Edgar Filing: Alliance Distributors Holding Inc.

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

FORM 10-KSB

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

|_| 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
000-32319

Alliance Distributors Holding Inc.
(Name of Small Business Issuer in Its Charter)

Delaware 33-0851302
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

15-15 132nd Street
College Point, New York 11356
(Address of principal executive offices)

Registrant's Telephone Number, Including Area Code:
(718) 747-1500
--------------

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section
12(g) of the Act:
Common Stock, par value $0.001 per share

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act.
|_|

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

Yes |X| No |_|

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|

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

State Issuer's revenues for its most recent fiscal year: $58,670,335.

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant was $7,074,319 as of March 15, 2006.

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

State the number of shares outstanding of each of the Issuer's classes of common
stock, as of the latest practicable date: 48,721,065 as of March 16, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

See index to exhibits

Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|

ITEM 1. DESCRIPTION OF BUSINESS

Alliance Distributors Holding Inc. (the "Company" or "Alliance") is a
distributor of video game consoles and video game peripherals, accessories and
software. Our offices are located at 15-15 132nd Street, College Point, New York
11356. Our telephone number is (718) 747-1500.

Business Background

In June 2002, the Company, then named JPAL, Inc. ("JPAL"), a Nevada corporation
which then had no ongoing business or significant assets, acquired Essential
Reality, LLC ("ER, LLC") which had been formed in 1998 as Freedom Multimedia,
LLC in Delaware to develop and market a virtual video game controller. Following
this transaction, JPAL changed its name to Essential Reality, Inc.
("Essential"). In November 2003, we discontinued sales of our virtual video game
controller because of our inability to raise necessary funds.

On June 17, 2004, Essential entered into a Share Exchange Agreement (the
"Exchange Agreement") with Jay Gelman, Andre Muller and Francis Vegliante, the
sole shareholders (the "Stockholders") of AllianceCorner Distributors Inc., a
New York corporation ("AllianceCorner") which had been engaged in the video game
distribution business since August 2003. Pursuant to the Exchange Agreement, the
Company on June 29, 2004 acquired all the outstanding capital stock of
AllianceCorner from the Stockholders and, in exchange for such capital stock,
issued 517,105 Series B Convertible Non Redeemable Preferred Shares ("Series B
Preferred Shares") to Jay Gelman, 517,105 Series B Preferred Shares to Andre
Muller and 517,104 Series B Preferred Shares to Francis Vegliante. On November
22, 2004, the Series B Preferred Shares converted into 8,226,671 shares of
common stock for each of Jay Gelman and Andre Muller and into 8,226,655 shares
of common stock for Francis Vegliante.

In connection with this acquisition, the Company issued the share equivalent of
22,028,759 shares of common stock and 346,663 shares of Series A Convertible Non
Redeemable Preferred Stock and warrants to purchase 1,564,096 shares of common
stock in private placements. Each share of Series A Convertible Non Redeemable
Preferred Stock entitles the holder to 15.91 votes, and votes as one class with
the common stock on as converted basis.

These transactions diluted the ownership of our shareholders prior to June 2004
to 1.06% of the 47,368,756 shares of common stock outstanding as of December 31,
2005.

Certain holders granted to Jay Gelman an irrevocable voting proxy to vote their
voting stock. As of March 16, 2006, Jay Gelman's voting proxy covered
6,976,899 shares of common stock, as well as 168,427 shares of Series A
Convertible Non Redeemable Preferred Stock that have 2,679,674 votes, for a
total voting proxy of 9,656,573 votes.

We accounted for our acquisition of AllianceCorner as a reverse acquisition as
of June 30, 2004. The pre-acquisition financial statements of AllianceCorner are
treated as historical financial statements of the combined companies.

AllianceCorner was formed in May 2003 under the name Alliance Partners, Inc. The
name of Alliance Partners, Inc. was changed to AllianceCorner Distributors Inc.
in September 2003 and was further changed to Alliance Distributors Holding, Inc.
("Alliance New York") in July 2004. Effective November 17, 2004, Alliance New
York was merged into Alliance Distributors Holding Inc., a Delaware corporation
that was wholly owned by Essential.

Effective November 22, 2004, Essential reincorporated in Delaware and changed
its name to Alliance Distributors Holding Inc. ("Alliance" or the "Company"), by
way of a merger of Essential into Alliance, which was then a wholly owned
Delaware subsidiary of Essential.

On March 7, 2005, Mr. Vegliante sold 4,000,000 shares of common stock to
investors in a private transaction at a purchase price of $0.125 per share.

Stock Purchase Agreement

On January 2, 2006, the Company entered into a Stock Purchase Agreement (the
"Acquisition Agreement") to buy all of the capital stock of Foto Electric Supply
Co., Inc. (Fesco). The Acquisition Agreement expired by its terms on February
28, 2006. The Company and the shareholders of Fesco are on a non-binding basis
nevertheless pursuing efforts to consummate a transaction. Fesco is a privately
held company based in New York City whose primary business is the distribution
of consumer electronics.

Our Business

What we Sell

We distribute to retail stores videogame consoles that are manufactured by Sony
(primarily the PlayStation(R) 2 Computer Entertainment system or "PS2" and Play
Station Portable system or "PSP"), Nintendo of America, Inc. "Nintendo"
(including the GameCubeTM and Game Boy(R) Advance systems) and, pursuant to a
resale relationship we have with one of Microsoft's distributors, Microsoft
products, including the Xbox(R) system. We generally sell these consoles at
prices ranging from $70 to $250. We also distribute accessories and game
software that are made for these consoles by the console manufacturers and third
parties. Accessories include controllers, memory cards, network adaptors,
steering wheels for racing games and extra cable for game controllers. We sell
our accessories and software at prices ranging from $10.00 to $150.00. At
December 31, 2005, we had available an aggregate of approximately 4,000 products
for sale to our customers.

The Market

According to The NPD Group, Inc. a leading market information provider, the
videogame market, which includes gaming hardware, software, and accessories,
generated U.S. retail sales of $10.5 billion in 2005. This represented an
approximate six percent increase over the $9.9 billion sales generated in 2004.
The sales increase was the result of a strong portable game market, which offset
the declines in the console market. According to the International Development
Group ("IDG"), the average age of Americans who play video and PC games is 29,
and approximately 145 million people play videogames on a regular basis.

Suppliers

We are direct distributors for Sony Computer Entertainment America Inc. ("Sony")
and Nintendo of America Inc. ("Nintendo") and purchase product from them
directly. We are also direct distributors for approximately 75 third-party
vendors (including Electronic Arts Inc., Take Two Interactive Software, Inc. and
THQ Inc.) of accessories and software for video games. We have no relationship
with Microsoft for distribution of the Microsoft Xbox(R), and purchase our
Xbox(R) supplies from another distributor.

For the fiscal year ended December 31, 2005, we purchased approximately 33% of
our products for cash in advance, and the balance on 30 day to 45 day terms. For
the fiscal year ended December 31, 2004, we purchased approximately 30% of our
products for cash in advance, and the balance on 30 day to 45 day terms.

In addition to manufacturer credit and internally generated funds, we have a
financing agreement with a lender under which the lender may in its discretion
lend us up to $10,000,000 based on eligible receivables and inventory. We have
pledged substantially all of our assets as security for this financing.

For the fiscal year ended December 31, 2005, three of our suppliers in the
aggregate accounted for approximately 62% of our purchases (with one supplier
accounting for 42% alone), and our ten largest suppliers in the aggregate
accounted for 82% of our purchases. For fiscal year ended December 31, 2004, the
same three suppliers in the aggregate accounted for approximately 56% of our
purchases, and our ten largest suppliers in the aggregate accounted for 77% of
our purchases. We have no long term agreement with any of our suppliers, and
conduct business with them on an individual purchase order basis. Our business
would be materially and adversely affected should any material supplier
terminate its relationship with us or modify its relationship with us.

Warehouse and Showroom

Our executive offices and approximately 2,000 square foot showroom are located
in approximately 5,500 square feet of space at 15-15 132nd Street, College
Point, New York 11356. We utilize our showroom to display products to our
customers. We store our inventory in our 11,500 square foot warehouse in College
Point, New York. Products are either picked up directly by the customer from our
showroom or delivered by one of our three delivery vehicles or through a third
party courier. We deliver products at no additional charge to customers that
purchase at least $500 worth of products in the New York metropolitan area and
the surrounding tri-state region.

Our Customers; Sales and Marketing

Our customers consist primarily of approximately 2,600 retail outlets located
throughout the United States and Canada, with a majority being in the New York
metropolitan area and the surrounding tri-state region. These customers include
independent retailers, regional electronics superstores, entertainment specialty
stores, video stores, online retailers, specialty toy retailers, supermarkets,
drug stores, department stores, and military bases. We estimate that these
stores are owned by approximately 350 to 500 different entities. Approximately
35% of our sales are on a cash on delivery basis, and the balance is invoiced
primarily on 7 through 30 day terms. To our knowledge, no group of stores under
common ownership accounted for 10% or more of our sales for fiscal year ending
2005 and 2004.

We sell to our customers on a purchase order basis through our sales employees
who are paid on a salary plus commission basis. We have no long-term sales
agreements.

We market ourselves in part as being engaged in a "Video Game Alliance" with our
customers, fostering the sense that we are truly partners with our retailer
customers in selling products to the end user. Our showroom in College Point is
designed in part to help us advise our customers on how best to sell the product
they buy from us, and we offer them banners, and point of sale and similar
material. In advertisements we list our customers and indicate that the
advertisement is "brought to you by Alliance Distributors." We have not to date
advertised in the trade press. We attend and exhibit at two trade shows
annually.

We have developed a business-to-business website that offers customers many of
the conveniences of our retail showroom and the ability to order products
directly on line. We believe that the website may allow us to expand our
marketing area.

Warranties and Returns

We offer no warranties to our customers and do not have any facilities for the
repair or service of any products. We nevertheless accept returns of product
claimed to be defective and reimburse our customers for the full purchase price
of these products. Although the majority of our suppliers in turn accept these
returns from us, certain suppliers credit us with a fixed allowance for returns
and require that we assume any additional risk.

Competition

The products that we distribute are also sold through large retail chain stores,
many of which have greater financial, technical, personnel and other resources
than we do. Management estimates that the great majority of product sales are
made through Wal-Mart, BestBuy, Target, Gamestop and other retailers that buy
directly from manufacturers

In addition to Alliance, the dominant independent distributors in our industry
include: Mecca Electronics Industries, Inc., Jack of all Games (a subsidiary of
Take Two Interactive Software, Inc.), About Time Inc, Pioneer Distributors Inc
d/b/a JB Marketing, Florida State Games, SVG Distribution, Inc. and D&H
Distributing Co., Inc. These companies have significantly greater financial
resources than our company. We compete with these companies on the basis of
personalized service, advice and marketing support that we seek to offer to our
customers.

Government Regulation

The manufacturers of the products we distribute must test them for compliance
with Federal Communications Commission (FCC) standards to avoid radio frequency
emissions that could interfere with other radio frequency transmissions or
similar regulatory standards in other countries. We are not required to test our
products for compliance.

Trademarks

We hold no patents or material proprietary technology. We have no intellectual
property other than a trademark for "Video Game Alliance."

Employees

We currently employ 30 employees, all except for three are employed on a full
time basis.

ITEM 2. DESCRIPTION OF PROPERTIES

Our executive offices and approximately 2,000 square foot showroom are located
in approximately 5,500 square feet of space at 15-15 132nd Street, College
Point, New York 11356. We lease these offices and showroom pursuant to a
ten-year lease which expires on February 28, 2013. We currently pay rent in the
amount of approximately $5,300 per month, which rent increases approximately 3%
beginning on March 1st each year, with a monthly rent of approximately $6,500
per month in the final year of the lease. We utilize our showroom to display
products to our customers.

We also lease approximately 11,500 additional square feet of warehouse space in
two adjacent buildings located at 18-37 and 18-39 128th Street, College Point,
New York 11356. Both leases expire on June 30, 2008. The aggregate rent
currently payable under these two leases is approximately $9,700 per month,
which rent increases 3% each year commencing on December 1st under the lease for
18-37 128th Street and on July 1st under the lease for 18-39 128th Street. Our
current premises are adequate for our current operations and we do not
anticipate that we will require any additional premises in the foreseeable
future.

ITEM 3. LEGAL PROCEEDINGS

Other than as set forth below, we know of no material, active or pending legal
proceedings against our company, nor are we involved as a plaintiff in any
material proceeding or pending litigation. There are no proceedings in which any
of our directors, officers or affiliates, or any registered or beneficial
shareholder, is an adverse party or has a material interest adverse to our
interest.

On August 19, 2004 a complaint was filed by Radio Wave LLC ("Plaintiff"), in the
Supreme Court of the State of New York, County of New York, against Essential
Reality, LLC, Essential and David Devor, a former officer and a current employee
of the Company, for rent, and costs relating to premises formerly occupied by
the Company. Plaintiff seeks to recover $150,416 for the period up to August 31,
2004, plus additional amounts to be determined by the Court for the period
subsequent to August 31, 2004. Plaintiff also seeks to recover $50,000 in
expenses and attorney fees plus additional amounts to be determined by the
Court. The Company is currently in settlement discussions with Plaintiff and has
provided a reserve for its estimate of the loss.

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

The Company may need to amend its Certificate of Incorporation to effect a
reverse stock split of the Company's authorized common stock and to further
amend its Certificate of Incorporation to increase the number of the Company's
authorized shares of common stock if the Company consummates any equity
financing in connection with the Acquisition Agreement described above under the
section titled Stock Purchase Agreement.

On December 19, 2005, shareholders holding 62% of the total outstanding shares
entitled to vote, voted to amend the Company's Certificate of Incorporation to
effect a reverse stock split of the Company's authorized common stock, par value
$0.001 per share and the Company's issued and outstanding common stock on the
basis of one-for-five at such time, if any, as the Board of Directors shall deem
appropriate ("Reverse Stock Split"). The Board of Directors has to this date not
effected the Reverse Stock Split.

On January 13, 2006, shareholders holding 62% of the total outstanding shares
entitled to vote, voted to amend the Company's Certificate of Incorporation to
increase the number of the Company's authorized shares of common stock from
20,000,000 shares to 100,000,000 shares on a post 2006 Reverse Stock Split basis
at such time, if any, as the Board of Directors shall deem appropriate. The
Board of Directors has to this date not effected the increase in authorized
shares.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock has traded on the OTC Bulletin Board since April 28, 2005. It
traded on the Pink Sheets Electronic Quotation Service from July 2003 to April
27, 2005 and on the OTC Bulletin Board from April 19, 2001 until July 2003. Our
current trading symbol is ADTR.OB. The following table sets out the high and low
closing bid prices of our common stock during the periods indicated as quoted on
the OTC Bulletin Board and the Pink Sheets Electronic Quotation Service. Prices
are adjusted to reflect a one-for 44 reverse split effective on November 22,
2004, and reflect inter-dealer prices, without retail mark-up, mark-down or
commissions, and may not represent actual transactions.

--------------------------------------------------------------------------------
QUARTER ENDED BID PRICE PER SHARE
--------------------------------------------------------------------------------
2005 HIGH LOW
--------------------------------------------------------------------------------
March 31, 2005 $0.65 $0.11
--------------------------------------------------------------------------------
June 30, 2005 $0.20 $0.12
--------------------------------------------------------------------------------
September 30, 2005 $0.45 $0.13
--------------------------------------------------------------------------------
December 31, 2005 $0.47 $0.20
--------------------------------------------------------------------------------
2004 HIGH LOW
--------------------------------------------------------------------------------
March 31, 2004 $11.00 $4.84
--------------------------------------------------------------------------------
June 30, 2004 $15.40 $3.52
--------------------------------------------------------------------------------
September 30, 2004 $15.40 $4.40
--------------------------------------------------------------------------------
December 31, 2004 $4.40 $0.20
--------------------------------------------------------------------------------

As of March 16, 2006, there were 128 stockholders of record of the Company's
Common Stock. This number does not include shares held in street name. The
Company has not paid cash dividends on its Common Stock and does not plan to pay
cash dividends in the foreseeable future.

EQUITY COMPENSATION PLAN INFORMATION

Our current Alliance Distributors Holding Inc. 2004 Stock Plan (the "Plan") was
adopted by our directors on October 25, 2004 and was approved by our
shareholders on October 25, 2004. No options were issued and outstanding under
the Plan during fiscal year 2004.

As of December 31, 2005, the Company has 7,390,000 options outstanding under the
Plan. The options are ten-year non-qualified options to purchase the Company's
common stock, 7,240,000 of the options have an exercise price of $0.325 per
share and 150,000 of the options have an exercise price of $0.32 per share and
they vest and become exercisable in 12 equal quarterly installments. Of the
total options granted, 1,100,000 options were granted to Jay Gelman, the CEO and
Chairman of the Board of Directors of the Company, 1,100,000 options were
granted to Andre Muller, the President, COO and a director of the Company,
100,000 options were granted to Barbara A. Ras, CFO of the Company and 150,000
options were granted to each of Thomas Vitiello, Steven H. Nathan and Humbert B.
Powell, III, each a non-employee director of the Company. The options were
granted in reliance on the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended.

Equity Compensation Plan Information
------------------------------------- ---------------------------- ---------------------------- -----------------------------------
Number of securities remaining
Number of Securities to be available for future issuance
issued upon exercise of Weighted-average exercise under equity compensation plans
outstanding options, price of outstanding options (excluding securities reflected
Plan category warrants and rights warrants and rights in column (a))
------------------------------------- ---------------------------- ---------------------------- -----------------------------------

Equity compensation plans approved 7,390,000 $0.325 2,610,000
by security holders
------------------------------------- ---------------------------- ---------------------------- -----------------------------------

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
OVERVIEW

See "Business-Background," for description of a transaction whereby
AllianceCorner Distributors Inc. ("AllianceCorner") became a New York
wholly-owned subsidiary of Essential. The name of AllianceCorner was changed to
Alliance Distributors Holding, Inc. ("New York Alliance") in July 2004.
Effective November 17, 2004, New York Alliance was merged into Alliance
Distributors Holding Inc., a Delaware corporation that was wholly owned by
Essential. Effective November 22, 2004, Essential reincorporated in Delaware and
changed its name to Alliance Distributors Holding Inc. ("Alliance" or the
"Company"), by way of a merger of Essential into Alliance, which was then a
wholly owned Delaware subsidiary of Essential. The business of AllianceCorner
became our only business. Since the former stockholders of AllianceCorner
acquired a majority of our voting interests, the transaction was treated as a
reverse acquisition of a public shell, with AllianceCorner treated as the
acquirer for accounting purposes. Accordingly, the pre-acquisition financial
statements of AllianceCorner are our historical financial statements. At the
time of the acquisition, the Company had no continuing operations and its
historical results would not be meaningful if combined with the historical
results of AllianceCorner.

Our distribution revenues are derived from the sale of interactive video games
and gaming products for all key manufacturers and third-party software titles,
accessories and hardware. Operating margins in our distribution business are
dependent on the mix of software and hardware sales, with software generating
higher margins than hardware.

CRITICAL ACCOUNTING POLICIES

Certain of the Company's accounting policies require the application of
significant judgment by management in selecting the appropriate assumptions for
calculating financial estimates. By their nature, these judgments are subject to
an inherent degree of uncertainty. These judgments are based on historical
experience, observation of trends in the industry, information provided by
customers and information available from other outside sources, as appropriate.
Critical accounting policies include:

Revenue Recognition - The Company recognizes sales upon shipment of products to
customers as title and risk of loss pass upon shipment and collectibility is
reasonably assured. Provisions for estimated uncollectible discounts and rebates
to customers, estimated returns and allowances and other adjustments are
provided for in the same period the related sales are recorded. While such
amounts have been within expectations and the provisions established, the
Company cannot guarantee that it will continue to experience the same rates as
in the past.

Accounts Receivable - Accounts Receivable as shown on the Balance Sheet are net
of allowances and anticipated discounts. The Company establishes credit terms
for new clients based upon management's review of their credit information and
projects terms, performs ongoing credit evaluations of its customers, adjusting
credit terms when management believes appropriate based upon payment history and
an assessment of their current credit worthiness. The allowance for doubtful
accounts is determined through analysis of the aging of accounts receivable at
the date of the financial statements for estimated losses resulting from the
inability of its clients to make required payments. The Company determines this
allowance by considering a number of factors, including the length of time trade
accounts receivable are past due, previous loss history, estimate of the
client's current ability to pay its obligation to the Company, and the condition
of the general economy and the industry as a whole. While credit losses have
generally been within expectations and the provisions established, the Company
cannot guarantee that credit loss rates in the future will be consistent with
those experienced in the past. In addition, the Company has credit exposure if
the financial condition of one of its major clients were to deteriorate. In the
event that the financial condition of its clients were to deteriorate, resulting
in an impairment of their ability to make payments, additional allowances may be
necessary. It is reasonably possible that the Company's estimate of the
allowance for doubtful accounts will change. The Company increased its allowance
for doubtful accounts by approximately $148,000 during 2005 and maintains a
balance of approximately $181,000 as of December 31, 2005.

Inventories - Inventory is stated at the lower of cost or market, cost being
determined on the average cost basis. The Company receives price protection from
its suppliers for merchandise that may be slow moving or aged. The Company
evaluates the adequacy of its slow moving or aged inventory quarterly and writes
down its inventory to fair value based upon the price protection received or
current market value. While write-downs have been within expectations and the
provisions established, the Company cannot guarantee that it will continue to
experience the same level of write-downs as in the past. The Company does not
offer warranties to its customers but will accept returns of product claimed to
be defective and reimburse the customers for the full purchase price. The
majority of the Company's suppliers in turn accept these returns from us. There
are no reserves for warranties as of December 31, 2005.

Income Taxes - At December 31, 2005, the Company had federal and state net
operating loss carryforwards (NOL's) of approximately $5,481,000. In accordance
with SFAS No. 109, "Accounting for Income Taxes", the Company establishes
valuation allowances if it is "more likely than not" that the Company will not
be able to utilize it to offset future taxes. The Company has established a
valuation allowance of $2,356,600 at December 31, 2005 due to the uncertainty
surrounding the realization of the NOL's which resulted from the Exchange
Agreement. Pursuant to IRC Section 382 of the Tax Reform Act of 1986 the
utilization of NOL's is limited in the case of certain transactions including
significant changes in ownership interests. The Company has determined that
based upon the terms of the Exchange Agreement, an ownership change pursuant to
this Act has occurred and as a result, the NOL's are significantly limited.

YEAR ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004

The following table shows each specified item as a dollar amount and as a
percentage of net sales in each fiscal period, and should be read in conjunction
with the financial statements included elsewhere in this Annual Report on Form
10-KSB:

Year Ended Year Ended
December 31, December 31,
2005 2004
(Thousands) (Thousands)
-------------------- --------------------

Net sales $ 58,670 100.0% $ 35,037 100.0%
Cost of goods sold 52,732 89.9% 31,116 88.8%
-------- -------- --------- --------
Gross profit 5,938 10.1% 3,921 11.2%
Operating Expenses:
Selling, general and
administrative expenses 5,308 9.0% 3,919 11.2%
-------- -------- --------- --------
Income from operations 630 1.1% 2 .0%

Interest expense 521 .9% 230 .7%
-------- -------- --------- --------
Income(loss) before income taxes 109 .2% (228) (.7%)
Income tax expense (benefit) (77) .1% 14 .0%
-------- -------- --------- --------

Net income (loss) $ 186 .3% $ (242) (.7)%
======== ======== ========= ========

RESULTS OF OPERATIONS

Net sales increased by $23,633,344, or 67.5%, from $35,036,991 for the year
ended December 31, 2004 to $58,670,335 for the year ended December 31, 2005. The
growth in net sales was primarily due to the increase in sales with our existing
customers, as well as an increase in our customer base.

Cost of goods sold increased by $21,616,749, or 69.5%, from $31,116,020 for the
year ended December 31, 2004 to $52,732,769 for the year ended December 31,
2005. The increase was consistent with revenue growth. Gross profit as a
percentage of net sales decreased to 10.1% for the year ended December 31, 2005
from 11.2% for the year ended December 31, 2004. This decrease was primarily due
to the Company's strategy to grow the customer base and increase revenues by
introducing incentive pricing programs to new and key customers. Cost of goods
sold excludes the distribution costs of purchasing, receiving, inspection,
warehousing and handling costs; we include these costs in our selling, general
and administrative expenses. Our gross margins may not be comparable to those of
other entities since some entities include these distribution costs in the cost
of goods sold. These distribution costs were $1,160,619 and $994,100 for the
year ended December 31, 2005 and 2004, respectively.

Selling, general and administrative expenses increased by $1,388,575, or 35.4%,
from $3,919,071 for the year ended December 31, 2004 to $5,307,646 for the year
ended December 31, 2005. The increase was primarily due to the Company's
increase in salaries and related payroll taxes of $282,064, allowance for
doubtful accounts of $148,000 and write-offs of accounts receivable of
$98,870,advertising and marketing expenses of $195,145, professional fees
associated with the Company's expanded operations of $133,053, litigation
expenses of $125,000, freight out expenses of $119,568, insurance premiums of
$91,975 and stock option compensation expense of $38,332 as a result of 750,000
options that were granted to non-employees who provide services to the Company.
Selling, general and administrative expenses as a percentage of net sales
decreased to 9.0% for the year ended December 31, 2005 from 11.2% for the year
ended December 31, 2004. For the year ended December 31, 2005, selling, general
and administrative expenses were comprised of the following: $746,414 in selling
expenses, $1,160,619 in distribution costs and $3,400,613 in general and
administrative expenses. For the year ended December 31, 2004, selling, general
and administrative expenses were comprised of the following: $497,157 in selling
expenses, $994,100 in distribution costs and $2,427,814 in general and
administrative expenses.

Interest expense increased by $291,669, or 126.9%, from $229,844 for the year
ended December 31, 2004 to $521,513 for the year ended December 31, 2005. The
increase was primarily due to increased borrowings as well as higher interest
rates on bank borrowings during the year ended December 31, 2005. The increased
borrowing levels were the result of increased sales volume that required higher
inventory levels and increased accounts receivable.

LIQUIDITY AND CAPITAL RESOURCES

For the year ended December 31, 2005 net cash used in operating activities was
$2,423,184. Net cash used in operations for the year ended December 31, 2005
consisted of net income of $185,725 and included the following changes in
operating assets and liabilities: an increase in accounts receivable of
$2,402,755, an increase in inventory of $1,500,632, an increase in due from
vendors of $705,205, and an increase in accounts payable of $1,458,855. The
increases were all the result of increased sales volume.

Net cash used in investing activities for the year ended December 31, 2005 was
$144,062 which was primarily used for the purchase of equipment and acquisition
agreement costs.

Net cash provided by financing activities for the year ended December 31, 2005
was $2,598,485 which primarily consisted of net proceeds on our note payable to
bank of $2,768,291.

For the year ended December 31, 2004 net cash used in operating activities was
$5,181,707. Net cash used in operations for the year ended December 31, 2004
consisted of a net loss of $241,749 and included the following changes in
operating assets and liabilities: an increase in accounts receivable of
$3,216,014, an increase in inventory of $972,128 a decrease in accounts payable
of $1,889,677 and a decrease in amount due to factor of $1,283,854.

Net cash used in investing activities for the year ended December 31, 2004 was
$72,001 which was primarily used for the purchase of equipment.

Net cash provided by financing activities for the year ended December 31, 2004
was $4,817,460 which consisted primarily of gross proceeds of $4,000,000 from
the Offering, less payments of issuance costs of $200,500, payments of merger
expenses of $111,963, repayment of long term obligations of $271,624, payment of
deferred financing costs of $50,000, payment of Essential's pre-acquisition
liabilities of $915,329 and net proceeds on our note payable to bank of
$2,366,876.

On June 29, 2004 the Company received $2,884,171 in net proceeds from the sale
of 1,124,767 shares of Series A 6% Convertible Non-Redeemable Preferred Shares
of Essential ("Series A 6% Preferred Shares) in a private placement (the
"Offering"). At the same time, substantially all outstanding debt of the Company
was extinguished through either conversion into an aggregate of 452,202 shares
of Series A 6% Preferred Shares or through cash payments.

The Company has entered into a financing agreement with Rosenthal & Rosenthal,
Inc. ("Rosenthal") dated November 11, 2004 and amended on November 1, 2005 (the
"Agreement"). Under the Agreement, Rosenthal may in its discretion lend to the
Company up to $10,000,000, which is the maximum credit under the facility, based
on eligible inventory and receivables. All borrowings are due on demand, are
secured by substantially all of the assets of the Company and are subject to the
Company's compliance with certain financial covenants. The Company's CEO and the
Company's President have signed limited guaranties in respect of borrowings
under the Agreement.

The amendment dated November 1, 2005 among other things increased the maximum
credit under the facility from $5,000,000 to $10,000,000 and reduced the
interest rate on borrowings by 0.5%.

The Agreement terminates November 30, 2007 unless terminated by Rosenthal on 30
days' notice. Interest accrues on outstanding borrowings at the prime rate (but
not less than 4.75%) plus 1.5%. At December 31, 2005, the interest rate on
borrowings outstanding was 8.75%. In addition, the Company will pay the lender
on each anniversary date an annual fee of 1% of the maximum credit which is
amortized over one year, and a monthly administrative fee of $1,000. The
financing expense for the annual fee recorded for the years ended December 31,
2005 and 2004 amounted to approximately $56,000 and $6,000, respectively. At
December 31, 2005, the principal amount outstanding under the facility was
$5,135,167.

Under the terms of the Agreement, the Company is required to maintain a
specified level of net worth, working capital and debt ratios as defined. In May
2005, Rosenthal informed the Company that it did not comply with a financial
covenant under the Agreement for the fourth quarter of 2004. Rosenthal has
provided a waiver for this failure to comply. In addition, for the first and
second quarter of 2005, the Company did not comply with certain financial
covenants for which Rosenthal has also provided waivers. On October 31, 2005 and
March 21, 2006, the Company and Rosenthal agreed to amend the covenants,
effective September 30, 2005 and December 31, 2005, respectively. Based upon
these amendments, the Company was in compliance with all of its covenants at
September 30, 2005 and December 31, 2005.

The Company believes that it will have sufficient liquidity for the next twelve
months and the foreseeable future. However, the Company would be materially and
adversely affected if Rosenthal demands payment of these borrowings under the
Agreement and the Company is unable to refinance these borrowings.

Reference is made to the section titled Stock Purchase Agreement above for
information relating to an Acquisition Agreement.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment". This
statement revises FASB Statement No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS No. 123(R) focuses primarily on the accounting for transactions
in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires companies to recognize in the statement
of operations the cost of employee services received in exchange for awards of
equity instruments based on the grant-date fair value of those awards (with
limited exceptions). This Statement, for small business issuers is effective as
of the beginning of the Company's next fiscal year. Accordingly, the Company
will adopt SFAS 123(R) in its first quarter of fiscal 2006. The impact of this
new standard on the Company's net income for fiscal 2006 is estimated to be
approximately $120,000 before the grant of any new options. The impact of this
new standard, if it had been in effect, on the net income and related per share
amounts for the year ended December 31, 2005 is disclosed in Note 2 - Stock
Based Compensation of the financial statements.

In May 2005, the FASB issued SFAS No. 154, "Accounting for Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS No. 154"). SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes,
and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principle. This Statement applies to all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. SFAS No. 154 becomes
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.

FLUCTUATIONS IN OPERATING RESULTS AND SEASONALITY

We have experienced fluctuations in quarterly operating results as a result of
the timing of the introduction of new titles; variations in sales of titles
developed for particular platforms; market acceptance of our titles; sequels or
enhancements of existing titles; projected and actual changes in platforms; the
timing and success of title introductions by our competitors; product returns;
changes in pricing policies by us and our competitors; order cancellations; and
delays in product shipment. Sales of our titles are also seasonal, with peak
shipments typically occurring in the fourth calendar quarter as a result of
increased demand for titles during the holiday season. Annual comparisons of
operating results are not necessarily indicative of future operating results.

ITEM 7. FINANCIAL STATEMENTS

ALLIANCE DISTRIBUTORS HOLDING INC.

Index

Page

Report of Independent Registered Public Accounting Firm F - 1

Balance Sheet as of December 31, 2005 F - 2

Statements of Operations for the years ended December 31, 2005
and 2004 F - 3

Statements of Stockholders' Equity for the years ended December
31, 2005 and 2004 F - 4

Statements of Cash Flows for the years ended December 31, 2005
and 2004 F - 5 to F - 6

Notes to Financial Statements F - 7 to F - 16

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Stockholders
Alliance Distributors Holding Inc.

We have audited the accompanying balance sheet of Alliance Distributors Holding
Inc. as of December 31, 2005, and the related statements of operations,
stockholders' equity and cash flows for the years ended December 31, 2005 and
2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alliance Distributors Holding
Inc. as of December 31, 2005, and the results of its operations and its cash
flows for the years ended December 31, 2005 and 2004 in conformity with
accounting principles generally accepted in the United States of America.

/s/ Mahoney Cohen & Company, CPA, P.C.

New York, New York
March 10, 2006

F-1

ALLIANCE DISTRIBUTORS HOLDING INC.
Balance Sheet
December 31, 2005

ASSETS

Current assets:
Cash $ 251,844
Accounts receivable, net of allowance for doubtful
accounts of approximately $181,000 5,526,444
Inventory 5,368,967
Due from vendors 739,453
Prepaid acquisition and proposed offering costs 161,823
Prepaid expenses and other current assets 224,665
Deferred tax asset 155,000
------------
Total current assets 12,428,196

Property and equipment, net 370,875

Other assets 71,300
------------
$ 12,870,371
============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Note payable-bank $ 5,135,167
Accounts payable 4,033,497
Current portion of long term obligations 18,468
Accrued expenses and other current liabilities 393,830
------------
Total current liabilities 9,580,962

Long term obligations 12,126

Deferred lease obligation 25,785

Commitments and contingencies

Stockholders' equity:
Series A Convertible Non-Redeemable Preferred Stock,
$.001 par value - Authorized, 8,615,348 shares;
issued and outstanding, 346,663 shares 347

Common Stock, $.001 par value - Authorized, 100,000,000
shares; issued and outstanding 47,368,756 shares 47,369
Additional paid-in capital 3,224,521
Accumulated deficit (20,739)
------------
Total stockholders' equity 3,251,498
------------
$ 12,870,371
============

See notes to financial statements.
F-2

ALLIANCE DISTRIBUTORS HOLDING INC.
Statements of Operations
For the Years Ended December 31, 2005 and 2004

----------------------------
2005 2004
------------- ------------

Net sales $ 58,670,335 $ 35,036,991

Cost of goods sold 52,732,769 31,116,020
------------ ------------
Gross profit 5,937,566 3,920,971

Selling, general and administrative expenses 5,307,646 3,919,071
------------ ------------
Income from operations 629,920 1,900

Interest expense 521,513 229,844
------------ ------------
Income (loss) before provision for (benefit from)
income taxes 108,407 (227,944)

Provision for (benefit from) income taxes (77,318) 13,805
------------ ------------
Net income (loss) 185,725 (241,749)

Preferred stock dividends -- 164,531
------------ ------------
Net income (loss) available to common stockholders $ 185,725 $ (406,280)
============ ============
Net income (loss) available to common stockholders
per share - Basic $ .00 $ (.01)
============ ============
Net income (loss) available to common stockholders
per share - Diluted $ .00 $ (.01)
============ ============
Weighted-average common shares outstanding-Basic 46,622,314 35,330,253
============ ============
Weighted-average common shares outstanding-Diluted 47,110,005 35,330,253
============ ============

See notes to financial statements.

F-3

ALLIANCE DISTRIBUTORS HOLDING INC.
Statements of Stockholders' Equity
For the Years Ended December 31, 2005 and 2004

Preferred Stock A Preferred Stock B Common Stock
----------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------

Balance, January 1, 2004 -- $ -- -- $ -- 300 $ 300

Exchange of Alliance
shares for Essential shares -- -- 1,551,314 1,551 (300) (300)

Essential shareholders' shares
prior to reverse acquisition -- -- -- -- 422,457 422

Issuance of shares in exchange
for Essential debt and Essential's
debt and liabilities assumed 452,202 452 -- -- 77,543 78

Proceeds from PPO, net of
cash issuance costs 1,124,767 1,125 -- -- -- --

Shares issued to placement
agent of PPO, net of merger
expenses of $385,000 108,146 108 -- -- -- --

Preferred stock dividend 46,200 46 -- -- -- --

Conversion of Preferred Stock B
into Common Stock -- -- (1,551,314) (1,551) 24,679,997 24,680

Conversion of Preferred Stock A
into Common Stock (1,166,666) (1,167) -- -- 18,560,743 18,561

Shares issued to settle Common
Stock liability -- -- -- -- 110,000 110

Warrants issued to lender -- -- -- -- -- --

Merger expenses and registration
fees -- -- -- -- -- --

Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 1, 2005 564,649 564 -- -- 43,850,740 43,851

Conversion of Preferred Stock A
into Common Stock (217,986) (217) -- -- 3,468,016 3,468

Registration costs -- -- -- -- -- --

Issuance of stock options to
non-employees -- -- -- -- -- --

Shares issued to placement agent
of proposed offering -- -- -- -- 50,000 50

Net income -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2005 346,663 $ 347 -- -- 47,368,756 $ 47,369
=========== =========== =========== =========== =========== ===========

Retained
Additional Earnings Total
Paid In (Accumulated Stockholders'
Capital Deficit) Equity
----------- ----------- -----------

Balance, January 1, 2004 $ 435,715 $ 199,816 $ 635,831

Exchange of Alliance
shares for Essential shares (1,251) -- --

Essential shareholders' shares
prior to reverse acquisition (422) -- --

Issuance of shares in exchange
for Essential debt and Essential's
debt and liabilities assumed (1,068,428) -- (1,067,898)

Proceeds from PPO, net of
cash issuance costs 3,798,375 -- 3,799,500

Shares issued to placement
agent for PPO, net of merger
expenses of $385,000 (108) -- --

Preferred stock dividend 164,485 (164,531) --

Conversion of Preferred Stock B
into Common Stock (23,129) -- --

Conversion of Preferred Stock A
into Common Stock (17,394) -- --

Shares issued to settle Common
Stock liability 32,090 -- 32,200

Warrants issued to lender 60,000 -- 60,000

Merger expenses and registration
fees (193,693) -- (193,693)

Net loss -- (241,749) (241,749)
----------- ----------- -----------
Balance, January 1, 2005 3,186,240 (206,464) 3,024,191

Conversion of Preferred Stock A
into Common Stock (3,251) -- --

Registration costs (16,250) -- (16,250)

Issuance of stock options to
non-employees 38,332 -- 38,332

Shares issued to placement agent
of proposed offering 19,450 -- 19,500

Net income -- 185,725 185,725
----------- ----------- -----------
Balance, December 31, 2005 $ 3,224,521 $ (20,739) $ 3,251,498
=========== =========== ===========

See notes to financial statements.

F-4

ALLIANCE DISTRIBUTORS HOLDING INC.
Statements of Cash Flows
For the Years Ended December 31, 2005 and 2004

2005 2004
------------ ------------
CASH FLOWS USED IN OPERATING ACTIVITIES:

Net income (loss) $ 185,725 $ (241,749)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH USED IN OPERATING ACTIVITIES:
Deferred rent 8,188 13,359
Depreciation and amortization 115,171 82,950
Bad debt expense 246,870 27,050
Stock option compensation expense 38,332 --
Amortization of deferred financing costs 74,250 10,833
Deferred taxes (155,000) --
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in assets
Accounts receivable (2,402,755) (3,216,925)
Due from factor -- 1,283,854
Inventory (1,500,632) (972,128)
Due from vendors (705,205) (19,848)
Prepaid expenses and other current assets (3,474) (64,185)
Increase (decrease) in liabilities
Accounts payable 1,458,855 (1,889,677)
Accrued expenses and other current
liabilities 216,491 (195,241)
------------ ------------
Net cash used in operating activities (2,423,184) (5,181,707)
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (76,672) (68,952)
Increase in other assets (12,500) (3,049)
Payments for acquisition agreement costs (54,890) --
------------ ------------
Net cash used in investing activities (144,062) (72,001)
------------ ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from sale of securities -- 4,000,000
Proceeds from note payable - bank 57,695,237 10,018,726
Repayments of note payable - bank (54,926,946) (7,651,850)
Payments for pre-acquisition liabilities -- (915,329)
Payments for registration and issuance costs (16,250) (200,500)
Payments for merger costs -- (111,963)
Repayment of long-term obligations (29,250) (271,624)
Payment of deferred financing costs (100,000) (50,000)
Payment for proposed offering costs (24,306) --
------------ ------------
Net cash provided by financing activities 2,598,485 4,817,460
------------ ------------
NET INCREASE (DECREASE) IN CASH 31,239 (436,248)

CASH, beginning of year 220,605 656,853
------------ ------------
CASH, end of year $ 251,844 $ 220,605
============ ============

See notes to financial statements

F-5

ALLIANCE DISTRIBUTORS HOLDING INC.
Statements of Cash Flows (Continued)
For the Years Ended December 31, 2005 and 2004

2005 2004
------------ -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Interest paid $ 409,170 $ 148,413
============ ===========
Income tax paid $ 7,373 $ 19,222
============ ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Issuance of Common Stock to placement agent $ 19,500 $ --
============ ===========
Acquisition and proposed offering costs accrued $ 63,127 $ --
============ ===========
Issuance of Series A 6% Preferred Stock
to placement agent $ -- $ 385,000
============ ===========
Liabilities assumed $ -- $ 1,067,898
============ ===========
Series A 6% Preferred Stock dividend $ -- $ 164,531
============ ===========
Merger costs accrued $ -- $ 81,730
============ ===========
Issuance of common stock to settle liability $ -- $ 32,200
============ ===========
Issuance of warrants to lender $ -- $ 60,000
============ ===========

See notes to financial statements

F-6

ALLIANCE DISTRIBUTORS HOLDING INC.
Notes to Financial Statements

Note 1 - BASIS OF PRESENTATION, ORGANIZATION AND OTHER MATTERS

Alliance Distributors Holding Inc. (the "Company" or "Alliance") is a
distributor of video game consoles, peripherals, accessories and software to
customers throughout the United States for most key manufacturers and third
party publishers in the video game industry.

On June 17, 2004, the Company (formerly Essential Reality, Inc. "Essential")
entered into a Share Exchange Agreement (the "Exchange Agreement") with Jay
Gelman, Andre Muller and Francis Vegliante, who were the sole shareholders (the
"Shareholders") of AllianceCorner Distributors Inc., a privately held, wholesale
distributor incorporated in New York ("AllianceCorner"). AllianceCorner had no
prior affiliation with Essential and commenced operations in August 2003.
Pursuant to the Exchange Agreement, Essential on June 29, 2004 acquired all the
outstanding capital stock of AllianceCorner from the Shareholders in exchange
for 1,551,314 Series B Convertible Non Redeemable Preferred Shares ("Series B
Preferred Shares"). As a result of the acquisition, the business of Alliance is
Essential's only business. The transaction was accounted for as a reverse
acquisition as of June 30, 2004 and the pre-acquisition financial statements of
AllianceCorner are treated as historical financial statements of the combined
companies. As the transaction was accounted for as a reverse acquisition into a
public shell, no goodwill has been recorded and the costs incurred have been
accounted for as a reduction of additional paid-in capital. As a result of the
reverse acquisition: (i) the historical financial statements of Essential for
periods prior to the date of the transaction are not presented and (ii) because
AllianceCorner is the accounting acquirer, Essential's historical stockholders'
equity is not carried forward to the merged company as of June 30, 2004.

The name of AllianceCorner was changed to Alliance Distributors Holding, Inc.
("New York Alliance") in July 2004. Effective November 17, 2004, New York
Alliance was merged into Alliance Distributors Holding Inc., a Delaware
corporation that was wholly owned by Essential. Effective November 22, 2004,
Essential reincorporated in Delaware and changed its name to Alliance
Distributors Holding Inc., by way of a merger of Essential into Alliance
Distributors Holding Inc., which was then a wholly owned Delaware subsidiary of
Essential. The Company operates as a single segment.

On July 21, 2005, the Company and Abrams/Gentile Entertainment Inc. ("Age")
entered into an operating agreement ("Agreement") in which the Company and Age
became members in Alliance Age LLC, a limited liability company formed in
Delaware, to set forth the terms on which the parties will develop and
commercialize products they mutually agree upon from time to time. The Company
agreed to pay Age a $4,000 monthly retainer fee on the first day of each month
commencing August 2005, provided, that no fee is payable for any month beginning
with January 2006 upon a determination that no products are then proceeding
towards completion at a proper pace. The Company owns 65% of Alliance Age LLC.
As of December 31, 2005, Alliance Age LLC was inactive and no monthly retainer
fees have yet been paid.

PRIVATE PLACEMENT OFFERING

As part of the Exchange Agreement with AllianceCorner, Essential was required to
raise funds to complete the transaction. Essential sold 1,124,767 shares of
Series A 6% Convertible Non Redeemable Preferred Shares (the "Series A Preferred
Shares"), through a private placement offering ("PPO"). The PPO resulted in
gross proceeds of $4,000,000 and net proceeds to the Company of $3,799,500. At
the same time, substantially all outstanding debt of Essential was extinguished
through either issuance by the Company of an aggregate of 452,202 Series A
Preferred Shares or through cash payments which totaled $915,329.

Sunrise Securities Corp. ("Sunrise") acted as the placement agent in connection
with the PPO and received (a) an $8,500 nonrefundable retainer fee; and (b) a
commission consisting of 108,146 shares of Series A Preferred Shares and 5 year
warrants due June 29, 2009 to purchase 1,564,096 shares of common stock at an
exercise price of $.22. (See Stockholders' Equity section below).

STOCKHOLDERS' EQUITY

Each share of common stock entitles the holder thereof to one vote on each
matter that may come before a meeting of the shareholders. Any Series A
Preferred Share or Series B Preferred Share entitles the holder to 15.91 votes,
and votes as one class with the common stock.

In the Exchange Agreement, the Shareholders agreed to vote their Series B
Preferred Shares in favor of an amendment to the Company's Articles of
Incorporation that would increase the number of authorized shares of common
stock from 50,000,000 to 4,400,000,000 (the "Amendment"), and in favor of a
simultaneous reverse split of the common stock on the basis of one share for
forty-four shares to 100,000,000 authorized shares (the "Reverse Split"). These
actions became effective on November 22, 2004 and all share and per share data
included in these financial statements have been retroactively adjusted for the
split.

The Series A Preferred Shares were entitled to a dividend in kind, upon
conversion, accruing at the rate of 6% per annum from June 29, 2004 until the
effectiveness of the Amendment, November 22, 2004. The Company issued 46,200
additional shares of Series A Preferred Shares that converted into 735,000
shares of common stock and recorded a preferred dividend in the amount of
$164,531.

The adoption of the Amendment and the Reverse Split resulted in the automatic
conversion of each Series A Preferred Share and each Series B Preferred Share
into 15.91 shares of common stock. However, Series A Preferred Shares owned by a
holder were not to be converted into common stock if as a result of such
conversion the holder would beneficially own in excess of 4.999% or 9.999% of
the issued and outstanding shares ("4.999% Restriction"). Series A Preferred
Shares not converted into the Company's common stock due to the operation of the
4.999% Restriction are not entitled to the 6% dividend referred to above.

F-7

As of December 31, 2005, there were 47,368,756 shares of common stock issued and
outstanding consisting of 24,679,997 shares of common stock issued upon
conversion of all of the Series B Preferred Shares, 22,028,759 shares of common
stock issued upon conversion of 1,384,652 shares of the Series A Preferred
Shares, 110,000 shares of common stock issued in payment of liabilities, 50,000
shares of common stock issued to a placement agent and 500,000 shares of common
stock issued and outstanding prior to June 2004.

As of December 31, 2005 there were issued and outstanding 346,663 shares of
Series A Preferred Shares convertible into 5,515,408 shares of common stock
subject to the 4.999% Restriction. Subsequent to December 31, 2005, 85,000
shares of Series A Preferred Stock were converted into 1,352,309 shares of
Common Stock.

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates reflected in these financial statements relate primarily
to bad debt reserves on accounts receivable and the realization of deferred tax
assets.

Allowance for Doubtful Accounts

The Company establishes credit terms for new clients based upon management's
review of their credit information and projects terms, performs ongoing credit
evaluations of its customers, adjusting credit terms when management believes
appropriate based upon payment history and an assessment of their current credit
worthiness. The Company records an allowance for doubtful accounts for estimated
losses resulting from the inability of its clients to make required payments.
The Company determines this allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, previous
loss history, estimate of the client's current ability to pay its obligation to
the Company, and the condition of the general economy and the industry as a
whole. While credit losses have generally been within expectations and the
provisions established, the Company cannot guarantee that credit loss rates in
the future will be consistent with those experienced in the past. In addition,
the Company has credit exposure if the financial condition of one of its major
clients were to deteriorate. In the event that the financial condition of its
clients were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be necessary. It is reasonably possible that
the Company's estimate of the allowance for doubtful accounts will change. The
Company increased its allowance for doubtful accounts by $148,000 during 2005
and maintains a balance of approximately $181,000 at December 31, 2005.

Inventory

Inventory consists entirely of finished goods held for sale and is reported at
the lower of cost or market, on the average cost basis. The Company receives
price protection from its suppliers for merchandise that may be slow moving or
aged. The Company evaluates the adequacy of its slow moving or aged inventory
quarterly and writes down its inventory to fair value based upon the price
protection received or current market value. While write-downs have been within
expectations and the provisions established, the Company cannot guarantee that
it will continue to experience the same level of write-downs as in the past. At
times, the Company makes advance payments to vendors to procure and ensure
delivery of certain high demand products. Such deposits are reflected as due
from vendors in the balance sheet. The Company does not offer warranties to its
customers but will accept returns of product claimed to be defective and
reimburse the customers for the full purchase price. The majority of the
Company's suppliers in turn accept these returns from us. There are no reserves
for warranties as of December 31, 2005.

Property and Equipment

Property and equipment is recorded at cost. Expenditures for major additions and
improvements are capitalized and minor replacements, maintenance and repairs are
charged to expense as incurred. Assets held under capital leases are recorded at
the lower of the net present value of the minimum lease payments or the fair
value of the leased assets at the inception of the lease. Leasehold improvements
are amortized over the lesser of the lease terms or the assets' useful lives.
When property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the results of operations for the respective period.
Depreciation and amortization is provided over the estimated lives of the
related assets using the straight-line method. The estimated useful lives for
significant property and equipment categories are as follows:

Vehicles 4 years
Warehouse equipment 3 to 7 years
Office furniture and equipment 2 to 7 years
Leasehold improvements 5 to 10 years

F-8

Impairment of Long-Lived Assets

The Company follows Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 requires that long-lived assets, including property and equipment, be
reviewed for impairment whenever events or changes in circumstances indicate
that their carrying amount may not be recoverable. The Company assesses its
assets for impairment based on the estimated future undiscounted cash flows
expected to result from the use of the asset and records impairment losses when
this amount is less than the carrying amount. Impairment losses are recorded for
the excess of the assets' carrying amount over their fair value, which is
generally determined based on the estimated future discounted cash flows over
the remaining useful life of the asset using a discount rate determined by
management at the date of the impairment review. Management believes at this
time that the carrying value and useful life of long-lived assets continue to be
appropriate.

Deferred Rent

The Company accounts for scheduled rent increases contained in its leases on a
straight-line basis over the non-cancellable lease term. The Company did not
receive any tenant allowances from its landlords for these leases.

Revenue Recognition

The Company recognizes sales upon shipment of products to customers as title and
risk of loss pass upon shipment and collectibility is reasonably assured.
Provisions for estimated discounts and rebates to customers, estimated returns
and allowances and other adjustments are provided for in the same period the
related sales are recorded.

Income Taxes

AllianceCorner, with the consent of its stockholders, elected to have its income
taxed under the provisions of Subchapter S of the Internal Revenue Code and the
corresponding provisions of New York State Tax laws. Under the aforementioned
provisions, corporate income or loss and any tax credits earned are included in
the stockholders' individual federal and state income tax returns. Accordingly,
no provision has been made for federal income taxes for the periods prior to
June 29, 2004. Effective June 29, 2004, the Company is taxed as a C corporation.

Accordingly, AllianceCorner was subject to New York State S corporation taxes
and New York City corporate income taxes for the period prior to June 29, 2004
and as a C corporation for the period subsequent to June 30, 2004.

The Company accounts for income taxes using the liability method which requires
the recognition of deferred tax assets or liabilities for the temporary
differences between the financial reporting and tax bases of the Company's
assets and liabilities and for tax carryforwards at enacted statutory rates in
effect for the years in which the differences are expected to reverse. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.

Shipping and Handling

The Company includes shipping and handling revenues in net sales. For the years
ended December 31, 2005 and 2004, shipping and handling revenues were
approximately $168,000 and $166,000, respectively. The Company includes shipping
and handling costs in selling, general and administrative expense. For the years
ended December 31, 2005 and 2004, the Company incurred approximately $364,000
and $245,000, of such costs, respectively.

Advertising Expenses

Advertising expenses are charged to operations in the period in which they are
incurred. Advertising expenses for the years ended December 31, 2005 and 2004
were approximately $170,000 and $35,000, respectively.

Fair Value of Financial Instruments

The carrying amounts of significant financial instruments, which includes
accounts receivable, accounts payable and accrued expenses, approximated fair
value as of December 31, 2005 and 2004 due to their short-term maturities.
Borrowings under the financing agreement approximate fair value due to their
variable interest rate.

Comprehensive Income

SFAS No. 130, "Reporting Comprehensive Income," establishes standards for the
reporting and display of comprehensive income and its components in the
financial statements. As of December 31, 2005 and 2004, the Company has no items
that represent other comprehensive income.

F-9

Net Income Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding for the period. Diluted
net income per share is computed by dividing the net income by the weighted
average number of common shares and common equivalent shares outstanding during
the period. The denominator for basic net income (loss) per share weighted
average number of shares outstanding reflects the conversion of Series B
Preferred Shares for Common Stock as of January 1, 2004 and of Series A
Preferred Shares for Common Stock as of June 29, 2004, computed on a post
Reverse Split basis (see Note 1). The denominator used for diluted net income
(loss) per share was calculated as follows:

--------------------------------------------------------------------------------
2005 2004
--------------------------------------------------------------------------------
Denominator for basic net income (loss) per
share weighted-average shares outstanding 46,622,314 35,330,253
--------------------------------------------------------------------------------
Shares issuable upon conversion of warrants 487,691 --
--------------------------------------------------------------------------------
Denominator for diluted net income (loss) per
share weighted-average shares outstanding 47,110,005 35,330,253
--------------------------------------------------------------------------------

Common equivalents for the year ended December 31, 2004 exclude 250,000 shares
for the warrants issued to the Company's lender since their effect would be
anti-dilutive.

Stock Based Compensation

The Company accounts for stock based employee compensation arrangements under
the intrinsic value method pursuant to APB Opinion No. 25, "Accounting for Stock
Issued to Employees". Under this method, compensation cost is the excess, if
any, of the quoted market price of the stock at the grant date or other
measurement date over the amount an employee must pay to acquire the stock.

Had compensation costs for the Company's stock option grants to employees been
determined based on the fair value at the grant dates for awards under these
plans in accordance with SFAS No. 123, the Company's net income (loss) and basic
and diluted net income (loss) per share would have been reduced to the pro forma
amounts as follows:

For the Year Ended
December 31, 2005
--------------------
(Unaudited)
Net income, as reported $185,725

Deduct: Total stock-based employee
compensation expense determined under fair
value based method, net of tax effects (121,864)
---------
Proforma net income $ 63,861
=========
Net income per share:

Basic and diluted - as reported $ 0.00
=========
Basic and diluted - proforma $ 0.00
=========

There were no options issued as of December 31, 2004. Accordingly, no
compensation expense was recorded in the financial statements with respect to
option grants.

The fair value of the options using the Black Scholes pricing model was
calculated with the following weighted-average assumptions used for grants
during the year ended December 31, 2005: risk-free interest rate 4.25-4.5%;
expected life 6.5 years; expected volatility 55-126%. The fair value generated
by the Black-Scholes model may not be indicative of the future benefit, if any,
that may be received by the option holder.

Recent Accounting Pronouncements

F-10

Note 3 - CONCENTRATIONS OF CREDIT RISK AND MAJOR SUPPLIERS

Cash

The Company maintains cash balances at one bank. Accounts at each institution
are insured by the Federal Deposit Insurance Corporation up to $100,000.

Accounts Receivable

Concentrations of credit risk with respect to accounts receivable are limited
because a large number of geographically diverse customers make up the Company's
customer base, thus spreading the trade credit risk. The Company controls credit
risk through credit approvals, credit limits and monitoring procedures. The
Company performs credit evaluations of its customers but generally does not
require collateral to support accounts receivable.

Fluctuations in Operating Results and Seasonality

The Company has experienced fluctuations in quarterly operating results as a
result of the timing of the introduction of new titles; variations in sales of
titles developed for particular platforms; market acceptance of our titles;
sequels or enhancements of existing titles; projected and actual changes in
platforms; the timing and success of title introductions by our competitors;
product returns; changes in pricing policies by us and our competitors; order
cancellations; and delays in shipment. Sales of various titles are also
seasonal, with peak shipments typically occurring in the forth calendar quarter
as a result of increased demand for titles during the holiday season. Annual
comparisons of operating results are not necessarily indicative of future
operating results.

Major Suppliers

For the year ended December 31, 2005, three of our suppliers in the aggregate
accounted for approximately 62% of our purchases (with one accounting for 42%
alone), and our ten largest suppliers in the aggregate accounted for 82% of our
purchases. For the year ended December 31, 2004, the same three suppliers in the
aggregate accounted for approximately 56% of our purchases, and our ten largest
suppliers in the aggregate accounted for 77% of our purchases. At December 31,
2005 and 2004, the amount due to these three suppliers was approximately
$1,830,000 and $1,339,000, respectively, and is included in accounts payable on
the accompanying balance sheet. If a significant supplier terminates or modifies
its relationship with the Company future results could be materially and
adversely affected.

Note 4 - PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 2005 consists of:

Leasehold improvements $239,971
Office furniture and equipment 168,599
Warehouse equipment 88,788
Vehicles 52,226
Equipment under capital leases 46,340
--------
595,924
Less: Accumulated depreciation and
amortization 225,049
--------
$370,875
========

Depreciation and amortization expense amounted to $115,171 and $82,950 for the
years ended December 31, 2005 and 2004, respectively.

F-11

Note 5 - FINANCING AGREEMENTS

The amendment dated November 1, 2005 among other things increased the maximum
credit under the facility from $5,000,000 to $10,000,000 and reduced the
interest rate on borrowings by 0.5%.

In connection with establishing the Agreement, the Company issued to Rosenthal a
warrant (the "Warrant") to purchase 500,000 shares of common stock at $0.10 per
share. The Warrant expires on November 30, 2010. On notice by the Company the
Warrants will expire earlier if the closing price of the common stock during a
period designated in the Warrants is not less than $0.40 per share. The Warrants
may be exercised for cash or on a cashless basis (i.e., by deducting from the
number of shares otherwise issuable on exercise a number of shares that have a
then market value equal to the exercise price). The Company recorded a deferred
financing cost of approximately $60,000 in the fourth quarter 2004, representing
the fair value of the warrants, which will be amortized over the life of the
financing agreement of three years. The financing expense recorded for the years
ended December 31, 2005 and 2004 amounted to approximately $18,000 and $5,000,
respectively.

Note 6 - LONG TERM OBLIGATIONS

At December 31, 2005, long-term obligations consist of:

Notes payable in monthly installments of approximately
$1,200 through September 2008, including interest at
varying rates up to 5.5%, secured by related equipment
with a carrying value of approximately $27,000 $24,990

Capital lease obligations payable in various monthly
installments of approximately $1,100 through June
2006, including interest at 5.5%, secured by related
equipment with a carrying value of approximately $12,000 6,093
-------
31,083
Less: Amount representing interest 489
-------
30,594
Less: Current portion 18,468
-------
$12,126
=======

F-12

At December 31, 2005, future payments of long-term obligations including
interest are as follows:

Year Ending
December 31,
------------
2006 18,899
2007 8,183
2008 4,001
--------
$ 31,083
========

Note 7 - INCOME TAXES

The components of the provision for (benefit from) income taxes are as follows:

2005 2004
------- -------
Current:
Federal $34,906 $ --
State and local 42,776 13,805
------- -------
77,682 13,805

Deferred:
Federal (122,600) --
State and local (32,400) --
------- -------
(155,000) --
------- -------
Total $(77,318) $13,805
======= =======

The Company was taxed as an S Corporation for federal and state purposes for the
period January 1, 2004 through June 29, 2004. As such, the Company's tax
provision for this period includes only New York City taxes, which are
determined as if the Company was a C Corporation. New York City does not
recognize S Corporation status. For the period the Company was a C Corporation
during 2004, the Company incurred a federal, state and local net operating loss,
which was carried forward and reduced the taxable income for fiscal year 2005.

Significant components of the Company's net deferred tax assets are as follows
at December 31, 2005:

Net operating loss carryforwards $ 2,356,600

Reserves and other items not
currently deductible 131,600

Costs capitalized to inventory
for tax purposes 26,700

Other (3,300)
------------
2,511,600
Less: valuation allowance (2,356,600)
------------
Net deferred tax assets $ 155,000
============

F-13

Reconciliation of the U.S. statutory rate with the Company's effective tax rate
(benefit) is summarized as follows:

--------------------------------------------------------------------------------
2005 2004
--------------------------------------------------------------------------------
Federal statutory rate (benefit) 34.0% 34.0%
--------------------------------------------------------------------------------
Increase (decrease) in tax resulting from:
--------------------------------------------------------------------------------
State and local taxes, net of federal benefit 26.0% (6.1)%
--------------------------------------------------------------------------------
Nondeductible expenses 4.3% --
--------------------------------------------------------------------------------
Utilization of NOL (69.8)% --
--------------------------------------------------------------------------------
Change in valuation allowance (69.1)% (32.9)%
--------------------------------------------------------------------------------
Other 3.3% (1.1)%
--------------------------------------------------------------------------------
(71.3)% (6.1)%
--------------------------------------------------------------------------------

At December 31, 2005, the Company had federal and state net operating loss
carryforwards (NOL's) of approximately $5,481,000. The federal NOL's expire in
2023 and the state NOL's expire in 2016. The Company has established a valuation
allowance of $2,356,600 at December 31, 2005 due to the uncertainty surrounding
the realization of the NOL's which resulted from the Exchange Agreement.
Pursuant to IRC Section 382 of the Tax Reform Act of 1986 the utilization of
NOL's is limited in the case of certain transactions including significant
changes in ownership interests. The Company has determined that based upon the
terms of the Exchange Agreement, an ownership change pursuant to this Act has
occurred. As a result, the NOL's are significantly limited.

Note 8 - RETIREMENT PLAN

The Company sponsors a 401(k) contributory plan (the "Plan") for the benefits of
employees who are at least 21 years of age. The Company's management determines,
at its discretion, any annual contributions. The Company elected not to
contribute to the Plan for the years ended December 31, 2005 and 2004.

Note 9 - STOCK OPTIONS AND WARRANTS

Stock Options

In January 2005, the Company established a stock option plan to issue up to
10,000,000 options.

Information with respect to stock options is as follows:

--------------------------------------------------------------------------------
Weighted Average
Shares Exercise Price
--------------------------------------------------------------------------------
Outstanding - beginning of year -- $ --
--------------------------------------------------------------------------------
Granted 7,650,000 $.325
--------------------------------------------------------------------------------
Forfeited (260,000) $.325
--------------------------------------------------------------------------------
Outstanding - end of year 7,390,000 $.325
--------------------------------------------------------------------------------
Weighted-average fair value of
options granted during the year $.095

--------------------------------------------------------------------------------

All of the issued options are ten-year non-qualified and vest in twelve equal
quarterly installments.

Of the total options granted, 1,100,000 options were granted to Jay Gelman, the
CEO and Chairman of the Board of Directors of the Company, 100,000 options were
granted to Barbara A. Ras, the CFO of the Company, 1,100,000 options were
granted to Andre Muller, the President, COO and a director of the Company, and
150,000 options were granted to each of Thomas Vitiello, Steven H. Nathan and
Humbert B. Powell, III, each a non-employee director of the Company. The options
were granted in reliance on the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended.

Of the total options granted, 250,000 options were granted to a non-employee who
provided past services to the Company and 500,000 options were granted to
non-employees for future services to be provided over a three year period.
During the year ended December 31, 2005, the Company recorded stock-based
compensation expense of approximately $38,000 for these options.

The fair value of the options using the Black-Scholes pricing model was
calculated with the following weighted-average assumptions used for the grant:
risk-free interest rate 4.25%; expected life 6.5 years; expected volatility 55%.
The fair value generated by the Black-Scholes model may not be indicative of the
future benefit, if any, that may be received by the option holder.

Options Outstanding

--------------------------------------------------------------------------------------------------------------------
Weighted-Average
Range of Number Remaining
Exercise Outstanding at Contractual Weighted-Average Options Weighted-Average
Prices December 31, 2005 Life in Years Exercise Price Exercisable Exercise Price
--------------------------------------------------------------------------------------------------------------------

$0.32-$0.325 7,390,000 9.05 $0.325 1,839,167 $0.325
--------------------------------------------------------------------------------------------------------------------

F-14

Warrants

Pursuant to the PPO, the Company issued Sunrise 5 year warrants which expire on
June 29, 2009 to purchase 1,564,096 shares of common stock with an exercise
price of $0.22 per share. (See Note 1)

On November 11, 2004, in connection with establishing the Financing Agreement,
the Company issued warrants to purchase 500,000 shares of common stock at $0.10
per share. (See Note 5)

Note 10 - COMMITMENTS AND CONTINGENCIES

Leases

The Company leases showroom, office and warehouse space under operating leases
expiring from 2008 through 2013. The future minimum lease payments, excluding
escalation charges, are as follows:

Year Ending
December 31,
------------
2006 $ 183,000
2007 188,000
2008 131,000
2009 71,000
2010 73,000
Thereafter 167,000
--------
$813,000
========

In accordance with SFAS No. 13, "Accounting for Leases," non-cancellable
operating leases with scheduled rent increases require that rent expense be
recognized on a straight-line basis over the lease term. Rent expense for the
years ended December 31, 2005 and 2004 includes approximately $8,000 and
$13,000, respectively, which relates to the amortized portion of the scheduled
rent increases. At December 31, 2005 an obligation of approximately $26,000
representing future deferred rent payments is reflected in the accompanying
balance sheet.

Total rent expense charged to operations for the years ended December 31, 2005
and 2004 was approximately $185,000 and $191,000, respectively.

Employment Agreement

On July 26, 2004, the Chief Executive Officer of Alliance signed an employment
agreement for two years with annual compensation of $300,000 per year for the
first year and $350,000 for the second year, and at the discretion of the Board
of Directors, bonuses equal to his salary. In addition, he will receive a
monthly car allowance in the amount of $750 per month.

The Employment Agreement also provides for the Board of Directors to award
discretionary bonuses to Mr. Gelman in an amount equal to his salary. In the
event of a termination of Mr. Gelman's employment by the Company other than for
Cause, as defined under the Employment Agreement, or by Mr. Gelman for Good
Reason, as defined under the Employment Agreement, Mr. Gelman will be entitled
to a lump sum payment equal to three times his base salary for the period from
the date of termination through June 30, 2006. The Employment Agreement contains
a 12-month non-compete provision effective following termination, except for
termination by the Company other than for Cause, or Good Reason by Mr. Gelman.
The Employment Agreement also contains customary confidentiality provisions.

Litigation

On August 19, 2004 a complaint was filed by Radio Wave LLC ("Plaintiff"), in the
Supreme Court of the State of New York, County of New York, against Essential
Reality, LLC, Essential and David Devor, a former officer and a current employee
of the Company, for rent and costs relating to premises formerly occupied by the
Company. Plaintiff seeks to recover $150,416 for the period up to August 31,
2004, plus additional amounts to be determined by the Court for the period
subsequent to August 31, 2004. Plaintiff also seeks to recover $50,000 in
expenses and attorney fees plus additional amounts to be determined by the
Court. The Company is currently in settlement discussions with the Plaintiff and
has provided a reserve for its estimate of the loss.

F-15

Note 11 - FOURTH QUARTER ADJUSTMENT

During the fourth quarter of fiscal 2004 the Company conducted its annual
physical inventory. The physical inventory resulted in a difference with the
perpetual inventory system of approximately $269,000, which was recorded as an
expense in 2004 within cost of sales in the accompanying financial statements.

The Company determined that approximately $198,000 of the difference was due to
an error in the perpetual inventory system which did not properly update certain
sales transactions. The balance was related to shrinkage.

No such adjustment was necessary in fiscal 2005.

Note 12 - STOCK PURCHASE AGREEMENT

In connection with the possible acquisition of Fesco, the Company signed an
Engagement Agreement dated as of October 11, 2005 (the "Engagement Agreement")
with an investment banking firm ("Firm"). The Engagement Agreement provides,
among other things, for services of the Firm as the Company's financial adviser
and exclusive placement agent for a proposed private placement of approximately
$60 million of Alliance equity securities (the "Proposed Offering"). If the
Proposed Offering is successful, the net proceeds will be used primarily to fund
the cash portion of the Fesco purchase price and related expenses. No assurances
can be given when, if ever, the Proposed Offering will close or the terms. None
of the securities to be sold in the Proposed Offering will be registered under
the Securities Act of 1933, as amended (the "1933 Act") and shall not be offered
or sold in the United States absent registration or an applicable exemption from
the registration requirements of the 1933 Act.

In connection with its agreement with the Firm, the Company issued to them
50,000 shares of Alliance Common Stock with a value of $19,500, and agreed to
pay designated success fees and issue warrants to them if the offering is
successfully completed, and to reimburse them for designated expenses. For
accounting purposes, these costs will be offset against any proceeds raised from
the private placement.

During 2005, the Company incurred costs of approximately $95,000 and $67,000 in
connection with the Acquisition Agreement and the Proposed Offering,
respectively, which are included on the balance sheet at December 31, 2005. If
the transaction is successful, the respective costs will be either included in
the acquisition purchase price or offset against the offering proceeds raised.
If it is determined by management that the acquisition will not occur, the
Company will expense all costs to operations.

F-16

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

ITEM 8A. CONTROLS AND PROCEDURES

An evaluation has been carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer/Principal Financial and Accounting Officer, of the
effectiveness of the design and the operation of our "disclosure controls and
procedures" (as such term is defined in Rules 13a-15(e) under the Securities
Exchange Act of 1934) as of December 31, 2005 ("Evaluation Date"). Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer/Principal
Financial and Accounting Officer have concluded that, as of the Evaluation Date,
the disclosure controls and procedures are reasonably designed and effective to
ensure that (i) information required to be disclosed by us in the reports we
file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and (ii) such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial
Officer/Principal Financial and Accounting Officer, as appropriate to allow
timely decisions regarding required disclosure.

ITEM 8B. OTHER INFORMATION

None

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

Our directors and executive officers, their ages, positions held and duration
each person has held that position, are as follows:

NAME POSITION HELD WITH THE COMPANY AGE DATE FIRST ELECTED OR APPOINTED

Jay Gelman Chief Executive Officer, Assistant Secretary 44 Chief Executive Officer on June 29, 2004;
and Chairman of Board of Directors Assistant Secretary on November 11, 2004; and
Chairman of the Board of Directors on
October 14, 2004

Andre Muller Chief Operating Officer, President, Secretary 41 Chief Operating Officer and President on
and Director June 29, 2004; Secretary on November 11,
2004; and Director on October 14, 2004

Barbara A. Ras Chief Financial Officer and Principal Financial 43 Chief Financial Officer/ Principal Financial
and Accounting Officer and Accounting Officer on April 7, 2005

Humbert B. Powell, III Director 67 Director and Chairman of the Board of
Directors from July 1, 2002 until October 14,
2004 and currently a Director

Thomas Vitiello Director 44 Director on October 14, 2004

Steven H. Nathan Director 55 Director on March 14, 2005

JAY GELMAN

Jay Gelman in 1989 co-founded L & J Marketing, Inc. d/b/a Alliance Distributors,
a regional video game software and hardware distributor based in College Point,
NY. He served as President, until December of 1997 when Alliance was sold to
Take Two Interactive Software, Inc. From 1998 until 2003, Mr. Gelman was
employed by Track Data Corporation (NASDAQ: TRAC) where he served as a director
and as Executive Vice President. In 2003, Mr. Gelman co-founded Alliance
Partners (name later changed to AllianceCorner Distributors Inc.), and served as
its President and Chief Executive Officer. Since the acquisition by the Company
of AllianceCorner Distributors Inc. on June 29, 2004, Mr. Gelman has served as
Chief Executive Officer of the Company and is also currently the Chairman of the
Board of Directors.

ANDRE MULLER

For more than five years prior to 2003 Andre Muller was employed as a General
Manager by Take Two Interactive Software, Inc. In 2003, Mr. Muller co-founded
Alliance Partners (name later changed to AllianceCorner Distributors Inc.), and
served as its Chief Operating Officer. Since the acquisition by the Company of
AllianceCorner Distributors Inc. on June 29, 2004, Mr. Muller has served as
Chief Operating Officer and President of the Company.

BARBARA A. RAS

Barbara A. Ras has not engaged in business activities since September 2002. From
October 1994 to August 2002 she was employed at Take Two Interactive Software,
Inc. (NASDQ: TTWO), in several positions, including controller and chief
accounting officer, and also as chief financial officer of Take Two's
distribution arm. Previously, she was a tax accountant and an internal auditor.
Ms. Ras is a certified public accountant.

HUMBERT B. POWELL, III

Humbert B. Powell, III has been a Managing Director at Sanders Morris Harris, a
regional investment-banking firm headquartered in Houston, Texas, with a branch
in New York City, since November 1996. He is a trustee of Salem-Teikyo
University. Mr. Powell served as chief executive officer of the Company from
June 20, 2002 until July 1, 2002.

THOMAS VITIELLO

For more than five years, Mr. Vitiello has been the president of VIT Trading,
Inc., a trader in precious metals. He graduated from NYU with a BS in Finance in
1985.

STEVEN H. NATHAN

Steven H. Nathan has since 1997 served as President of Progressive Planning,
Inc. a tax and financial consulting firm in Jericho, New York. From 1993 through
1997 he was Vice President and Chief Financial Officer of L & J Marketing, Inc.
d/b/a Alliance Distributors, a regional video game software and hardware
distributor based in College Point, New York. He held similar positions from
1984 to 1993 with Wren/AP Distributors.

TERM OF OFFICE

The Company's Directors are appointed for a one-year term to hold office until
the next annual meeting of shareholders. Our officers serve at the pleasure of
the Board of Directors.

See "Certain Relationships and Related Transactions" for information on a
transaction between the Company and Jay Gelman.

There are no family relationships among directors or executive officers.

The Company has a separately designated standing audit committee established in
March 2005 in accordance with Section 3(a)(58)(A) of the Exchange Act. Serving
on the Committee are Steven H. Nathan and Thomas Vitiello. The Board of
Directors has determined that it has an audit committee financial expert serving
on the audit committee, Steven H. Nathan.

The board of directors have determined that Steven H. Nathan is an independent
director based on Rule 4200 of the National Association of Securities Dealers'
listing standards and is qualified as an "Audit Committee Financial Expert" as
defined in Item 7(d)(3)(iv) of Schedule 14A.

Section 16(a) Beneficial Ownership Reporting Compliance

The Company believes that during the period from January 1, 2005 through
December 31, 2005 all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten-percent beneficial owners were complied
with.

Code of Ethics

The Company has adopted a Code of Ethics that applies to its Chief Executive
Officer and its Chief Financial Officer/Principal Financial and Accounting
Officer.

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth certain information as to the total remuneration
paid by the Company to its Chief Executive Officer and Chief Operating Officer.
No other officer received salary and bonus payments, other than the named
individual, in excess of $100,000 for each of the last three completed fiscal
years.

Summary Compensation Table
--------------------------------------------------------------------------------
Name and Fiscal Annual Securities
Princial Year Ended Compensation underlying Options
Position December 31 Salary (#)
--------------------------------------------------------------------------------
Jay Gelman,
Chief
Executive
Officer 2005 $303,137 1,100,000
--------------------------------------------------------------------------------
2004 $182,211 (*) --
--------------------------------------------------------------------------------
Andre Muller,
President and
Chief
Operating Officer 2005 $303,047 1,100,000
--------------------------------------------------------------------------------
2004 $182,211 (*) --
--------------------------------------------------------------------------------

(*) For the period from June 29, 2004 through December 31, 2004

The following table sets forth certain information as to the stock options
granted by the Company to its Chief Executive Officer, Chief Operating Officer
and Chief Financial Officer/Principal Financial and Accounting Officer.

Option Grants in Last Fiscal Year
------------------------------------------------------------------------------------------------------------------------------
Number of securities Percent of total options
underlying options granted to employees in
Name granted fiscal year 2005 Exercise Price Expiration date
------------------------------------------------------------------------------------------------------------------------------

Jay Gelman 1,100,000 14.4% $0.325 January 15, 2015
------------------------------------------------------------------------------------------------------------------------------
Andre Muller 1,100,000 14.4% $0.325 January 15, 2015
------------------------------------------------------------------------------------------------------------------------------
Barbara A. Ras 100,000 1.3% $0.325 April 14, 2015
------------------------------------------------------------------------------------------------------------------------------

The following table sets forth certain information as to the aggregated stock
option exercises in fiscal 2005 by its Chief Executive Officer, Chief Operating
Officer and Chief Financial Officer/Principal Financial and Accounting Officer
and option values as of December 31, 2005.

Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Values

--------------------------------------------------------------------------------------------------------------------------------
Number of securities
underlying unexercised Value of unexercised
options at in-the-money options at
December 31, 2005 December 31, 2005
----------------------------------------------------------------------------------------------------------------------------
Shares acquired on
Name exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
----------------------------------------------------------------------------------------------------------------------------

Jay Gelman -- -- 275,000 825,000 $1,375 $4,125
----------------------------------------------------------------------------------------------------------------------------
Andre Muller -- -- 275,000 825,000 $1,375 $4,125
----------------------------------------------------------------------------------------------------------------------------
Barbara A. Ras -- -- 16,667 83,333 $83 $417
----------------------------------------------------------------------------------------------------------------------------

DIRECTOR COMPENSATION

On January 14, 2005, the board of directors resolved that each director will be
entitled to a $1,500 fee for each of four regularly scheduled meetings during
each year.

Prior to August 30, 2004, board members were compensated for their services as
director. Each member received annual compensation of $10,000 ($12,000 if acting
as chairman of a committee) plus options to purchase 10,000 shares of the
Company's common stock at an exercise price equal to the closing price of our
common stock on the date of the grant. The options vested over a one-year period
in equal quarterly amounts, so long as the director completed service for such
quarter. Non-employee directors were reimbursed for reasonable expenses in
connection with serving as a director and member of a committee. There were
100,000 options issued prior to June 29, 2004, all of which were cancelled
pursuant to terms of the Exchange Agreement.

Employment Agreement

Reference is made to Certain Relationships and Related Transactions describing
the Company's employment agreement with Jay Gelman, the Company's Chief
Executive Officer and Chairman.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The following table sets forth, as of March 16, 2006, information regarding the
beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act
of 1934) of the Company's Common Stock based upon the most recent information
available to the Company for (i) each person known by the Company to own
beneficially more than five (5%) percent of the Company's outstanding Common
Stock, (ii) each of the Company's officers and directors and (iii) all officers
and directors of the Company as a group. Unless otherwise indicated, each
stockholder's address is c/o the Company, 15-15 132nd Street, College Point, New
York 11356.

Beneficial ownership is determined in accordance with the rules of the SEC, and
for calculating the shares and percentage beneficially owned by each Selling
Security Holder includes any securities which the person has the right to
acquire within 60 days of the date of this information statement through the
conversion or exercise of any security or right. The terms of the Series A
Convertible Non Redeemable Preferred Shares ("Series A Preferred Shares")
restrict each holder's right to convert the Series A Preferred Shares to the
extent that beneficial ownership of such holder and its affiliates would exceed
4.999% or 9.999% of the shares of Common Stock that would be outstanding after
giving effect to such conversion. For convenience, the table and the footnotes
are presented as if these restrictions did not apply. For purposes of the table
and the footnotes below, there are deemed outstanding 52,884,123 shares of
common stock, consisting of 48,721,065 shares of common stock currently issued
and outstanding and 4,163,058 shares of common stock issuable on conversion of
261,663 Series A Preferred Shares. Each Series A Preferred Share converts into
15.91 shares of common stock.

--------------------------------------------------------------------------------
Name and address of beneficial Common Stock (% of class)
owner
--------------------------------------------------------------------------------

Jay Gelman 18,341,577 (1) (34.38%)
--------------------------------------------------------------------------------

Andre Muller 8,685,004 (2) (16.28%)
--------------------------------------------------------------------------------

Barbara A. Ras 122,333 (3) (0.23%)
--------------------------------------------------------------------------------

Humbert B. Powell, III 85,228 (4) (0.16%)
--------------------------------------------------------------------------------

Thomas Vitiello 62,500 (5) (0.12%)
--------------------------------------------------------------------------------

Steven H. Nathan 62,500 (6) (0.12%)
--------------------------------------------------------------------------------

All executive officers and 27,359,142 (50.64%)
directors as a group
--------------------------------------------------------------------------------

Francis Vegliante 4,684,988 (7) (8.78%)
--------------------------------------------------------------------------------
Nathan A. Low (8)
c/o Sunrise Securities 6,170,648 (9) (11.40%)
Corp., 641 Lexington
Avenue N.Y., N.Y. 10022
--------------------------------------------------------------------------------
Theseus Fund, L.P.
f/k/a Minotaur Fund LLP 5,200,000 (10) (9.83%)
131 Olive Hill Lane, Woodside, CA
94062
--------------------------------------------------------------------------------

-----------------------------
(1) Consists of Mr. Gelman's record and beneficial ownership of 8,226,671 shares
of common stock, 366,666 shares of common stock issuable upon exercise of
366,666 options that are currently exercisable, 91,667 shares of common stock
issuable upon exercise of 91,667 options exercisable within 60 days, and
6,976,899 shares of common stock and 168,427 Series A Preferred Shares
convertible into 2,679,674 shares of common stock that are subject to a voting
proxy. Of the total number of shares of common stock subject to a voting proxy,
Theseus Fund, L.P. (f/k/a Minotaur Fund LLP) granted to Mr. Gelman a proxy to
vote 1,071,335 shares of common stock.

(2) Consists of Mr. Muller's record and beneficial ownership of 8,226,671 shares
of common stock, 366,666 shares of common stock issuable upon exercise of
366,666 options that are currently exercisable and 91,667 shares of common stock
issuable upon exercise of 91,667 options exercisable within 60 days.

(3) Consists of Ms. Ras' record and beneficial ownership of 66,000 shares of
common stock and her indirect beneficial ownership of 23,000 shares of common
stock owned by her husband, 25,000 shares of common stock issuable upon exercise
of 25,000 options that are currently exercisable and 8,333 shares of common
stock issuable upon exercise of 8,333 options exercisable within 60 days.

(4) Consists of Mr. Powell's record and beneficial ownership of 22,728 shares of
common stock, 50,000 shares of common stock issuable upon exercise of 50,000
options that are currently exercisable and 12,500 shares of common stock
issuable upon exercise of 12,500 options exercisable within 60 days.

(5) Consists of 50,000 shares of common stock issuable upon exercise of 50,000
options that are currently exercisable and 12,500 shares of common stock
issuable upon exercise of 12,500 options exercisable within 60 days.

(6) Consists of 50,000 shares of common stock issuable upon exercise of 50,000
options that are currently exercisable and 12,500 shares of common stock
issuable upon exercise of 12,500 options exercisable within 60 days.

(7) Consists of Mr. Vegliante's record and beneficial ownership of 4,226,655
shares of common stock, 366,666 shares of common stock issuable upon exercise of
366,666 options that are currently exercisable and 91,667 shares of common stock
issuable upon exercise of 91,667 options exercisable within 60 days.

(8) Mr. Low has sole dispositive and voting power in Sunrise Securities Corp.
Mr. Low's wife has sole voting and investment power in the shares owned by
Nathan A. Low Family Trust. Mr. Low has shared voting and investment power in
Level Counter LLC, which has sole investment and voting power in the shares
owned by Sunrise Equity Partners. Mr. Low has shared voting and investment power
in the shares owned by Sunrise Foundation Trust. Mr. Low disclaims beneficial
ownership of the shares owned by Nathan A. Low Family Trust, Sunrise Equity
Partners and Sunrise Foundation Trust.

(9) These 6,170,648 shares consist of 636,400 shares of common stock owned by
Sunrise Equity Partners, 245,794 shares of common stock owned by Sunrise
Securities Corp., 756,346 shares of common stock due to the deemed conversion of
47,539 Series A Convertible Non Redeemable Preferred Stock ("Series A Preferred
Shares") owned by Nathan A. Low, 388,315 shares of common stock due to the
deemed conversion of 24,407 Series A Preferred Shares owned by Nathan A. Low
Family Trust, 2,290,515 shares of common stock due to the deemed conversion of
143,967 Series A Preferred Shares owned by Nathan A. Low Roth IRA, 346,504
shares of common stock due to the deemed conversion of 21,779 Series A Preferred
Shares owned by Sunrise Foundation Trust, 366 shares of common stock due to the
deemed conversion of 23 Series A Preferred Shares owned by Sunrise Securities
Corp. and 282,307 shares of common stock due to the deemed conversion of 17,744
shares of common stock owned by Sunrise Equity Partners. Further includes
800,527 shares of common stock issuable upon exercise of 800,527 warrants owned
by Nathan A. Low, 200,132 shares of common stock issuable upon exercise of
200,132 warrants owned by Sunrise Foundation Trust and 223,442 shares of common
stock issuable upon exercise of 223,442 warrants owned by Sunrise Securities
Corp.

(10) See footnote 1 for information relating to the voting proxy granted to Jay
Gelman by Theseus Fund, L.P. f/k/a Minotaur Fund LLP.

The following table sets forth, as of March 16, 2006, information regarding the
beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act
of 1934) of the Company's Series A Non Redeemable Convertible Preferred Stock
("Series A Preferred Shares") based upon the most recent information available
to the Company for (i) each person known by the Company to own beneficially more
than five (5%) percent of the Company's outstanding Series A Preferred Shares,
(ii) each of the Company's officers and directors and (iii) all officers and
directors of the Company as a group.

--------------------------------------------------------------------------------
Name and address of beneficial Series A Convertible Non
owner Redeemable Preferred Shares (% of class)
--------------------------------------------------------------------------------

Jay Gelman 168,427 (11) (64.37%)
--------------------------------------------------------------------------------
All executive officers and 168,427 (64.37%)
directors as a group
--------------------------------------------------------------------------------
Nathan A. Low (12)
c/o Sunrise Securities Corp., 641 255,459 (13) (97.63%)
Lexington Avenue N.Y., N.Y. 10022
--------------------------------------------------------------------------------
Nathan A. Low Roth
IRA 143,967 (14) (55.02%)
c/o Sunrise Securities Corp.
641 Lexington Avenue
N.Y., N.Y. 10022
--------------------------------------------------------------------------------
Nathan A. Low Family
Trust 24,407 (15) (9.33%)
c/o Sunrise Securities Corp.
641 Lexington Avenue
N.Y., N.Y. 10022
--------------------------------------------------------------------------------
Sunrise Equity
Partners 17,744 (6.78%)
c/o Sunrise Securities Corp.
641 Lexington Avenue
N.Y., N.Y. 10022
--------------------------------------------------------------------------------
Sunrise Foundation
Trust 21,779 (8.32%)
c/o Sunrise Securities Corp.
641 Lexington Avenue
N.Y., N.Y. 10022
--------------------------------------------------------------------------------
Level Counter LLC (16)
641 Lexington Avenue 17,744 (17) (6.78%)
25th Floor
N.Y., N.Y. 10022
--------------------------------------------------------------------------------
Amnon Mandelbaum (18)
641 Lexington Avenue 17,744 (19) (6.78%)
25th Floor
N.Y., N.Y. 10022
--------------------------------------------------------------------------------
Marilyn Adler (20)
641 Lexington Avenue 17,744 (21) (6.78%)
25th Floor
N.Y., N.Y. 10022
--------------------------------------------------------------------------------

-----------------------------

(11) Consists of 24,407 Series A Preferred Shares subject to a voting proxy
granted to Jay Gelman by the Nathan A. Low Family Trust, 143,967 Series A
Preferred Shares subject to a voting proxy granted to Jay Gelman by the Nathan
A. Low Roth IRA and 53 Series A Preferred Shares subject to a voting proxy
granted to Jay Gelman by Northumberland Holdings, LTD.

(12) Mr. Low has sole dispositive and voting power in Sunrise Securities Corp.
Mr. Low's wife has sole voting and investment power in the shares owned by
Nathan A. Low Family Trust. Mr. Low has shared voting and investment power in
Level Counter LLC, which has sole investment and voting power in the shares
owned by Sunrise Equity Partners. Mr. Low has shared voting and investment power
in the shares owned by Sunrise Foundation Trust. Mr. Low disclaims beneficial
ownership of the shares owned by Nathan A. Low Family Trust, Sunrise Equity
Partners and Sunrise Foundation Trust.

(13) Consists of 47,539 Series A Preferred Shares owned by Nathan A. Low,
143,967 Series A Preferred Shares owned by Nathan A. Low Roth IRA, 17,744 Series
A Preferred Shares owned by Sunrise Equity Partners, 24,407 Series A Preferred
Shares owned by Nathan A. Low Family Trust, 21,779 Series A Preferred Shares
owned by Sunrise Foundation Trust and 23 Series A Preferred Shares owned by
Sunrise Securities Corp.

(14) See footnote 11 for information relating to the voting proxy granted to Jay
Gelman by the Nathan A. Low Roth IRA.

(15) See footnote 11 for information relating to the voting proxy granted to Jay
Gelman by the Nathan A. Low Family Trust.

(16) Level Counter LLC has sole investment and voting power in the shares owned
by Sunrise Equity Partners. Level Counter LLC disclaims beneficial ownership of
these shares.

(17) See footnote 16.

(18) Mr. Mandelbaum has shared voting and investment power in Level Counter LLC,
which has sole investment and voting power in the shares owned by Sunrise Equity
Partners. Mr. Mandelbaum disclaims beneficial ownership of the shares owned by
Sunrise Equity Partners.

(19) See footnotes 16 and 18.

(20) Consists of shares owned by Level Counter LLC. Ms. Adler has shared voting
and investment power in Level Counter LLC, which has sole investment and voting
power in the shares owned by Sunrise Equity Partners. Ms. Adler disclaims
beneficial ownership of the shares owned by Sunrise Equity Partners.

(21) See footnotes 16 and 20.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Other than as disclosed below, there have been no transactions, or proposed
transactions, which have materially affected or will materially affect us in
which any director, executive officer or beneficial holder of more than 5% of
the outstanding common stock, or any of their respective relatives, spouses,
associates or affiliates, has had or will have any direct or material indirect
interest.

Employment Agreement. The Company has a two year employment agreement (the
"Employment Agreement") effective as of July 1, 2004 with Jay Gelman, who is the
Company's Chief Executive Officer and Chairman of its Board of Directors. The
Employment Agreement provides for annual compensation of $300,000 for the first
year and $350,000 for the second year. The Employment Agreement also provides
for the Board of Directors to award discretionary bonuses to Mr. Gelman in an
amount equal to his salary. In the event of a termination of Mr. Gelman's
employment by the Company other than for Cause, as defined under the Employment
Agreement, or by Mr. Gelman for Good Reason, as defined under the Employment
Agreement, Mr. Gelman will be entitled to a lump sum payment equal to three
times his base salary for the period from the date of termination through June
30, 2006. The Employment Agreement contains a 12-month non-compete provision
effective following termination, except for termination by the Company other
than for Cause, or Good Reason by Mr. Gelman. The Employment Agreement also
contains customary confidentiality provisions.

Reference is made to the Liquidity and Capital Resources section above for a
discussion relating to limited guaranties signed by the Company's CEO and the
Company's President with respect to borrowings by the Company under the
Financing Agreement.

-----------------------------

ITEM 13. EXHIBITS
(a)
1. Financial Statements. See Item 7 Index to Financial Statements.
2. Financial Statement Schedules. Not applicable

Exhibit
Number Description

2.1 Exchange Agreement between Essential Reality, Inc. and Messrs. Jay Gelman, Andre Muller and Francis Vegliante
dated as of June 17, 2004. Incorporated herein by reference from Exhibit 2.1 to the Company's Form 8-K filed on
July 14, 2004 (the "Form 8-K").

2.2 Form of Agreement and Plan of Merger dated as of October 25, 2004 by and between Essential Reality, Inc. and
Alliance Distributor Holding Inc. Incorporated herein by reference from Exhibit 2 to the Company's Form 8-K
filed on November 23, 2004.

3.1 Certificate of Incorporation of Alliance Distributors Holding Inc. Incorporated herein by reference from
Exhibit 3.1 to the Company's Form 8-K filed on November 23, 2004.

3.2 By-Laws of Alliance Distributors Holding Inc. Incorporated herein by reference from Exhibit 3.2 to the Company's
Form 8-K filed on November 23, 2004.

4.1 Alliance Distributors Holding Inc. 2004 Stock Plan. Incorporated herein by reference from Exhibit 3.3 to the
Company's Form 8-K filed on November 23, 2004.

4.2 Form of Stock Option Agreement. Incorporated herein by reference from Exhibit 4.2 to the Company's Form 10K-SB
filed on March 30, 2005.

4.3 Form of Warrant issued to Rosenthal & Rosenthal. Incorporated herein by reference from Exhibit 4.1 to the
Company's Form 8-K filed on November 15, 2004.

4.4 Form of Warrants issued to Legend Merchant Group, Inc. and Coniston Investment Corp. Incorporated herein by
reference from Exhibit 4.1 to the Company's Form SB-2 filed on July 19, 2002.

4.5 Form of Warrant issued to Sunrise Securities Corp. Incorporated herein by reference from Exhibit 99.4 to the
Company's Form 8-K filed on July 14, 2004.

9.1 Irrevocable Proxy given in favor of Jay Gelman. Incorporated herein by reference from Exhibit 9.1 to the Form 8-K.

9.2 Form of Irrevocable Proxy dated December 15, 2005 given in favor of Jay Gelman, filed herewith.

10.1 Retainer Agreement dated as of June 29, 2004 between Essential Reality, Inc. and IVC Group. Incorporated herein by
reference from Exhibit 10.1 to the Company's Form 10-QSB for the period ended June 30, 2004, filed on August 17,
2004.

10.2 Employment Agreement, dated as of July 26, 2004 between Essential Reality Inc. and Jay Gelman, President and CEO of
Essential Reality Inc. Incorporated herein by reference from Exhibit 10.2 to the Company's Form 10-QSB filed on
August 17, 2004.

10.3 Subscription Agreement among the Investor's listed on Schedule I thereto, Essential Reality, Inc. and Jay Gelman.
Incorporated herein by reference from Exhibit 99.1 to the Form 8-K.

10.4 Subscription Agreement Supplement No. 1 between the Investors listed on Schedule I thereto and Essential Reality,
Inc. Incorporated herein by reference from Exhibit 99.2 to the Form 8-K.

10.5 Registration Rights Agreement between Essential Reality and the Investors listed on Schedule I to the Subscription
Agreement. Incorporated herein by reference from Exhibit 99.3 to the Form 8-K.

10.6 Stock Purchase Warrant between Essential Reality, Inc. and Sunrise Securities Corp. Incorporated herein by reference
from Exhibit 99.4 to the Form 8-K.

10.7 Investment Banking Agreement between Essential Reality, Inc. and Sunrise Securities Corp. Incorporated herein by
reference from Exhibit 99.5 to the Form 8-K.

10.8 Form of Financing Agreement between the Company and Rosenthal & Rosenthal. Incorporated herein by reference from
Exhibit 10.1 to the Company's Form 8-K filed on November 16, 2004.

10.9 Amendment dated November 1, 2005 to the Financing Agreement between the Company and Rosenthal & Rosenthal.
Incorporated herein by reference from Exhibit 10.2 to the Company's Form 10-QSB filed on November 7, 2005.

10.10 Amendment dated October 31, 2005 to the Financing Agreement between the Company and Rosenthal & Rosenthal,
filed herewith.

10.11 Form of Amendment dated March 21, 2006 to the Financing Agreement between the Company and Rosenthal & Rosenthal,
filed herewith.

10.12 Form of Security Agreement issued to Rosenthal & Rosenthal. Incorporated herein by reference from Exhibit 10.2 to
the Company's Form 8-K filed on November 15, 2004.

10.13 Form of Guaranty issued to Rosenthal & Rosenthal. Incorporated herein by reference from Exhibit 10.3 to the
Company's Form 8-K filed on November 15, 2004.

10.14 Form of Registration Rights Agreement issued to Rosenthal & Rosenthal. Incorporated herein by reference from Exhibit
10.4 to the Company's Form 8-K filed on November 15, 2004.

10.15 Lease Agreement dated as of July 28, 2003 between KIM Management, LLC, and Big Brother World, Inc. Incorporated
herein by reference from Exhibit 10.12 to the Company's Form SB-2 filed on December 23, 2004.

10.16 Lease Agreement dated as of December 1, 2003 between Angelo Pegno et. al. and AllianceCorner Distributors Inc.
Incorporated herein by reference from Exhibit 10.13 to the Company's Form SB-2 filed on December 23, 2004.

10.17 Lease Agreement dated as of July 1, 2003 between Angelo Pegno Et. al. and Alliance Partners, Inc. Incorporated
herein by reference from Exhibit 10.14 to the Company's Form SB-2 filed on December 23, 2004.

10.18 Assignment and Assumption of Lease Agreement dated as of March 30, 2004 between Corner Distributors, Inc. and
AllianceCorner Distributors, Inc., filed herewith.

10.19 Operating Agreement of Alliance Age LLC between Alliance Distributors Holding Inc. and Abrams/Gentile Entertainment
Inc. dated July 21, 2005. Incorporated herein by reference from Exhibit 99.1 to the Company's Form 10-QSB filed
on August 15, 2005.

10.20 Stock Purchase Agreement dated January 2, 2006 by and among the Company and the Sellers set forth therein.
Incorporated herein by reference from Exhibit 10.1 to the Company's Form 8-K filed on January 10, 2006.

14 Code of Ethics. Incorporated herein by reference from Exhibit 14 to the Company's Form 8-K filed on March 16, 2005.

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, filed
herewith.

31.2 Certification of Chief Financial Officer/Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934, filed herewith.

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

32.2 Certification of Chief Financial Officer/Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The aggregate fees billed by the Company's principal accounting firm, Mahoney
Cohen & Company, CPA, P.C., for professional services for fiscal 2005 and 2004
were as follows:

------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------
Audit fees (1) $107,935 $91,250
------------------------------------------------------------------------
Audit related fees (2) 24,910 65,235
------------------------------------------------------------------------
Total $132,845 $156,485
------------------------------------------------------------------------

(1) Represents fees billed in connection with the audit of the Company's
financial statements and review of the financial statements included in
the Company's Quarterly Reports on Form 10-QSB.
(2) Represents fees billed in connection with services related to the
acquisition of Fesco and review of the Company's Form SB-2, Private
Placement Memorandum, Schedule 14-C, and Form 8-K filings.

Audit Committee Pre-Approval Policies and Procedures.
The Audit Committee is directly and solely responsible for oversight, engagement
and termination of any independent auditor employed by the Company for the
purpose of preparing or issuing an audit report or related work.

The Committee:
Meets with the independent auditor prior to the audit and discusses the planning
and staffing of the audit;

Approves in advance the engagement of the independent auditor for all audit
services and non-audit services and approves the fees and other terms of any
such engagement;

Obtains periodically from the independent auditor a formal written statement of
the matters required to be discussed by Statement of Auditing Standards No. 61,
as amended, and, in particular, describing all relationships between the auditor
and the Company; and

Discusses with the auditor any disclosed relationships or services that may
impact auditor objectivity and independence.

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this Report on Form 10-KSB to be signed on its behalf by
the undersigned, thereunto duly authorized.

March 22, 2006
Alliance Distributors Holding Inc.

By: /s/ Jay Gelman
---------------------------------
Jay Gelman
CEO and Chairman of the Board

By: /s/ Barbara A. Ras
---------------------------------
Barbara A. Ras
Chief Financial Officer/Principal
Financial and Accounting Officer

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

/s/ Jay Gelman Date: March 22, 2006
------------------------------------------
Jay Gelman, Chief Executive Officer and
Chairman of the Board

/s/ Andre Muller Date: March 22, 2006
------------------------------------------
Andre Muller, President, Secretary, Chief
Operating Officer and Director

/s/ Barbara A. Ras
------------------------------------------- Date: March 22, 2006
Barbara A. Ras
Chief Financial Officer/Principal
Financial and Accounting Officer

/s/ Humbert B. Powell, III Date : March 22, 2006
------------------------------------------
Humbert B. Powell, III, Director

/s/ Steven H. Nathan Date : March 22, 2006
------------------------------------------
Steven H. Nathan, Director

/s/ Thomas Vitiello Date : March 22, 2006
------------------------------------------
Thomas Vitiello, Director