September 30, 2007		11,443		204,465		394,805		610,713

Net film cost balance before the three months ended September 30, 2007 amortization & write offs		61,443		6,588,715		565,760		7,215,918

Less film cost amortization & write offs during the three months ended September 30, 2007		(11,443)		(-)		(136,200)		(147,643)

Net film cost balance at September 30, 2007	$	50,000	$	6,588,715	$	429,560	$	7,068,275

-15-

Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

4. Film Costs, Revenues and Amortization of Film Costs (continued)

Activity during the year ended June 30, 2008:

	Released		In Production		Development and Pre-Production		Total

Net film cost balance at June 30, 2007	$	50,000	$	6,384,250	$	170,955	$	6,605,205

Production costs incurred during year ending June 30, 2008		23,758		425,431		584,245		1,033,434

Transfers of film costs between categories for the year ended June 30, 2008		4,997,322		(4,953,433)		(43,889)		-

Total film costs incurred and paid by FMYR during year ended June 30, 2008		5,021,080		(4,528,002)		540,356		1,033,434

Net film cost balance before the year ended June 30, 2008 amortization & write-offs		5,071,080		1,856,248		711,311		7,638,639

Less film cost amortization & write- offs during the year ended June 30, 2008( See Footnote 5-D below )		(750,322)		(1,856,248)		(287,155)		(2,893,725)

Net film cost balance at June 30, 2008	$	4,320,758	$	-	$	424,156	$	4,744,914

-16-

Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

4. Film Costs, Revenues and Amortization of Film Costs (continued)

The following is an analysis of film cost amortization and write-downs for three months ended September 30, 2008 and 2007:

			Three Months Ended
			September 30,
			2008		2007
Released Projects – Amortization
	After Sex		$	-	$	75
	Held for Ransom			-		75
	Speedway Junkie			-		-
	Good Advice			-		357
	Other			189		-
	Borderland			220,558		-

	Total			220,747		507

Projects in Development, In-Production, or Pre-Production
	Ligeia			12,921		-
	Bad Lieutenant 2			18,352		-
	Once Fallen			11,750		-
	White Air			-		10,936
	FMYR/EFF Participation Payment			-		136,200
	Total of other individual
		projects with total original costs
		less than $40,000		7,147		-

	Total			50,170		147,136

		Total all projects	$	270,9178	$	147,643

-17-

Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

4. Film Costs, Revenues and Amortization of Film Costs (continued)

Following is an analysis of revenues, by project and type for the three months ended September 30, 2008 and 2007:

			Three Months Ended
			September 30,
			2008		2007
Producer Fees
	Wickerman		$	-	$	-
	The Contract			-		-
	88 Minutes			-		-
	Righteous Kill					275,000
	Bad Lt			100,000		-
	Ligeia			35,000		-
	Once Fallen			50,000		-

		Total producer fees / film revenue		185,000		275,000

Royalties and Other Revenue
	Royalties			-		9,167
	Film production service fees and other			-		-
	Net Income participation revenues			-		-
	Distribution revenues(Borderland)			362,096		-
	Distribution revenues ( White Air)			-		25,000
	Consultant and participation fees			20,000		-

		Total royalties and other revenue		382,096		34,167

	Total revenue		$	567,096	$	309,167

-18-

Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

4. Film Costs, Revenues and Amortization of Film Costs (continued)

Following is the percentage make-up of net film costs at September 30, 2008, June 30, 2008, and September 30, 2008:

		September 30, 2008		June 30, 2008		September 30, 2007

Borderland		90	%	91	%	70	%
Conan the Barbarian		7	%	6	%	4	%
Righteous Kill		0	%	0	%	2	%
King of California		0	%	0	%	22	%
Day of the Dead		0	%	1	%	0	%
Terror Train		0	%	1	%	0	%
Total of other individual projects less than 5%		3	%	1	%	2	%

	Total	100	%	100	%	100	%

FMYR has a limited number of customers. A percentage breakout of the revenues by major customers is as follows for the three months ended September 30, 2008 and 2007:

	September 30,
Major Customers	2008	2007
NuImage/Millennium Films	32.62%	88.90%
Lions Gate Films	63.85%	0.00%
After Dark	0.00%	8.10%
Others	3.53%	300%

Total Revenue	100.00%	100.00%

FMYR has a limited number of customers. A percentage breakout of revenues by major customers is as follows for the years ended June 30, 2008 and 2007:

	June 30,
Major Customers	2008	2007
NuImage/Millennium Films	59.59%	98.97%
Lions Gate Films	27.86%	0.00%
After Dark	6.19%	0.00%
Others	6.36%	1.03%

Total Revenue	100.00%	100.00%

-19-

Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

5. Property and Equipment

Property and equipment at September 30, 2008 and June 30, 2008 consisted of the following:

			September 30,		June 30,
		Life	2008		2008

Office furniture and equipment		7 years	$	52,558	$	52,558
Computer equipment		5 years		93,083		93,083
Software		3 years		88,956		88,956
Leasehold Improvements		1 year		20,445		20,445

	Total			255,042		255,042

Less accumulated depreciation and amortization				(224,249)		(217,514)

			$	30,793	$	37,528

During the three months ended September 30, 2008 and 2007, depreciation and amortization expense was $ 6,735 and $11,196, respectively.

6. Notes Payable under Film Participation Agreements

To finance funding of film projects, FMYR has obtained advances/investments from outside investors that want to participate in specific production projects and/or participation revenues. During the years ended June 30, 2008, 2007 and 2006, the Company received an aggregate of $700,000 and $2,050,000 and $3,227,692, respectively, from Tau Entertainment (Elisa Salinas), Scorched Earth Entertainment, Freedom Films and EFF Partners LLC for investment in specific projects.

During the years ended June 30, 2007 and 2006 FMYR received $1,300,000 and $0 respectively from Tau Entertainment (Elisa Salinas); $0 and $800,000 respectively from EFF Partners LLC; $0 and $72,500 respectively from Scorched Earth Entertainment; $0 and $2,355,192 respectively from Freedom Films for investments in production projects; and $750,000 and $0 from Gary Granstaff for participation revenues. During the year ended June 30, 2008, FMYR received $200,000 from Dr. Raja H. Ataya; and $500,000 from Justin Holecek for participation revenues. During the year ending June 30, 2008, major material payments of $1,085,000 were paid to Tau Entertainment (Elisa Salinas) for King of California.

-20-

Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

6. Notes Payable under Film Participation Agreements (continued)

EFF Partners LLC received $300,000 in October 2005 from outside investors, of which $272,514 was invested in White Air and $27,486 in The Tenant. In February 2006, EFF Partners received from an outside investor, $500,000 of which $85,000 was invested in Rin Tin , $41,000 was invested in The Tenant, $74,000 was invested in White Air, and $ 300,000 was invested in Day of the Dead. During the year ending June 30, 2008 the Company repaid $10,000 in relation to Borderland , and converted the monies due by EFF Partners LLC in convertible debts amounting to $500,000 to Tamburello and $300,000 to Terkovich (see Note 8).

On May 18, 2007 and August 17, 2007, the Company, through its wholly-owned subsidiaries, EFF Independent, Inc., (“EFFI”) and Emmett Furla Films Productions Corp (“EFFPC”), entered into a financing agreement with Gary Granstaff, a private individual, and Dr. Raja H. Ataya MD, a private individual. The Granstaff Financing Agreement terms are that EFFI and EFFPC receive $750,000 in exchange for 15% of EFFI and EFFPC’s future film revenues (primarily producer fees) until the $750,000 is repaid. Additionally, Mr. Granstaff receives an ongoing 15% interest in EFFI and EFFPC’s participation interest in the film, “Righteous Kill.” Mr. Granstaff has no recourse to the Company for payments due unless the Company has revenues from its film projects. The Dr. Raja H. Ataya MD Financing Agreement terms are that EFFI and EFFPC receive $200,000 in exchange for 1% of EFFI and EFFPC’s future film revenues (primarily producer fees) in perpetuity. For the sum of US$200,000, Ataya would receive 1% of the film net revenues received by EFFI and EFFPC on a going-forward basis. Concurrently EFFI and EFFPC entered into a consulting agreement with Tommy Lee Thomas and Jody Nolan whereby Thomas and Nolan received 0.4% the film net revenues (mainly producer fees) received by EFFI and EFFPC on a going-forward basis. Dr. Ataya has no recourse to the Company for payments due unless the Company has net revenues from its applicable film projects. During the three months ending June 30, 2008 the Company through its wholly-owned subsidiaries, EFF Independent, Inc. (“EFFI”) and Emmett Furla Productions Corp. (“EFFPC”), received $500,000 from Justin Holecek, who would receive 12.5% of the films net revenues received by EFFI and EFFPC on an a going-forward basis. Mr. Holecek has no recourse to the Company for payments due unless the Company has net revenues from its applicable film projects. Additionally, Mr. Randall Emmett, a Director and Officer of the Company personally guaranteed $250,000 of the amount Mr. Holecek paid. Pursuant to guidance provided in SOP 00-2, Accounting by Producers or Distributors of Films, and EITF 88-18, Sales of Future Revenues, the Company has recorded the amounts for Mr. Granstaff, Dr. Ataya and Mr. Holecek’s amounts as Loan Participant Payable.

-21-

Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

6. Notes Payable under Film Participation Agreements (continued)

As of September 30, 2008, June 30, 2008 and 2007, the balances outstanding and details of notes and loans payable are $, 5,343,655, $5,969,921 and $7,957,412 respectively under film participation agreements. The detail balances of these balances outstanding at September 30, 2008, June 30, 2008 and 2007 are as follows:

		Investor Loans								Participation Loans
		Tau		Scorched
		Entertainment		Earth		Freedom		EFF		Gary		Dr. Raja H.		Justin
Specified Use		(Elisa Salinas)		Entertainment		Films		Partners, LLC		Granstaff		Ataya		Holecek		Totals

The Tenant		$	-	$	-	$	-	$	68,486	$	-	$	-	$	-	$	68,486
Borderland			1,799,719		572,500		2,355,192		-		-		-		-		4,727,411
White Air			-		-		-		346,514		-		-		-		346,514
Wickerman			250,000		-		-		-		-		-		-		250,000
King of California			1,300,000		-		-		-		-		-		-		1,300,000
Room Service			130,000		-		-		-		-		-		-		130,000
Day of the Dead			-		-		-		300,000		-		-		-		300,000
Rin Tin Tin			-		-		-		85,000		-		-		-		85,000
Participation Fee			-		-		-		-		750,000		-		-		750,000
Balance - June 30, 2007			3,479,719		572,500		2,355,192		800,000		750,000		-		-		7,957,411

Participation Fee			-		-		-		-		-		200,000		500,000		700,000
Special Adjustments or payments:
Agreed to Transfer Investor
to Convertible Debt			(315,000)		-		-		(790,000)		-		-		-		(1,105,000)
Adjust for projects not being
made (Room Service) and
/or Project term (Wickerman)
indicate loss and no longer due			(380,000)		-		-		-		-		-		-		(380,000)
Cash accrued payment at 6/30/08			(1,085,000)		(20,000)		-		(10,000)		(74,144)		(5,221)		(8,125)		(1,202,490)
Balance - June 30, 2008			1,699,719		552,500		2,355,192		-		675,856		194,779		491,875		5,969,921

Borderland Payment re LionsGate 7/08			(204,067)		(74,850)		(308,874)										(587,791)

Cash Payments On producer for qtr 9/08											(20,250)		(1,350)		(16,875)		(38,475)

	Balance - September 30, 2008	$	1,495,652	$	477,650	$	2,046,318	$	-	$	655,606	$	193,429	$	475,000	$	5,343,655

-22-

Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

6. Notes Payable under Film Participation Agreements (continued)

For the Borderland movie project, in proportion to their actual investment in the negative costs of the picture, certain investors will receive: (a) a 7% one-time finance fee from the proceeds of the picture; and (b) 8% annual interest on their respective investments. The investors will also be permitted to designate certain pre-negotiated credits in connection with the picture as well as participate in the Net Profits (generally defined as monies remaining after all negative costs, distribution fees and costs in connection have been recouped, paid and/or reserved against). The investors will have participation in the Net Profits of the picture on a proportional basis to their investment.

Tau Entertainment (Elisa Salinas) invested funds into three additional projects: (1) Wickerman, whereby Tau Entertainment invested $250,000 in the development of the picture and will be re-paid out of the net proceeds of the picture, the payment of which is guaranteed by the distributor/financier (NuImage) of the picture; (2) Room Service whereby they invested $130,000 in the development of the Picture for which they will be repaid if and when the picture is fully financed (by a third party) and produced, if ever; and (3) King of California whereby they invested $1,300,000 in the production of the picture for which Tau Entertainment will be repaid after delivery and from distribution. In November 2007, FMYR paid to Tau Entertainment (Elisa Salinas) $1,000,000 for King of California, and in December 2007, FMYR paid to Tau Entertainment (Elisa Salinas) $85,000 for King of California.

Freedom Films invested $2,000,000 in July 2005 and $355,192 in the year ending June 2006 directly into Borderland ISA to be used for the production of the film project “Borderland”. The investor is to receive: (a) a 7% one-time finance fee; and (b) 8% annual interest on its investment in the picture. The investor will also be permitted to designate certain pre-negotiated credits in connection with the picture as well as participate in the film’s net profits. The investor’s participation in the net profits of the picture shall be on a proportional basis to their investment.

FMYR received $500,000 plus another $72,500 during the year ended June 2006 from Scorched Earth Entertainment to invest in the “Borderland” film project. The investor is to receive: (a) a 7% one-time finance fee and (b) 8% annual interest on its investment in the picture. The investor will also be permitted to designate certain pre-negotiated credits in connection with the picture as well as participate in the film’s net profits. The investor’s participation in the net profits of the picture shall be on a proportional basis to their investment.

7. Notes Payable

On September 17, 2008, Family Room Entertainment Corporation (“FMYR”) issued a promissory note for the aggregate sum of $130,000 due in the month of April 2009. This amount consists of $65,000 of principal and $65,000 of contingent interest and will be contingent upon the Company receiving $330,000 of net producer’s fee that FMYR is to receive for services performed for the motion picture “Conan the Barbarian” which might or might not be received on or before April 30, 2009. If the producer’s fee is not received, the Company is not liable for the $65,000 in contingent interest.

8. Convertible Notes Payable

During the years ended June 30, 2005, 2006, 2007 and 2008 the Company issued convertible notes to third parties. As part of the several financing transactions, the Company also issued warrants to purchase shares of stock at various exercise prices.

					Debt Feature		Initial Debt
Date of	Amount		Conversion	Term	Fair Value at		Carrying
Note	of Note		Price (1)	of Note	Issuance		Value

11/9/04	$	2,000,000	$30.00 or 80%	2 years	$	674,158	$	1,032,899
5/24/06	$	400,000	80%	1 year	$	135,770	$	264,250
6/5/07	$	1,000,000	$0.10 (2)	2 years	$	1,000,000	$	-
9/30/07	$	300,000	80%	2 years	$	24,722	$	275,278
1/1/08	$	500,000	80%	2 years	$	41,204	$	458,796
6/21/08	$	290,000	80%	2 years	$	23,896	$	266,104
6/30/08	$	315,000	80%	2 years	$	25,961	$	289,039

(1)	= the conversion price is the lower of the set price or 80% of market closing price.

(2)	= fixed conversion price.

Date of Warrants	Number of	Market Price		Exercise		Term of	Fair Value		Fair Value		Fair Value
Issued	Warrants	at issue date		Price		Warrants	at Issuance		6/30/2007		6/30/2008
November 4, 2004	33,333	$	16.40	$	24.00	5 years	$	104,894	$	96	$	1
November 4, 2004	83,333	$	16.40	$	30.00	5 years	$	262,460	$	239	$	1
June 5, 2007	5,000,000	$	0.14	$	0.10	5 years	$	565,376	$	468,336	$	29,032
June 5, 2007	5,000,000	$	0.14	$	0.20	5 years	$	551,018	$	455,515	$	23,494

Notes payable –	September 30,		June 30,
Convertible	2008		2008

Gross Notes payable Convertible debt	$	2,992,401	$	2,992,401
Less unamortized debt issue costs		(651,868)		(792,700)
Net notes payable Convertible	$	2,340,533	$	2,199,701

-23-

Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

8. Convertible Notes Payable (continued)

Unamortized Debt Discount
Yearly/Qtrly Activity		Date	Activity Explanation
$	1,041,602	11/9/2004	Initial carrying value
$	(285,002)	6/30/2005	Debt amortization
$	756,600	6/30/2005	Year-end Balance
$	519,196	6/30/2006	Adjustment for debt retirement
$	(118,345)	6/30/2006	Debt amortization
$	1,157,451	6/30/2006	Year-end Balance
$	(1,038,469)	6/30/2007	Debt amortization
$	1,000,000	6/30/2007	Adjustment for new debt
$	1,118,982	6/30/2007	Year-end Balance
$	(326,282)	6/30/2008	Debt amortization
$	792,700	6/30/2008	Year-end Balance
$	(140,832)	9/30/2008	Debt amortization
$	651,868	9/30/2008	9-30-08 Balance

The notes contain provisions on interest accrual at the “prime rate” published in The Wall Street Journal from time to time, plus three percent (3%). The Interest Rate shall not be less than ten percent (10%). Interest is calculated on a 360-day year. Interest on the Principal Amount shall be payable monthly, commencing 120 days from the closing and on the first day of each consecutive calendar month thereafter (each, a “Repayment Date”) and on the Maturity Date.

Following the occurrence and during the continuance of an Event of Default (as discussed in the Note), the annual interest rate on the Note shall automatically be increased by two percent (2%) per month until such Event of Default is cured.

The Notes also provide for liquidated damages on the occurrence of several events. As of September 30, 2008 and June 30, 2007, the Company has incurred no liquidating damages.

Redemption Option - The Company will have the option of prepaying the outstanding principal amount (“Optional Redemption”), in whole or in part, by paying to the Holder a sum of money equal to one hundred twenty percent (120%) of the principal amount to be redeemed, together with accrued but unpaid interest thereon

Debt Features

The Holder shall have the right, but not the obligation, to convert all or any portion of the then aggregate outstanding principal amount of this Note, together with interest and fees due hereon, into shares of Common Stock.

-24-

Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

8. Convertible Notes Payable (continued)

Debt Features (continued)

The proceeds from the financing transactions were allocated to the debt features and to the warrants based upon their fair values. After the latter allocations, the remaining value, if any, is allocated to the note on the financial statements.

The debt discount is being accreted using the effective interest method over the term of the note.

The value of the discount on the converted notes on the books is being accreted over the term of the respective notes. For the three months ended September 30, 2008 and 2007, the Company accreted $140,832 and $59,947, respectively, of debt discount. The accretion of debt discount amount is adjusted in direct proportion to the conversions of debt to stock during the period.

Warrant amounts have been classified as a derivative instrument and recorded as a liability on the Company’s balance sheet in accordance with current authoritative guidance. The estimated fair value of the warrants was determined using the Black-Scholes option-pricing model with a closing price of on the date of issuance and the respective exercise price, a five-year term, and the volatility factor relative to the date of issuance. The model uses several assumptions including: historical stock price volatility (utilizing a rolling 120 day period), risk-free interest rate (3.50%), remaining time till maturity, and the closing price of the Company’s common stock to determine estimated fair value of the derivative liability. In valuing the warrants at September 30, 2008 and September 30, 2007, the company used the closing price of $0.004 and $0.011, respectively, the respective exercise price, as well as the remaining term on each warrant, as well as a volatility of 160% and 120%, respectively. In accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments, the Company is required to adjust the carrying value of the instrument to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of Other Income (Expense). The warrant derivative liability at September 30, 2008, had decreased to a fair value of $21,499 from prior the prior quarter, due to the drop in the stock price of the Company’s common stock, which resulted in an “other income” item of $31,029 on the Company’s books. The warrant derivative liability at June 30, 2008, had decreased to a fair value of $52,528 from prior year, due to the drop in the stock price of the Company’s common stock, which resulted in an “other income” item of $855,615 on the Company’s books.

The recorded value of such warrants can fluctuate significantly based on fluctuations in the market value of the underlying securities of the issuer of the warrants, as well as in the volatility of the stock price during the term used for observation and the term remaining for the warrants.

-25-

Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

8. Convertible Notes Payable (continued)

Debt Features (continued)

In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“SFAS 133”), the debt features provision (collectively, the features) contained in the terms governing the Notes are not clearly and closely related to the characteristics of the Notes. Accordingly, the features qualified as embedded derivative instruments at issuance and, because they do not qualify for any scope exception within SFAS 133, they were required by SFAS 133 to be accounted for separately from the debt instrument and recorded as derivative financial instruments.

Pursuant to the terms of the Notes, these notes are convertible at the option of the holder, at anytime on or prior to maturity. There is an additional interest rate adjustment feature, a liquidated damages clause, a cash premium option, as well as the redemption option. The debt features represent an embedded derivative that is required to be accounted for apart from the underlying Notes. At issuance of the Notes, the debt features had an estimated initial fair value, which was recorded as a discount to the Notes and a derivative liability on the consolidated balance sheet.

In subsequent periods, if the price of the security changes, the embedded derivative financial instrument related to the debt features will be adjusted to the fair value with the corresponding charge or credit to other expense or income. The estimated fair value of the debt features was determined using the probability weighted averaged expected cash flows / Lattice Model with the closing price on original date of issuance, a conversion price based on the terms of the respective contract, a period based on the terms of the notes, and a volatility factor on the date of issuance. The model uses several assumptions including: historical stock price volatility (utilizing a rolling 120 day period), risk-free interest rate (3.50%), remaining maturity, and the closing price of the Company’s common stock to determine estimated fair value of the derivative liability. In valuing the debt features at September 30, 2008 the Company used the closing price of $0.004 and the respective conversion price, a remaining term coinciding with each contract, and a volatility of 160%. For the three month period ended September 30, 2008, the estimated value of the debt features increased to $620,894 as a result of the decrease in the stock closing price thus the Company recorded “other expense” on the consolidated statement of operations for the change in fair value of the debt features related to these notes of $18,700. For the year ended June 30, 2008, the estimated value of the debt features increased to $602,194 as a result of new convertible debt issued during the year, thus the Company recorded “other expense” on the consolidated statement of operations for the change in fair value of the debt features related to these notes of $41,252.

Pursuant to the terms of the Notes, the Company has the option of prepaying the outstanding principal amount in whole or in part, by paying to the Holder a sum of money equal to one hundred twenty percent (120%) of the principal amount to be redeemed, together with accrued but unpaid interest thereon and any and all other sums due.

The recorded value of the debt features related to the Notes can fluctuate significantly based on fluctuations in the fair value of the Company’s common stock, as well as in the volatility of the stock price during the term used for observation and the term remaining for the warrants.

The significant fluctuations can create significant income and expense items on the financial statements of the Company.

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Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

8 . Convertible Notes Payable (continued)

Debt Features (continued)

Because the terms of the convertible notes (“notes”) require such classification, the accounting rules required additional convertible notes and non-employee warrants to also be classified as liabilities, regardless of the terms of the new notes and/or warrants. This presumption has been made due to the company no longer having the control to physical or net share settle subsequent convertible instruments because it is tainted by the terms of the notes. Were the notes to not have contained those terms or even if the transactions were not entered into, it could have altered the treatment of the other notes and the conversion features of the latter agreement may have resulted in a different accounting treatment from the liability classification. The notes and warrants, as well as any subsequent convertible notes or warrants, will be treated as derivative liabilities until all such provisions are settled.

For the three month period ended September 30, 2008 and 2007, the Company recorded other income of $12,329 and $130,939 related to the change in value of the debt features and the decrease in value of the warrants, respectively.

For the year ended June 30, 2008 and 2007, the Company recorded $326,282 and $1,038,469 of interest expense/(income) related to the accretion of debt related to the convertible financing.

For the three months ended September 30, 2008:

$	31,029	income, decrease in value of 2004, 2006, 2007 and 2008 warrant liability
	(18,700)	expense, increase in value of 2004, 2006, 2007 and 2008 derivative liability
$	12,329	other income related to convertible debt

For the three months ended September 30, 2007:

$	553,649	income, decrease in value of 2004, 2006 and 2007 warrant liability
	(422,710)	income, increase in value of 2004 and 2006 derivative liability
$	130,939	other income related to convertible debt

For the three months ended September 30, 2008:

$	118,892	of interest expense related to accretion of 2007 convertible debt
	21,940	of interest expense related to accretion of 2008 convertible debt
$	140,832	of interest expense related to convertible debt

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Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

8. Convertible Notes Payable (continued)

Debt Features (continued)

For the three months ended September 30, 2007:

$	-	of interest expense related to accretion of 2006 convertible debt
	59,947	of interest expense related to accretion of 2007 convertible debt
$	59,947	of interest expense related to convertible debt

The balance of the carrying value of the convertible debt as of September 30, 2008 and June 30, 2008 was:

$	508,419	June 30, 2007 value
	1,405,000	Increase in 2008 convertible debt
	(115,783)	Increase in debt discount
	(40,000)	Repayment of debt
	442,065	Accretion of convertible debt
$	2,199,701	June 30, 2008 carrying value of convertible debt

$	2,199,701	June 30, 2008 value
	140,832	Accretion of convertible debt
$	2,340,533	September 30, 2008 carrying value of convertible debt

The balance of the carrying value of the derivative liability as of September 30, 2008 and June 30, 2008 was:

$	445,159	June 30, 2007 value of derivative liability
	24,722	original values of 2007 derivative liability
	91,061	original values of 2008 derivative liability
	34,059	increase in values of 2007 derivative liability
	7,193	increase in values of 2008 derivative liability
$	602,194	June 30, 2008 value of derivative liability

$	602,194	June 30, 2008 value of derivative liability
	8,987	increase in values of 2007 derivative liability
	9,713	increase in values of 2008 derivative liability
$	620,894	September 30, 2008 value of derivative liability

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Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

8 . Convertible Notes Payable (continued)

Debt Features (continued)

The balance of the carrying value of the warrant liability as of September 30, 2008, and June 30, 2008 was:

$	924,159	June 30, 2007 value of warrant liability
	(333)	decrease in value of 2004 warrant liability
	(600,630)	decrease in value of 2007 warrant liability
	(270,668)	decrease in values of 2008 warrant liability
$	52,528	June 30, 2008 value of warrant liability

$	52,528	June 30, 2008 value of warrant liability
	-	decrease in value of 2004 warrant liability
	(31,029)	decrease in value of 2007 warrant liability
	-	decrease in values of 2008 warrant liability
$	21,499	September 30, 2008 value of warrant liability

Restructuring of Investor Production / Participation Notes

In June 2008 the Company amended two production participation notes having an aggregate principal balance of $1,405,000 to include a conversion feature. Accordingly, the notes are now classified as convertible debentures. The revised terms of the amended investor production participation notes are consistent with the existing terms of the convertible debentures outstanding. The Company did not issue any warrants in conjunction with the modification of the investor production participation notes.

The Company evaluated the modification of the note pursuant to EITF Issue Nos. 96-19, 02-04, and 06-06. The evaluation of the revised terms resulted in the recording additional debt discount and a derivative liability for the conversion feature.

9. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities at September 30, 2008 and June 30, 2008, consisted of the following:

	September 30, 2008		June 30, 2008
Accounts payable	$	43,669	$	63,734
Accrued interest payable		-		-
Accrued interest payable on convertible debt		256,950		195,709

	$	300,619	$	259,443

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Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

10. Lease Agreement

FMYR operates in leased facilities under a one-year lease agreement with a right of extension and renewal with a current base rental rate of approximately $3,200 per month for approximately 2,000 square feet. The lease expired on June 30, 2008. The Company signed a short-term lease for a smaller office in the same facility. This lease expires on June 30, 2009. Total future minimum lease commitment is $19,200 at the three months ended September 30, 2008 and $38,400 for the year ended June 30, 2009. Total rent expense under operating leases for the three months ended September 30, 2008 was $14,220 and for the year ended June 30, 2008 was $91,982.

11. Stock Options and Warrants

FMYR periodically issues incentive stock options to key employees, officers, and directors to provide additional incentives to promote the success of FMYR’s business and to enhance the ability to attract and retain the services of qualified persons. The issuance of stock options is approved by the Board of Directors.

FMYR granted no options during the three months ended September 30, 2008, or the year ended June 30, 2008, and, accordingly, no pricing assumptions or fair value financial information is presented.

FMYR uses the Black-Scholes option valuation model to estimate fair value of stock options or warrants issued. The Black-Scholes option valuation model was developed for use in estimating fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because FMYR’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

FMYR’s had no stock option activity and related information for the three month period September 30, 2008, and 2007.

Family Room Entertainment Corporation 2008 Consulting and Legal Services Plan (the “Plan”) : Under the Plan, as amended, FMYR is authorized to issue up to 2,000,000 shares of common stock to compensate key consultants and legal services providers to FMYR. 1,000,000 shares were issued in June 2008 for services valued at $13,200. The remaining shares were issued 500,000 in July 2008 and 500,000 in August 2008 for services valued at $11,500.

During the three months ended September 30, 2008, FMYR issued no warrants. The warrants issued during the year ended June 30, 2007 in connection with the funding of convertible debt were treated as derivative financial instrument liabilities. See Note 8 for further discussion.

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Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

11. Stock Options and Warrants (continued)

All warrants outstanding at September, 2008 are currently exercisable. A summary of outstanding stock warrants at September 30, 2008, follows:

		Remaining
		Contractual
Number of	Expiration	Life	Exercise
Shares	Date	(Years)	Price
116,667	November 2009	1.0	$24.00
5,000,000	June 2011	2.6		$0.10
5,000,000	June 2011	2.6		$0.20

10,116,667

12. Claims and Contingencies

None.

13. Major Customers and Concentrations

FMYR’s revenues were derived from a limited number of customers in the motion picture industry during the three months ended September 30, 2008 and 2007. Following is an analysis of major customers for the three months ended September 30, 2008 and 2007:

	2008		2007
Number of customers accounting for more than 10% of revenue	2		1

Percentage of total revenue derived from largest customer	64	%	98	%

Percentage of total revenue derived from second largest customer	30	%	1	%

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Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

14. Related Party Transactions

On a majority of the projects FMYR undertakes, FMYR’s chief executive officer (George Furla) and chief operating officer (Randall Emmett) have contractual arrangements with FMYR that provide for their compensation base to be between 20% to 30% for George Furla and between 25% to 33% for Randall Emmett, of the net producers fees/contingent compensation earned by the Company. Net producers’ fees are gross fees less approved direct costs incurred and/or contingent compensation earned from net profits and royalties by FMYR in providing the underlying services.

During the three months ended September 30, 2008 and 2007, FMYR received payments under certain agreements, in relation to the producer fees, for certain of FMYR’s affiliations with third party film productions with third party film producers/financiers. Through the three months ended September 30, 2008 and 2007, George Furla received $21,912 and $39,485 respectively, and Randall Emmett via his Randall Emmett Films Inc -1 received for the three months ended September 30, 2008 and the year ended June 30, 2008 $ 27,998 and $56,071 respectively. In addition, Randall Emmett via his Randall Emmett Films Inc. -1 received $13,500 and $50,000 for the three months ended September 30, 2008 and 2007, respectively, for other projects and costs which will be offset by his second and other producer receipts.

During the three months ended September 30, 2008, these executive officers received compensation under these contractual arrangements. The compensation is materially reflected in the cost of the related film project and is ultimately recognized as operating cost-amortization of film costs in the statement of operations.

On September 17, 2008, FMYR issued a promissory note for $130,000 to various parties, $40,000 of which is due to George Furla in April 2009.

FMYR contracted Stanley Tepper, as the Acting Executive VP Finance and Accounting/CFO through the firm of AGSInc., business management financial accounting production service consultants. AGSInc., received contracted consulting and management fees for the three months ended September 30, 2008 and 2007of $42,500 and $84,458, respectively. Out of these funds Mr. Tepper, received for the three months ended September 30, 2008 and 2007 received $22,500 and $36,000.

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Family Room Entertainment Corporation

Notes to Consolidated Financial Statements

September 30, 2008

15. FMYR Stock Repurchases

Date	Shares	Market Price		Cost		Commissions		Total
8/3/2006	3,250	$	2.40	$	7,800	$	400	$	8,200
8/4/2006	1,625	$	1.92		3,120		163		3,283
8/15/2006	1,374	$	1.86		2,556		135		2,691
8/16/2006	2,475	$	1.96		4,851		247		5,098
8/17/2006	500	$	2.40		1,200		25		1,225
8/17/2006	4,450	$	2.36		10,502		528		11,030
8/18/2006	4,800	$	2.34		11,232		557		11,789
8/21/2006	500	$	2.40		1,200		-		1,200
8/21/2006	1,250	$	2.40		3,000		-		3,000
8/21/2006	1,250	$	2.40		3,000		8		3,008
8/21/2006	500	$	2.72		1,360		-		1,360
8/23/2006	250	$	2.30		575		7		582
8/23/2006	500	$	2.50		1,250		58		1,308
8/30/2006	250	$	2.30		575		27		602
8/31/2006	250	$	1.80		450		33		483
9/5/2006	1,000	$	1.80		1,800		97		1,897
9/7/2006	1,000	$	1.60		1,600		88		1,688
9/14/2006	100	$	1.90		190		27		217
9/14/2006	500	$	1.90		950		32		982
9/18/2006	1,000	$	1.60		1,600		73		1,673
9/18/2006	100	$	1.60		160		25		185
9/19/2006	250	$	1.60		400		27		427
9/26/2006	1,250	$	1.70		2,125		72		2,197
9/27/2006	500	$	1.80		900		34		934
9/27/2006	700	$	1.88		1,316		8		1,324
9/27/2006	50	$	1.80		90		-		90
9/28/2006	1,250	$	1.88		2,350		7		2,357
9/29/2006	1,250	$	1.88		2,350		8		2,358
10/5/2006	1,000	$	1.60		1,600		106		1,706
6/29/2007	144,855	$	0.10		14,383		376		14,759
9/30/2007	472,055	$	0.11		49,630		840		50,470
Total Shares Purchased	650,084			$	134,115	$	4,008	$	138,123
Less: Shares return to
to available	(522,684)				(121,365)		(3,622)		(124,987)
Total Net Shares Purchased	127,400			$	12,750	$	386	$	13,136
Average Stock Price Per Share		$	0.52

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Family Room Entertainment Corporation

September 30, 2008

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS’

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In some cases, forward-looking statements are identified by terms such as “may”, “will”, “should”, “could”, “would”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “projects”, “predicts”, “potential”, and similar expressions intended to identify forward-looking statements. Such statements include, without limitation, statements regarding:

• • estimates of required capital expenditures

• fluctuations in the cost of production or other costs of production and operations

• our inability to meet growth projections

• our plans and expectations with respect to future acquisitions of movie rights leases

• • our belief that we will have sufficient liquidity to finance operations into early 2009;

• the amount of cash necessary to operate our business;

• our ability to raise additional capital when needed;

• general economic conditions; and

• the anticipated future financial performance and business operations of our company.

These forward-looking statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Report. Except as otherwise required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this Report to reflect any change in our expectations or any change in events, conditions, or circumstances on which any of our forward-looking statements are based or to conform to actual results. We qualify all of our forward-looking statements by these cautionary statements.

You should read this section in combination with the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Fiscal year ended June 30, 2008 included in our Annual Report on Form 10-KSB for the fiscal year ended June 30, 2008.

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Family Room Entertainment Corporation

September 30, 2008

GENERAL

Family Room Entertainment Corp. (“FMYR” or the “Company”)) is engaged in various aspects of the motion picture entertainment industry, including development, production, and production services. FMYR develops, produces and performs production related services for the motion picture entertainment industry mainly through the following three wholly-owned subsidiaries [Emmett/Furla Films]: (1) Emmett/Furla Films Productions Corporation (“EFFP”), a California Corporation involved in motion picture development, production, and production related services for high budget motion pictures (in excess of $20,000,000 to $50,000,000). EFFP’s subsidiary, Good Entertainment Service, Inc. (“GESI”), a Delaware Corporation, was originally a production servicing company and produced one motion picture “Good Advice” in the year 2000. Currently GESI is the subsidiary that signs with the film and entertainment industry guilds when the contracted resource is a member of such guild; (2) Emmett Furla Films Distribution LLC, (EFFD) is a Delaware Limited Liability Company set up to contract with third parties for the world-wide distribution and/or exploitation of FMYR’s wholly owned and or controlled entertainment properties, and (3) EFF Independent, Inc. (“EFFI”) a California Corporation, is setup primarily to develop and provide production related services for low budget motion picture (less than $20,000,000).

Critical Accounting Policies and Estimates

The Company follows the American Institute of Certified Pubic Accountant’s Statement of Position (“SOP”) 00-02 “Accounting by Producers and Distributors of Films”. See Note 2 to the Consolidated Financial Statements contained in the Annual Report on Form 10KSB of Family Room Entertainment Corporation (the “Company”) for the year ended June 30, 2008.

Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions provide a basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and these differences may be material.

We believe the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue Recognition

We recognize revenue from the development, production, and production services earned under the criteria established by SOP 00-2 as follows: and as such the Company recognizes revenue from various sources under the criteria established by SOP 00-2 as follows.

1.	Producers Fees – Producer fees are recognized upon receipt of the fees and delivery of the related services. If upon receipt of the fees all services have not been provided, the fees are deferred and recognized as the services are performed;

2.	Royalties – Royalty and profit participation are recognized when the amounts are known and the receipt of the royalties is reasonably assured. Accordingly, recognition generally occurs upon receipt (usually quarterly or semi-annually); and

3.	Distribution Revenues – Distribution Revenues are recognized when earned and appropriately reported by third (3) party Distribution companies and recorded Gross along with any distribution expenses charged by the Distributor and upon receipt of such revenues.

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Family Room Entertainment Corporation

September 30, 2008

4. Producer Development, Production Service Fees and Film Distribution Fees – As these services are provided, these fees are invoiced by FMYR to the third party financiers and producers and are recognized when the amount has been determined and receipt is reasonably assured.

Film Costs

Film costs include costs to 1) acquire rights or films, 2) project development (the process whereby underlying material, such as a books, manuscripts or screenplays, are made ready for production into a motion picture by creating a finished screenplay which takes into account the desires of the creative elements as well as the constraints of the budget and production schedule), 3) project packaging (the process whereby creative elements, such as directors and actors, are attracted to and agreements are made for them to perform their services in connection with the picture), and/or 4) produce feature motion pictures.

Production costs mainly consist of acquisition costs, salaries, equipment, and overhead. Production costs in excess of the amounts reimbursable by the actual production entity are capitalized. Once production on a particular film project commences, FMYR begins to derive producer fees. FMYR’s primary source of revenue is motion picture production fees. Production costs capitalized on a particular film project are amortized in the proportion that the revenue received during a period bear to the anticipated total gross revenues for that film. Estimates of anticipated total gross revenues for all film projects are reviewed periodically and revised when necessary. Un-amortized film production costs are also compared with net realizable value each reporting period on a film-by-film basis. If estimated gross revenues determined by FMYR’s management are not sufficient to recover the un-amortized film production costs, the un-amortized film production costs are written down to their estimated net realizable value.

Exploitation Costs

All exploitation costs, including marketing costs, are expensed as incurred. During the three months ended September 30, 2008 and 2007, FMYR incurred exploitation costs of $0 and $8,780 respectively.

Participation Costs

Estimates of unaccrued ultimate participation costs, if any, are used in the individual-film-forecast-computation to arrive at current period participation cost expense. Participation costs are determined using assumptions that are consistent with FMYR’s estimates of film costs, exploitation costs, and ultimate revenue. If, at any balance sheet date, the recognized participation costs liability exceeds the estimated unpaid ultimate participation costs for an individual film, the excess liability is reduced with an offsetting credit to unamortized film costs. To the extent that an excess liability exceeds unamortized film costs for a film, it is credited to income. Participation costs are not currently a factor on any of FMYR’s film projects.

Convertible Debt Financing and Derivative Liabilities

FMYR reviews the terms of convertible debt and equity instruments issued to determine whether there are embedded derivative instruments, including embedded conversion options, that are required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where the convertible instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, the Company may issue freestanding options or warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.

In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“SFAS 133”), the convertible debt holder’s conversion right provision, interest rate adjustment provision, liquidated damages clause, cash premium option, and the redemption option (collectively, the debt features) contained in the terms governing the convertible notes are not clearly and closely related to the characteristics of the notes. Accordingly, the features qualify as embedded derivative instruments at issuance and, because they do not qualify for any scope exception within SFAS 133, they are required by SFAS 133 to be accounted for separately from the debt instrument and recorded as derivative financial instrument liabilities.

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Family Room Entertainment Corporation

September 30, 2008

Share Based Payments

During the fiscal year 2008, FMYR adopted SFAS No. 123R, “Share Based Payment”, which result in FMYR having to expense the fair value of stock options and warrants issued to employees. FMYR elected to use the modified prospective method. The adoption of SFAS No. 123R did not have any direct impact on our financial statements for fiscal year 2008, because FMYR did not issue any stock options or warrants to employees in Fiscal year 2008 or 2007. Additionally, there were no unvested employee stock options or warrants outstanding as of September 30, 2008.

Plan of Operation

Our short-term objective : To produce and/or to provide production related services in connection with genre specific motion pictures with moderate production costs in the $1 million to $50+ million range.

Our long-term objectives: FMYR’s goal, through EFFP and EFFI, is to facilitate relationships (and as such, provide production related services) between creative talent (including writers, actors and directors) and companies who produce, finance and distribute motion pictures. As mentioned, FMYR acquires or licenses rights to materials upon which it believes motion pictures can be based (screenplays, books, etcetera, which are referred to within the entertainment industry as the “underlying property”). FMYR may further develop an underlying property by contracting for additional writing services and/or by bringing in new writers to perform “polishes” or “rewrites” on a particular underlying property. If FMYR is satisfied with the creative state of the underlying property, it will then make offers to directors and/or actors, to perform services in connection with a particular motion picture based on that underlying property. These offers are very often contingent and subject to the satisfaction of certain production elements, such as financier approval of the screenplay and the financier’s selection of a start date for principal photography. If a director or actors accepts one of FMYR’s offers, the director or actors are said to be “attached” to the motion picture project. Armed with the underlying property and the attached creative element(s) (these elements are often called the “package” in Hollywood), FMYR may then approach third party financiers seeking financing as well as distribution for the potential motion picture. Another approach that FMYR may take is to contact the financiers first, seeking first to produce the film, and then with a finished (or nearly finished) motion picture product, obtain distribution for the picture.

FMYR has financed operations through the sale of common stock and through financing from financial institutions. In order to sustain operations in the near term, it is anticipated that motion pictures through FMYR via production services and/or produced by FMYR will be entirely financed through outside sources. In April 2004, we received $644,455 in funds pursuant to a subscription agreement. Additionally, on November 17, 2004, we issued $2,000,000 in convertible notes, receiving net proceeds of $1,710,652 pursuant to a subscription agreement. In March, 2006, we issued a $400,000 convertible note and film entertainment consulting agreement due March 1, 2007. Both the note and the consulting agreement were extended one year. On June 5, 2007, we issued a $1,000,000 convertible note to the Longview Fund L.P.

During December 2006, though Tau Entertainment ( Elisa Salinas) we received $1,300,000 on film projects The agreements executed by these investors call for certain investor to receive: (a) a 7% one-time finance fee and (b) 8% annual interest on their respective investments. Investors will also be permitted to designate certain pre-negotiated credits in connection with the picture as well as participate in the Net Profits (net profits is generally defined as monies remaining after all negative costs, distribution fees and costs in connection have been recouped, paid and/or reserved against). The investors will participation in the net profits of the picture on a proportional basis to their investment. In addition, Tau Entertainment (Elisa Salinas) invested funds into three additional projects: (1) Wickerman, whereby Tau Entertainment invested $250,000 in the development of the picture and will be re-paid out of the net proceeds of the picture, the payment of which is guaranteed by the distributor/financier (NuImage) of the picture; (2) Room Service whereby they invested $130,000 in the development of the Picture for which they will be repaid if and when the picture is fully financed (by a third party) and produced, if ever; and (3) King of California whereby they invested $1,300,000 in the production of the picture for which Tau Entertainment will be repaid after delivery and from distribution. In November 2007, FMYR paid to Tau Entertainment (Elisa Salinas) $1,000,000 for King of California, and in December 2007, FMYR paid to Tau Entertainment (Elisa Salinas) $85,000 for King of California. And in June 2008 Elisa Salanis for Tau Entertainment converted $215,000 of debt for King of California and $100,000 of debt for Borderland into Convertible Debt ( See note 8 of the notes to the financial statements. Also, in June 2008, the Company wrote off the $250,000 for Wickerman and $130,000 for Room Service as these projects either were not going to earn any net profits or were written off as it was not going to be made.

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Family Room Entertainment Corporation

September 30, 2008

On June 27, 2005 we received $500,000 from Scorched Earth to invest in the Borderland USA project. The agreements executed by these investors call for certain investor to receive: (a) a 7% one-time finance fee and (b) 8% annual interest on their respective investments. Investors will also be permitted to designate certain pre-negotiated credits in connection with the picture as well as participate in the Net Profits (net profits is generally defined as monies remaining after all negative costs, distribution fees and costs in connection have been recouped, paid and/or reserved against). The investors will participation in the net profits of the picture on a proportional basis to their investment.

EFF Partners LLC received $300,000 in October 2005 from outside investors of which $272,514 was invested in White Air and $27,486 in The Tenant. In February 2006, EFF Partners received from an outside investor, $500,000 of which $85,000 was invested in Rin Tin Tin , $41,000 was invested in The Tenant, $74,000 was invested in White Air, and $ 300,000 was invested in Day of the Dead. During the year ended June 30, 2008 the Company converted the monies due by EFF Partners LLC in convertible debts amounting to Tamburello $500,000 and to Terkovich $300,000 ( see note 8 of the notes to financial statements for details)

On May 18, 2007 and August 17, 2007, the Company through its wholly-owned subsidiaries, EFF Independent, Inc., (“EFFI”) and Emmett Furla Films Productions Corp (“EFFPC”) entered into a financing agreement with Gary Granstaff, a private individual, and Dr. Raja H. Ataya MD, a private individual. The Granstaff Financing Agreement terms are that EFFI and EFFPC receive $750,000 in exchange for 15% of EFFI and EFFPC’s future film revenues (primarily producer fees) until the $750,000 is repaid. Additionally, Mr. Granstaff receives an ongoing 15% interest in EFFI and EFFPC’s participation interest in the film, “Righteous Kill.” Mr. Granstaff has no recourse to the Company for payments due unless the Company has revenues from its film projects. The Dr. Raja H. Ataya MD Financing Agreement terms are that EFFI and EFFPC receive $200,000 in exchange for 1% of EFFI and EFFPC’s future film revenues (primarily producer fees) in perpetuity. For the sum of US$200,000, Ataya would receive 1% of the film net revenues received by EFFI and EFFPC on a going-forward basis. Concurrently EFFI and EFFPC entered into a consulting agreement with Tommy Lee Thomas and Jody Nolan whereby Thomas and Nolan received 0.4% the film net revenues (mainly producer fees) received by EFFI and EFFPC on a going forward basis. Dr. Ataya has no recourse to the Company for payments due unless the Company has net revenues from its applicable film projects. During the 4 th quarter ending June 30, 2008 the Company through its wholly-owned subsidiaries, Eff Independent, Inc. ( “EFFI”) and Emmett Furla Productions Corp. ( “EFFPC”) received $500,000 from Justin Holecek and would receive 12.5% of the films net revenues received by EFFI and EFFPC on an a going-forward basis. Mr. Holecek has no recourse to the Company for payments due unless the Company has net revenues from its applicable film projects. Additionally, Mr. Randall Emmett, a Director and Officer of the Company personally guaranteed $250,000 of the amount Mr. Holecek paid. Pursuant to guidance provided in SOP 00-2, Accounting by Producers or Distributors of Films, and EITF 88-18, Sales of Future Revenues, the Company has recorded the amounts for Mr. Granstaff and Dr. Ataya’s amount as Loan Participant Payable.

There was no additional outside participation investment funds for the three months ended September 30, 2008.

FMYR'S future capital requirements will depend on numerous factors, including the profitability of our film projects and our ability to control costs. We believe that our current assets will be sufficient to meet our operating expenses and capital expenditures to the successful commercialization of our existing and future film projects. However, we cannot predict when and if any additional capital contributions may be needed and we may need to seek one or more substantial new investors. New investors could cause substantial major dilution to existing stockholders (see liquidity and capital resources below for additional discussion).

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Family Room Entertainment Corporation

September 30, 2008

RESULTS OF OPERATIONS

Three Months ended September 30, 2008 versus Three Months ended September 30, 2007

The Company’s operating revenue for the three months ended September 30, 2008 was $567,096 as compared to $309,167 for the three months ended September 30, 2007, for an increase of $257,929 (83.4%). The increase of $257,929 in revenues was attributable to an increase in the following: 1) distribution revenue of $337,096 (1348.4%), and 2) an increase in consulting and participation fees of $20,000 (100.0%), offset by a 1) decrease in producer fees of 90,000 (32.7%) and 2) a decrease in royalty revenue of $9,167 (100.0%). $362,096 of FMYR’s revenue in 2008 was derived from distribution revenues for the film Borderland and $100,000 of revenue was derived from producer’s fees from the film Bad Lieutenant. The remaining revenue in 2008 was mainly derived from consultant and participation fees of $20,000 and film production fees of $85,000.

Costs relating to operating revenue for the three months ended September 30, 2008 were $270,917 as compared to $147,643 for the three months ended September 30, 2007, for an increase of $123,274 (83.5%). The increase mainly consisted of 2008 amortized costs for Borderland of $220,558, Ligea of $12,921, Bad Lieutenant if $18,352 Once Fallen of $11,750 and other amortized film costs of $7,337, compared to 2007 amortized costs of $136,200 for FMYR/EFF participation payment and $11,443 in miscellaneous items (See Note 5).

Distribution costs for the three months ended September 30, 2008 were $205,197 as compared to $1,833 for the three months ended September 30, 2007, for an increase of $203,364 (11094.6%). The increase in cost was attributable to the distribution cost of Borderland and a couple minor movies as compared to no movies being distributed during the same period prior year.

FMYR’s gross margin for the three months ended September 30, 2008 were $90,982 as compared to $159,691for the three months ended September 30, 2007, for a decrease of $68,709 (43.0%). The gross margin percentage for the three months ended September 30, 2008 was 16.0% compared to 51.7% for the three months ended September 30, 2007, for a decrease of 35.7%. The increase in our gross percentage was mainly attributable to a negative gross margin percentage of (17.4%) for distribution costs and film amortization related to Borderland for the three months ended September 30, 2008.

Selling, general administrative expenses for the three months ended September 30, 2008 were $277,651 as compared to $345,160 for the three months ended September 30, 2007, for a decrease of $67,509 (19.6%). The following table further explains the change:

Selling, general and administrative Expenses
	Three months ending

Account	September 30	September 30	Variance	Variance	Explanation of Variance
Description	2008	2007	$	%

Salary and Wages	$ 22,750	$ 93,959	$ (71,209)	-75.8%	Reduced headcount
Payroll related expenses	30,429	56,849	(26,420)	-46.5%	Reduced headcount
Rent	14,114	31,233	(17,119)	-54.8%	Moved to a smaller office
Airfare	16,629	1,699	14,930	878.8%	Randall Emmett Travel Expenses
Office Overhead	14,539	39,103	(24,564)	-62.8%	Less costs in all categories offset by increase in insurance
Telephone	15,075	30,042	(14,967)	-49.8%	Reduced Cell phone usage
Automobile	4,296	6,185	(1,889)	-30.5%	Two less cars
Professional Fees	103,084	74,894	28,190	37.6%	$52K incease in audit fees offset by decrease in consultants
Depreciation	6,735	11,196	(4,461)	-39.8%	Less assets to depreciate
Bad Debt	50,000	0	50,000	100.0%	Reserve - Bad Lieutenant
Total	$ 277,651	$ 345,160	$ (67,509)	-19.6%

Other income (expense) differences are as follows:


Other Income and expenses	Three months ending
Account	September 30	September 30	Variance	Variance	Explanation of Variance
Description	2008	2007	$	%
(Income)/Expense
Interest income	$ 85	$ 1,532	$ (1,447)	-94.5%

Other income
Material other income	(380,000)		(380,000)	-	Gain on disposition of notes
Production recharge		(28,848)	28,848	-
Total other income	(380,000)	(28,848)	(351,152)	1217.2%

Change in value of derivatives
Warrant Liability	(855,615)	(214,904)	(640,711)	298.1%	Reduction in fair value of warrant and derivative
Derivative Liability	25,209	(555,482)	580,691	-104.5%	liabilities associates with convertible notes.
Total change of Value of derivatives	(830,406)	(770,386)	(60,020)	7.8%	Please see Footnote 8 to the financial statements
					for a detailed analysis of these items.
Interest expense
Afilliated	619,561	1,557,441	(937,880)	-60.2%	Interest expense - convertible debt
Afilliated - Development	20,529	38,499	(17,970)	-46.7%	Interest expense - other notes payable
Total interest expense	640,090	1,595,940	(955,850)	-59.9%
Total Other Income and Expenses	$ (570,231)	$ 798,238	$ (1,368,469)	-171.4%


Liquidity and Capital Resources

	June
Major items affecting liquidity and capital resources	2008	Explanation of Variance

Amortization of film costs	$ 2,893,725	Film projects amort against producer fee revenues and/or write-offs
		based on management's evaluation.
Change in value of warrant liabilities	$ (871,631)	Reduction in fair value of warrants associated to convertible debt
Change in value of derivative liabilities	$ 41,252	Increase in Fair value of derivative liabilities a result of additional debt issued
Amortization of debt discount	$ 442,065	Debt discount amortized
Gain on disposition of invrestor participation loan	$ (380,000)	Gain on note no longer owed
increase in accounts receivable - Borderland	$ (536,894)	$697K due less $160K cash received
(Increase) decrease in film costs	$ (1,033,434)	Write-off of uncollectible production service fee (Shattos)
Purchase of property and equipment	$ (25,871)	Purchase of computers
Proceeds from advance under development agreement	$ 700,000	Proceeds mainly from investor development and particiaption loans
Payments of advance under development agreement	$ (1,115,000)	Payments to investor pursuant to a development & participation agreements
Purchase of common stock	$ (50,470)	Treasury shares purchases - cash
Proceeds from convertible notes payable	$ 300,000	Cash received
Payment on convertible interest	$ (26,164)	Cash payments
Payment on convertible notes payable	$ (40,000)	Cash payments

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Family Room Entertainment Corporation

September 30, 2008

Liquidity and capital resources - continued

Net cash generated by operating activities for the three months ended September 30, 2008 amounted to $544,078which mainly consists of the net loss of $385,392 for the year ended June 30, 2008 plus the following: 1) $31,029 change in warrant financial liabilities, 2) $121,783 increase in accounts receivable, 3) $44,306, increase in film costs, 4) $67,881 increase in other assets , and 5) miscellaneous items of $77, offset by 1) $6,735 in depreciation expense, 2) $370,918 amortization of film costs, 4) $50,000 reserve for doubtful accounts, 4) $13,500 stock issued for compensation, 5) $140,832 of amortization of debt discount, 6) $171,176 increase in accounts payable; 7) $18,700 change in the value of derivative liabilities; and 8) decrease in accounts receivable – paid of $587,685.

Cash used by financing for the year ended June 30, 2008 amounted to $561,266. This consisted payments in payments on investor participation notes payable of $626,266, offset by proceeds from notes payable of $65,000.

Restructuring of Investor Production / Participation Notes

In its normal course of business as a film entertainment producer who provides production service, FMYR makes contractual commitments to acquire film rights and make payment for options to purchase properties (i.e. scripts and/or books). These contractual obligations and option payments, if any, can range from $10,000 to $350,000. At September 30, 2008 FMYR had outstanding commitments of approximately $ 200,000.

The important matters on which FMYR focuses in evaluating its financial condition and operating performance are the return on investment, but just as important are the quality of the movie projects we are involved in and the quality of the parties that are involved in those projects with us.

With the exception of publicity and marketing fees, FMYR’s operating costs are fairly fixed. To absorb these costs and to generate a profit, FMYR takes on as many projects as possible. Factors that FMYR takes into consideration before accepting a project are: 1) is the material (script) good enough to attract talent, 2) whether talent can be obtained, and 3) whether financing can be arranged.

FMYR’s evaluation of return on investment is a two-phase process. In the first phase we evaluate the project against the resources that we have available to determine if we can arrange for talent, directors and/and or production and/or distribution financing. Once a suitable project is identified, our decision on participation in that project is based our ability to recover projected costs, including our option on the project, development costs and our producer fees. We generally seek to obtain producers fees and a net profit participation that we believe will provide ten times the cost of our option on the project and our related development costs. Although our target return on the investment is high, we believe that it is necessary because it helps cover the cost of closed or abandoned projects.

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Family Room Entertainment Corporation

September 30, 2008

The recurring cash commitments of FMYR at September 30, 2008 are as follows:

Future annual debt maturities (including the convertible notes net of discount):

	Year Ending
	September 30,

	2008	$	2,340,533

	Total	$	2,340,533

Accounts payable and accrued liabilities:

Description

Accounts payable		$	43,669
Accrued Interest on convertible debt			256,950

	Total	$	300,619

Future annual minimum lease payments under operating leases:

	Period Ending
	September 30,
		$
	2009		28,800
	2010		-

	Total	$	28,800

Estimated fixed recurring monthly average selling, general and administrative expenses:

Description

Salaries, consultants and benefits		$	12,000
Rent			3,200
Parking			500
Telephone and communications			7,000
Directors, officers and corporate insurance			1,000
Accounting and auditing			7,000

	Total	$	30,700

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Family Room Entertainment Corporation

September 30, 2008

Estimated Future Cash Requirements

FMYR’s estimate of net cash requirements for overhead for the next twelve months subsequent to September 30, 2008, is approximately $35,000 (including the above monthly fixed cost estimate of $30,700) per month for a twelve month total of $420,000. The estimate of cash in flow (net of film cost and fees) from operations for that time period from projects currently in place is estimated to be approximately $500,000. We are unable to estimate beyond this twelve month period because we are currently in negotiations on several projects.

FMYR'S future capital requirements will depend on numerous factors, including the profitability of our film projects and our ability to control costs. We cannot for certain claim that our current assets along with financing from outside will be sufficient to meet our operating expenses and capital expenditures to the successful commercialization of our existing and future film projects. We will need to seek outside capital in order to continue as a going concern. In addition, we cannot predict when and if any additional capital contributions may be needed and we may need to seek one or more substantial new investors. New investors could cause substantial dilution to existing stockholders

Going Concern

As shown in the accompanying financial statements, the Company has incurred recurring losses from operations, and as of September 30, 2008, its total liabilities exceeded its total assets by $ $ 3,886,570 . These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management has instituted a cost reduction program that included a reduction in staffing, general overhead and related fringe costs and has instituted more efficient management techniques. In 2007, the Company relocated its offices in order to reduce rental costs as well moved again to smaller reduced offices in 2008 to substantially reduce its rental costs. In addition, the Company has movie projects in various stages of development, which should generate additional cash flow over the next several months. Additionally, the Company has been able to obtain additional capital through the issuance of debt or equity. The Company has an ongoing requirement for additional capital investment, and historically management has been able to obtain additional financing to meet its working capital needs. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

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Family Room Entertainment Corporation

September 30, 2008

ITEM 4(A) - CONTROLS AND PROCEDURES

The Chief Executive Officer and Chief Financial Officer (the principal executive officer and principal financial officer, respectively) of the Company have concluded, based on their evaluation as of September30, 2008, that the design and operation of the Company's "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")) are not effective to ensure that information required to be disclosed in the reports filed or submitted by the Company under the Exchange Act is accumulated, recorded, processed, summarized and reported to the management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding whether or not disclosure is required.

During the quarter ended September 30, 2008, there were no changes in the internal controls of the Company over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the internal controls of the Company over financial reporting.

ITEM 4(A)T – INTERNAL CONTROL OVER FINANCIAL REPORTING

(a) The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was not effective as of September 30, 2008. See the discussion under Item 4(A) above.

(b) This quarterly report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in its annual report filed on Form 10KSB.

(c) There were no changes in the Company's internal controls over financial reporting, known to the chief executive officer or the chief financial officer that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

For the three months ended September 30, 3008 issued 1,113,333 shares for services and compensation

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Family Room Entertainment Corporation

September 30, 2008

Item 3. DEFAULTS UPON SENIOR SECURITIES

None

Item 4. SUBMISSION OF MATTERS OF A VOTE TO SECURITY HOLDERS

Item 5. OTHER INFORMATION

None

Item 6. EXHIBITS AND REPORTS ON FORM 8-K:

(a) Exhibits

31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)(Section 302 of the Sarbanes-Oxley Act of 2002)

31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)( Section 302 of the Sarbanes-Oxley Act of 2002)

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

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

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Family Room Entertainment Corporation

September 30, 2008

SIGNATURES

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

/s/ George Furla Director, Chief Executive Officer, November 19, 2008

George Furla President and Chief Accounting Officer

/s / Randall Emmett Director, Chief Operating Officer November 19, 2008

Randall Emmett & Assistant Secretary

/s/ Anthony Caltaldo Director November 19, 2008

Anthony Cataldo

/s / Stanley Tepper Acting Executive VP Finance & Accounting November 19, 2008

Stanley Tepper & Chief Financial Officer

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Family Room Entertainment (CE) (USOTC:FMYR)
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