Pacificap Entertainment (PFEH) 10-Q 2008 Q1 Quarterly report

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10Q

(Mark One)

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2008

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

For the transition period from ____________ to ______________

Commission file number 000-31048

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(Name of Small Business Issuer in Its Charter)

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

4521 Campus Drive, Suite 562

Irvine, CA 92612

(Address of Principal Executive Offices)

(949) 706-1834

(Issuer's Telephone Number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No o

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

As of November 20, 2008, the Company had 377,258,692 shares of its par value $0.001 common stock issued and outstanding.

Transitional Small Business Disclosure Format (check one): Yes o  No x

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A Development Stage Company)

Quarterly Report on Form 10-Q for the

Quarterly Period Ending March 31, 2008

Table of Contents

PART I. FINANCIAL INFORMATION			Page
	Item 1. Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets: March 31, 2008 and December 31, 2007	F-1
		Condensed Consolidated Statements of Income (Losses): Three Months Ended March 31, 2008 and 2007, and For the Period from July 29, 1997 (Date of Inception) through March 31, 2008	F-2
		Condensed Consolidated Statements of Deficiency in Stockholders’ Equity For the period July 29, 1997 (Date of Inception) through March 31, 2008	F-3- F-12
		Condensed Consolidated Statements of Cash Flows: Three Months Ended March 31, 2008 and 2007, and For the Period from July 29, 1997 (Date of Inception) through March 31, 2008	F-13 - F15
		Notes to Unaudited Condensed Consolidated Financial Information: March 31, 2008	F-16 -F-36
	Item 2. Management Discussion and Analysis of Financial Condition Plan of Operation		1
	Item 3. Controls and Procedures		8
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings		9
	Item 2.Unregistered Sale of Equity Securities and Use of Proceeds		9
	Item 3. Defaults Upon Senior Securities		9
	Item 4. Submission of Matters to a Vote of Security Holders		9
	Item 5. Other Information		9
	Item 6. Exhibits		9
SIGNATURES			10

PACIFICAP ENTERTAINMENT HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
	March 31,			December 31,
	2008			2007
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	6,279		$	2,151
Total current assets		6,279			2,151
Property and equipment:
Office furniture, net of accumulated depreciation of $14,680 and $14,139 at March 31, 2008 and December 31, 2007, respectively		4,645			5,186
Other assets:
Prepaid expense		37,820			44,339
Financing Costs, net of accumulated amortization and write off of $795,084 and $778,084 at March 31, 2008 and December 31, 2007, respectively		67,960			82,206
Total other assets		105,780			126,545
Total assets	$	116,704		$	133,882
LIABILITIES AND (DEFICIENCY IN) STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	2,382,215		$	2,101,074
Other accrued liabilities		380,000			380,000
Notes payable , current portion		3,537,885			3,462,876
Advances from related parties		5,090			5,090
Other advances		164,362			164,362
Total current liabilities		6,469,552			6,113,402
Notes payable, long-term portion		302,390			208,000
Derivative liability relating to convertible debentures		9,691,995			14,055,623
Warrant liability relating to convertible debentures		7,100			28,403
Total long term debt		10,001,485			14,292,026
Commitments and contingencies
Total liabilities		16,471,037			20,405,428
(Deficiency in) stockholders' equity:
Preferred stock, par value, $0.001 per share; 50,000,000 shares authorized; none issued and outstanding at March 31, 2008 and December 31, 2007		-			-
Common stock, par value, $0.001 per share; 3,000,000,000 shares authorized; 344,439,092 and 299,668,892 shares issued at March 31, 2008 and December 31, 2007, respectively		344,439			299,669
Additional paid-in-capital		42,337,591			42,379,227
Deficit accumulated during development stage		(59,036,363	)		(62,950,442	)
Total (deficiency in) stockholder's equity		(16,354,333	)		(20,271,546	)
Total liabilities and (deficiency in) stockholder's equity	$	116,704		$	133,882

See accompanying notes to the unaudited condensed consolidated financial statements

F-1

PACIFICAP ENTERTAINMENT HOLDINGS, INC
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSSES)
(unaudited)
	For the three months ended March 31,						For the Period July 29, 1997 (Date of Inception) to March 31, 2008
	2008			2007
Costs and Expenses:
Selling, general and administrative	$	91,117		$	118,832		$	16,156,224
Acquisition of Pacificap Entertainment Holdings, Inc.		-			-			29,160,000
Write off of capitalized production costs								900,273
Acquisition of Cineports.com, Inc.		-			-			2,248,461
Impairment of film library		-			-			372,304
Impairment of investment		-			-			62,500
Depreciation		541			949			210,865
Total operating expenses		91,658			119,781			49,110,627
Loss from operations		(91,658	)		(119,781	)		(49,110,627	)
Other income, net		-			-			568,004
Interest expense, net		(414,195	)		(577,084	)		(9,517,917	)
Forgiveness of interest expenses		-			-			399,852
Other income from settlement of convertible debt and accrued interest in connection with sale of film distribution rights		-			-			11,082,695
Unrealized gain (loss) related to adjustment of derivative and warrant liability to fair value of underlying securities		4,419,932			6,296,117			(11,890,156	)
Total other income (expenses)		4,005,737			5,719,033			(9,357,522	)
Income (loss) from continuing operations, before income taxes and discontinued operations		3,914,079			5,599,252			(58,468,149	)
Provision for income taxes		-			-			-
Income (loss) from continuing operations, before discontinued operations		3,914,079			5,599,252			(58,468,149	)
Loss from discontinued operations		-			-			(352,905	)
Loss on disposal of discontinued operations, net		-			-			78,973
Net Income (loss)	$	3,914,079		$	5,599,252		$	(58,742,081	)
Cumulative effect of accounting change		-			-			(294,282	)
Net income (loss) applicable to common shares	$	3,914,079		$	5,599,252		$	(59,036,363	)
Income per share-basic	$	0.01		$	0.02
Income per share-fully diluted	see Note A			see Note A
Weighted average shares outstanding-basic		340,175,263			244,819,781
Weighted average shares outstanding-fully diluted		135,475,193,062			22,969,031,021

See accompanying notes to the unaudited condensed consolidated financial statements

F-2

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE COMPANY)

 CONDENSED CONSOLIDATED STATEMENTS OF DEFICIENCY IN STOCKHOLDERS' EQUITY

FOR THE PERIOD JULY 29, 1997 (DATE OF INCEPTION) THROUGH MARCH 31, 2008

(unaudited)

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

See accompanying notes to the unaudited condensed consolidated financial statements

F-3

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE COMPANY)

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

FOR THE PERIOD JULY 29, 1997 (DATE OF INCEPTION) THROUGH MARCH 31, 2008

(unaudited)

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

See accompanying notes to the unaudited condensed consolidated financial statements

F-4

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE COMPANY)

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

FOR THE PERIOD JULY 29, 1997 (DATE OF INCEPTION) THROUGH MARCH 31, 2008

(unaudited)

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

See accompanying notes to the unaudited condensed consolidated financial statements

F-5

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE COMPANY)

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

FOR THE PERIOD JULY 29, 1997 (DATE OF INCEPTION) THROUGH MARCH 31, 2008

(unaudited)

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

See accompanying notes to the unaudited condensed consolidated financial statements

F-6

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE COMPANY)

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

FOR THE PERIOD JULY 29, 1997 (DATE OF INCEPTION) THROUGH MARCH 31, 2008

(unaudited)

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

See accompanying notes to the unaudited condensed consolidated financial statements

F-7

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE COMPANY)

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

FOR THE PERIOD JULY 29, 1997 (DATE OF INCEPTION) THROUGH MARCH 31, 2008

(unaudited)

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

See accompanying notes to the unaudited condensed consolidated financial statements

F-8

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE COMPANY)

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

FOR THE PERIOD JULY 29, 1997 (DATE OF INCEPTION) THROUGH MARCH 31, 2008

(unaudited)

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

See accompanying notes to the unaudited condensed consolidated financial statements

F-9

PACIFICAP ENTERTAINMENT HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF DEFICIENCY IN STOCKHOLDERS' EQUITY (Continued)
FOR THE PERIOD JULY 19, 1997 (DATE OF INCEPTION) to MARCH 31, 2008 (unaudited)
	Preferred Shares	Share Amount		Common Shares	Share Amount		Common Stock Subscription		Additional Paid in Capital			Deficit Accumulated during Development Stage			Treasury Stock		Total
Balance forward	-	$	-	89,563,261	$	89,563	$	-	$	42,501,950		$	(52,642,909	)	$	-	$	(10,051,396	)
Shares issued in May 2006 as payment towards convertible debentures	-		-	895,631		896		-		90			-			-		986
Shares issued in July 2006 as payment towards convertible debentures				4,430,000		4,430		-		265			-			-		4,695
Shares issued in August 2006 as payment towards convertible debentures				13,290,000		13,290		-		222			-			-		13,512
Shares issued in September 2006 as payment towards convertible debentures				13,290,000		13,290		-		-			-			-		13,290
Shares issued in October 2006 as payment towards convertible debentures				22,150,000		22,150		-		(8,985	)		-			-		13,165
Shares issued in November 2006 as payment towards convertible debentures				31,010,000		31,010		-		(20,196	)		-			-		10,814
Shares issued in December 2006 as payment towards convertible debentures				22,150,000		22,150		-		(15,744	)		-			-		6,406
Net loss	-		-	-		-		-		-			(16,364,683	)		-		(16,364,683	)
Balance at December 31, 2006	-	$	-	196,778,892	$	196,779	$	-	$	42,457,602		$	(69,007,592	)	$	-	$	(26,353,211	)

See accompanying notes to the unaudited condensed consolidated financial statements

F-10

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE COMPANY)

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

FOR THE PERIOD JULY 29, 1997 (DATE OF INCEPTION) THROUGH MARCH 31, 2008

(unaudited)

	Preferred Shares		Share Amount		Common Shares		Share Amount		Additional Paid in Capital			Deficit Accumulated during Development Stage			Total
Balance forward		-		-		196,778,892		196,779		42,457,602			(69,007,592	)		(26,353,211	)
Shares issued in January 2007 as payment towards convertible debentures		-		-		39,870,000		39,870		(29,149	)		-			10,721
Shares issued in February 2007 as payment towards convertible debentures		-				17,720,000		17,720		(12,448	)		-			5,272
Shares issued in March 2007 as payment towards convertible debentures		-		-		31,010,000		31,010		(24,808	)		-			6,202
Shares issued in April 2007 as payment towards convertible debentures		-		-		13,290,000		13,290		(11,120	)		-			2,170
Shares issued in May 2007 as payment towards convertible debentures		-		-		1,000,000		1,000		(850	)		-			150
Net Income		-		-		-		-		-			6,057,150			6,057,150
Balance at December 31, 2007		-	$	-		299,668,892	$	299,669	$	42,379,227		$	(62,950,442	)	$	(20,271,546	)

See accompanying notes to the unaudited condensed consolidated financial statements

F-11

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE COMPANY)

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

FOR THE PERIOD JULY 29, 1997 (DATE OF INCEPTION) THROUGH MARCH 31, 2008

(unaudited)

	Preferred Shares		Share Amount		Common Shares		Share Amount		Additional Paid in Capital			Deficit Accumulated during Development Stage			Total
Balance forward		-		-		299,668,892		299,669		42,379,227			(62,950,442	)		(20,271,546	)
Shares issued in January 2008 as payment towards convertible debentures		-		-		29,846,800		29,847		(28,056	)		-			1,791
Shares issued in February 2008 as payment towards convertible debentures		-				14,923,400		14,923		(13,580	)		-			1,343
Net Income		-		-		-		-		-			3,914,079			3,914,079
Balance at March 31, 2008		-	$	-		344,439,092	$	344,439	$	42,337,591		$	(59,036,363	)	$	(16,354,333	)

See accompanying notes to the unaudited condensed consolidated financial statements

F-12

PACIFICAP ENTERTAINMENT HOLDINGS, INC
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
	For the three months ended March 31,						For the Period July 29, 1997(Date of Inception) to March 31, 2008
	2008			2007
Cash flows from operating activities:
Net income (loss) for the period from continuing operations	$	3,914,079		$	5,599,252		$	(58,762,430	)
Loss from discontinued operations		-			-			(352,905	)
Disposal of business segment, net		-			-			78,974
Adjustments to reconcile net losses  to net cash (used in) operating activities:
Cumulative effect of accounting change		-			-			294,282
Depreciation		541			949			210,865
Organization and acquisition costs expensed		-			-			11,553
Other income from settlement of convertible debt and accrued interest in connection with sale of film rights		-			-			(11,082,695	)
Interest forgiveness by noteholders		-			-			(399,852	)
Common stock issued in exchange for services		-			-			8,530,733
Non cash interest expense related to conversion and paydown of convertible debentures		3,134			22,195			570,401
Common stock issued in exchange for previously incurred debt		-			-			233,498
Common stock issued in exchange for interest		-			-			45,906
Common stock issued in exchange for expenses paid by shareholders		-			-			192,500
Common stock issued in connections with acquisition of Pacificap		-			-			29,160,000
Common stock issued in connection with acquisition of Battleship VFX, Inc.		-			-			91,642
Common stock issued in exchange for financing expenses		-			-			284,392
Common stock issued in connection with acquisition of Cineports		-			-			1,197,396
Warrants issued in connection with acquisition of Cineports		-			-			1,051,065
Stock options issued in exchange for services rendered		-			-			661,365
Preferred stock issued in exchange for services		-			-			855
Conversion of preferred stock		-			-			(855	)
Reverse of notes payable liability in dispute		-			-			15,280
Accretion of convertible debentures		169,399			213,206			4,103,718
Unrealized loss (income) related to adjustment of  derivative and warrant liability to fair value of underlying securities		(4,419,932	)		(6,296,117	)		11,890,156
Amortization and write off of financing costs		17,001			24,706			681,922
Amortization of prepaid interest		6,519			3,474			362,180
Impairment of film library		-			-			372,304
Write-off of  acquired asset		-			-			5,000
Write-off of  un-collectable other receivable		-			-			30,000
Gain from extinguishment of related party debt		-			-			(403,247	)
Debt forgiveness from creditors		-			-			(139,992	)
Write-off of capitalized production costs		-			-			900,273
Write off of other investment previously paid with common stock		-			-			62,500
Expenses paid by principal shareholders		-			-			117,015
(Increase) in:
Capital film costs								(750,000	)
Increase (decrease)  in:
Cash disbursed in excess of available funds		-			(250	)		-
Accounts payable and accrued expenses, net		281,142			326,141			4,046,746
Net cash (used in) operating activities		(28,117	)		(106,444	)		(6,689,455	)

See accompanying notes to the unaudited condensed consolidated financial statements

F-13

PACIFICAP ENTERTAINMENT HOLDINGS, INC
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
	For the three months ended March 31,					For the Period July 29, 1997(Date of Inception) to March 31, 2008
	2008		2007
Cash flows from investing activities:
Acquisition of film library and footage production costs		-		-			(183,080	)
Acquisition of office furniture		-		-			(19,325	)
Cash acquired in connection with acquisition		-		-			35,207
Net cash (used in) investing activities		-		-			(167,198	)
Cash flows from financing activities:
Advances from related parties, net of repayments		-		-			363,749
Other advances, net		-		(28,000	)		194,362
Proceeds from issuance of notes payable, net of repayments		-		-			1,240,665
Proceeds from issuance of long-term convertible debt, net of costs, fees, payments		32,245		200,000			4,791,956
Proceeds from issuance of common stock		-		-			272,200
Net cash provided by financing activities		32,245		172,000			6,862,932
Net increase in cash and equivalents		4,128		65,556			6,279
Cash and cash equivalents at the beginning of the period		2,151		-			-
Cash and cash equivalents at the end of the period	$	6,279	$	65,556		$	6,279

See accompanying notes to the unaudited condensed consolidated financial statements

F-14

PACIFICAP ENTERTAINMENT HOLDINGS, INC
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
	For the three months ended March 31,						For the Period July 29, 1997(Date of Inception) to March 31, 2008
	2008			2007
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest	$	-		$	-		$	96,807
Cash paid during the period for taxes		-			-			-
Common stock issued in exchange for services		-			-			8,530,733
Common stock issued in exchange for previously incurred debt		-			-			233,498
Common stock issued in conversion of convertible debt		3,134			22,195			570,401
Common stock issued in exchange for interest expense		-			-			45,906
Common stock issued in exchange for accrued interest		-			-			146,617
Common stock issued in exchange for expenses paid by shareholders		-			-			192,500
Common stock issued in connections with acquisition of Pacificap		-			-			29,160,000
Common stock issued in connection with acquisition of Battleship VFX, Inc.		-			-			91,642
Common stock issued in exchange for financing expenses		-			-			284,392
Common stock issued in connection with acquisition of Cineports		-			-			1,197,396
Warrants issued in connection with acquisition of Cineports		-			-			1,051,065
Stock options issued in exchange for services rendered		-			-			661,365
Preferred stock issued in exchange for services		-			-			855
Conversion of preferred stock		-			-			(855	)
Write off of  acquired asset		-			-			5,000
Write off of  un-collectable other receivable		-			-			30,000
Debt forgiveness from creditors		-			-			(139,992	)
Gain from extinguishment of related party debt					-			(612,247	)
Write off of capitalized production costs		-			-			900,273
Write off of other investment previously paid with common stock		-			-			62,500
Impairment of film library		-			-			372,304
Expenses paid by principal shareholders		-			-			117,015
Common stock issued in exchange for shareholder advances		-			-			45,500
Capitalized financing costs in connection with issuance of long-term convertible notes payable		-			-			611,290
Prepaid interest expense in connection with issuance of long-term convertible notes payable		-			-			400,000
Unrealized loss on adjustment of derivative and warrant liability to fair value of underlying securities		(4,419,932	)		(6,296,117	)		11,890,156
Other advances converted to notes payable		-			30,000			30,000
Accrued interest converted to notes payable		-			-			507,718
Notes payable settled in connection with sale of film distribution rights		-			-			2,500,000
Accrued interest settled in connection with sale of film distribution rights		-			-			730,471
Acquisition:
Assets acquired		-			-			379,704
Goodwill		-			-			490,467
Liabilities assumed		-			-			(588,027	)
Common stock Issued		-			-			(282,144	)
Net cash paid for acquisition	$	-		$	-		$	-
Liabilities disposed of in disposition of business, net	$	-		$	-		$	79,374
Net cash received in disposition of business	$	-		$	-		$	-
Acquisition of Pacificap:
Assets acquired		-			-			-
Liabilities assumed		-			-			-
Acquisition costs		-			-			29,160,000
Common stock issued		-			-			(29,160,000	)
Net cash paid for acquisition	$	-		$	-		$	-

See accompanying notes to the unaudited condensed consolidated financial statements

F-15

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)  

NOTE A-SUMMARY OF ACCOUNTING POLICIES

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

General

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

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Accordingly, the results from operations for the three month period ended March 31, 2008, are not necessarily indicative of the results that may be expected for the year ended December 31, 2008. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, 2007 financial statements and footnotes thereto included in the Company's SEC Form 10-KSB.

Business and Basis of Presentation

Pacificap Entertainment Holdings, Inc. (the “Company”), formerly Cavalcade of Sports Media, Inc., is in the development stage and its efforts in the past have been principally devoted to developing a sports entertainment business, which will provide 24 hours per day broadcasting from a library of nostalgic sports films and footage to paid subscribers.  To date the Company has generated no revenues, has incurred expenses, and has sustained losses.  Consequently, its operations are subject to all risks inherent in the establishment of a new business enterprise.  For the period from inception through March 31, 2008, the Company has accumulated losses of $59,036,363.

The unaudited condensed consolidated financial statements include the accounts of Pacificap Entertainment Holdings, Inc. and its wholly-owned subsidiaries, Cavalcade of Sports Network, Inc, Cineports.com, Inc., Sports Broadcasting Network, Inc. and Ethnic Broadcasting Company, Inc.  Significant intercompany transactions and accounts have been eliminated in consolidation.  Additionally, the Company owns 50% of economic interest in Operation Pilot LLC. Operation Pilot LLC does not have operations other than being a party of a distribution rights agreement (see Note A Capitalized Film Costs), which was sold during the year ended December 31, 2007 for $2,500,000 in assumed convertible debentures (Note H)..

Reclassifications

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

Stock Based Compensation

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

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

F-16

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)  

NOTE A-SUMMARY OF ACCOUNTING POLICIES (continued)

Stock Based Compensation (continued)

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

The Company had no employee stock options issued and outstanding at March 31, 2008. All prior awards of stock options were vested at the time of issuance in prior years.

Net income (loss) per share

The following reconciliation of net income and share amounts used in the computation of income (loss) per share for the three month periods ended March 31, 2008 and 2007:

	Three Months Ended March 31, 2008			Three Months Ended March 31, 2007
Net income used in computing basic net income per share	$	3,914,079		$	5,599,252
Impact of assumed assumptions:
Accretion of convertible debentures		169,399			213,206
Gain on derivative liability marked to fair value		(4,419,932	)		(6,296,117	)
Net loss in computing diluted net loss per share:	$	(336,454	)	$	(483,659	)

The weighted average shares outstanding used in the basic net income per share computations for the three month periods ended March 31, 2008 and 2007 was 340,175,263 and 244,819,781, respectively. In determining the number of shares used in computing diluted loss per share, the Company did not add approximately 135,135,017,799 and 22,724,211,240 for the three month periods ended March 31, 2008 and 2007, respectively because the effect would be antidilutive.  The potentially dilutive securities were mostly attributable to the warrants, options and convertible debentures outstanding.

Revenue Recognition

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

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

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

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

·   The arrangement fee is fixed or determinable.

·   Collection of the arrangement fee is reasonably assured.

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

F-17

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)  

NOTE A-SUMMARY OF ACCOUNTING POLICIES (continued)

Capitalized Film Costs

The Company follows the policy of capitalizing the costs of producing a film and bringing that film to market, and reporting the film costs as a separate asset on its balance sheet. The Company accounts for interest costs related to the production of a film in accordance with the provisions in FASB Statement No. 34, Capitalization of Interest Cost. Production overhead includes allocable costs of individuals or departments with exclusive or significant responsibility for the production of films. Production overhead does not include administrative and general expenses, the costs of certain overall deals, or charges for losses on properties sold or abandoned.

For an episodic television series, ultimate revenue for an episodic television series can include estimates from the initial market and secondary markets. Until the Company can establish estimates of secondary market revenue, the Company follows the policy of capitalizing costs for each episode produced that does not exceed an amount equal to the amount of revenue contracted for that episode. Film costs in excess of this limitation on an episode-by-episode basis will be expensed as incurred, and such amounts will not be restored as film cost assets in subsequent periods. The Company expenses all capitalized costs for each episode as it recognizes the related revenue for each episode. Once the Company can establish estimates of secondary market revenue, the Company will capitalize subsequent film costs.

The Company amortizes film costs using the individual-film-forecast-computation method, which amortizes such costs in the same ratio that current period actual revenue (numerator) bears to estimated remaining unrecognized ultimate revenue as of the beginning of the current fiscal year (denominator).

During the year ended December 31, 2005, the Company completed filming of its first movie and capitalized film costs in the amount of $750,000. All capitalized film costs were in production costs, the Company had no released, completed and not released, or in development or preproduction costs capitalized at December 31, 2007 and 2006.  As described in Note A, the Company owns 50% of economic interest in Operation Pilot LLC. In October 2006, Operational Pilot LLC entered into a distribution rights agreement granting a Licensee rights to market, advertise, and promote the film. In consideration of the rights granted, Licensee will pay to the Company all gross receipts received by Licensee resulting from the exercise of rights after making deductions for distribution expenses and fees, As of December 31, 2006, the Company has determined that marketing and sale of the film is highly uncertain in the near future. Accordingly, the Company wrote off $750,000 of the carrying value of its capitalized film through a charge to operations during the year ended December 31, 2006.  In the year ended December 31, 2007, the Company sold its economic interest in Operation Pilot for $2,500,000 in assumed convertible debentures.

Manufacturing Costs

The Company follows the policy of charging manufacturing and/or duplication costs of products for sale, such as videocassettes and digital video discs, to expense on a unit-specific basis when the related product revenue is recognized. The Company will at each balance sheet date, evaluate inventories of such products for net realizable value and obsolescence exposures, with appropriate adjustments recorded as necessary. The Company follows the policy of charging the cost of theatrical film prints to expense over the period benefited.  The Company incurred no manufacturing costs during the periods ended March 31, 2008 and 2007, and for the period from July 29, 1997 (date of inception) to March 31, 2008.

Exploitation Costs and Advertising

The Company accounts for advertising costs in accordance with the provisions of SOP 93-7, Reporting on Advertising Costs. All other exploitation costs, including marketing costs, are expensed as incurred. The Company incurred no advertising costs during the periods ended March 31, 2008 and 2007, and for the period from July 29, 1997 (date of inception) to March 31, 2008.

F-18

PACIFICAP ENTERTAINMENT HOLDINGS, INC

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)  

NOTE A-SUMMARY OF ACCOUNTING POLICIES (continued)

Research and Development

The Company accounts for research and development costs in accordance with the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 2 (“SFAS 2”), “Accounting for Research and Development Costs”. Under SFAS 2, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. The Company incurred no expenditures on research and product development for the three month periods ended March 31, 2008 and 2007, and the period from July 29, 1997 (date of inception) to March 31, 2008.

Liquidity

To date the Company has generated no revenues, has incurred expenses, and has sustained losses. As shown in the accompanying consolidated financial statements, the Company incurred an operating net loss of $91,658 during the three month period ended March 31, 2008 and $119,781 during the three month period ended March 31, 2007. The Company’s current liabilities exceeded its current assets by $6,463,273 as of March 31, 2008. For the period from inception through March 31, 2008, the Company has accumulated losses of $59,036,363. Consequently, its operations are subject to all risks inherent in the establishment of a new business enterprise.

Concentrations of Credit Risk

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and related party receivables. The Company places its cash and temporary cash investments with credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. The Company periodically reviews its trade receivables in determining its allowance for doubtful accounts. The Company does not have accounts receivable and allowance for doubtful accounts at March 31, 2008 and December 31, 2007.

Comprehensive Income

Statement of Financial Accounting Standards No. 130 (“SFAS 130”), “Reporting Comprehensive Income,” establishes standards for reporting and displaying of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company does not have any items of comprehensive income in any of the periods presented.

Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments.

F-19

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)  

NOTE A-SUMMARY OF ACCOUNTING POLICIES (continued)

Segment Information

Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”) establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The information disclosed herein materially represents all of the financial information related to the Company’s principal operating segment.

New Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose to measure many financial instruments, and certain other items, at fair value. SFAS 159 applies to reporting periods beginning after November 15, 2007. The adoption of SFAS 159 did have a material impact on the Company’s financial condition or results of operations.

In December 2007, the FASB issued SFAS No. 141(R),"Business Combinations" ("SFAS No. 141(R)"), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141R is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008.  Earlier adoption is prohibited and the Company does not expect the adoptionof SFAS No. 160 to have a significant impact on its financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS No. 160"), which will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets.  SFAS No. 160 is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008.  Earlier adoption is prohibited and the Company does not expect the adoptionof SFAS No. 160 to have a significant impact on its financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133”. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 for derivative instruments and hedging activities. SFAS No. 161 requires qualitative disclosure about objectives and strategies for using derivative and hedging instruments, quantitative disclosures about fair value amounts of the instruments and gains and losses on such instruments, as well as disclosures about credit-risk features in derivative agreements. The Company does not expect the adoption of SFAS No. 161 to have a significant impact on its consolidated financial statements.

In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The Company does not expect the adoption of SFAS No. 160 to have a significant impact on its financial position, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). SFAS 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company does not currently expect the adoption of SFAS 162 to have a material effect on its consolidated results of operations and financial condition.

F-20

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)  

 NOTE A-SUMMARY OF ACCOUNTING POLICIES (Continued)

New Accounting Pronouncements (Continued)

In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting for Convertible Debt instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis. The Company does not believe the adoption of FSP APB 14-1 will have significant effect on its consolidated results of operations and financial condition.

In May 2008, the FASB issued FASB Statement No. 163, “Accounting for Financial Guarantee Insurance Contracts”, which clarifies how FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises”, applies to financial guarantee insurance contracts issued by insurance enterprises.    The standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, including interim periods in that year. The Company does not expect the adoption of SFAS 163 to have a material effect on its consolidated financial statements.

In June 2008, the FASB issued FSP Emerging Issues Task Force (EITF) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under the FSP, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company does not expect the adoption of FSP EITF No. 03-6-1 to have a material effect on its consolidated financial statements.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future consolidated financial statements.

NOTE B – CONVERTIBLE PROMISSORY NOTES PAYABLE

A summary of convertible promissory notes payable at March 31, 2008 and December 31, 2007 is as follows:

	March 31,  2008		December 31,  2007
Convertible notes payable (“First Convertible Notes”); interest rate 10% per annum,; due two years from the date of the note; note holder has the option to convert unpaid note principal to the Company’s common stock at the lower of (i) $0.35 or (ii) 30% of the average of the three lowest intraday trading prices for the common stock on a principal market for the twenty days before, but not including conversion date.  The Company granted the note holder a security interest in substantially all of the Company’s assets and intellectual property and registration rights. In January 2007, the maturity date has been extended to December 31, 2008	$	1,432,405	$	1,435,539
Convertible notes payable (“Second Convertible Notes”); interest rate 10% per annum (default interest 15% per annum); due three years from the date of the note; note holder has the option to convert unpaid note principal the Company’s common stock at the lower of (i) $0.02 or (ii) 30% of the average of the three lowest intraday trading prices for the common stock on a principal market for the twenty trading days before but not including conversion date.   The Company granted the note holder a security interest in substantially all of the Company’s assets and intellectual property and registration rights. In January 2007, the maturity date has been extended to December 31, 2008		987,315		909,172

F-21

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)

NOTE B - CONVERTIBLE PROMISSORY NOTES PAYABLE (continued)

(Continued)	March 31, 2008		December 31, 2007
Convertible notes payable (“Third Convertible Notes”); interest rate 10% per annum (default interest 15% per annum); due three years from the date of the note; note holder has the option to convert unpaid note principal the Company’s common stock at the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the twenty trading days before but not including conversion date.   The Company granted the note holder a security interest in substantially all of the Company’s assets and intellectual property and registration rights	$	152,740	$	131,963
Convertible notes payable (“Fourth convertible Note”); interest rate 10% per annum (default interest 15% per annum); due three years from the date of the note; note holder has the option to convert unpaid note principal the Company’s common stock at the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the twenty trading days before but not including conversion date.   The Company granted the note holder a security interest in substantially all of the Company’s assets and intellectual property and registration rights		12,466		9,973
Convertible notes payable (“Fifth convertible Note”); interest rate 10% per annum (default interest 15% per annum); due three years from the date of the note; note holder has the option to convert unpaid note principal the Company’s common stock at the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the twenty trading days before but not including conversion date.   The Company granted the note holder a security interest in substantially all of the Company’s assets and intellectual property and registration rights		36,712		28,402
Convertible notes payable (“Sixth convertible Note”); interest rate 10% per annum (default interest 15% per annum); due three years from the date of the note; note holder has the option to convert unpaid note principal the Company’s common stock at the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the twenty trading days before but not including conversion date.   The Company granted the note holder a security interest in substantially all of the Company’s assets and intellectual property and registration rights		20,776		14,959
Convertible notes payable (“Seventh convertible Note”); interest rate 10% per annum (default interest 15% per annum); due three years from the date of the note; note holder has the option to convert unpaid note principal the Company’s common stock at the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the twenty trading days before but not including conversion date.   The Company granted the note holder a security interest in substantially all of the Company’s assets and intellectual property and registration rights		13,379		9,224

F-22

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)

NOTE B - CONVERTIBLE PROMISSORY NOTES PAYABLE (continued)

(Continued)	March 31, 2008			December 31, 2007
Convertible notes payable (“Eighth convertible Note”); interest rate 10% per annum (default interest 15% per annum); due three years from the date of the note; note holder has the option to convert unpaid note principal the Company’s common stock at the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the twenty trading days before but not including conversion date.   The Company granted the note holder a security interest in substantially all of the Company’s assets and intellectual property and registration rights	$	23,452		$	13,479
Convertible notes payable (“Ninth convertible Note”); interest rate 2% per annum (default interest 15% per annum); due three years from the date of the note; note holder has the option to convert unpaid note principal the Company’s common stock at the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the twenty trading days before but not including conversion date.   The Company granted the note holder a security interest in substantially all of the Company’s assets and intellectual property and registration rights		42,194			-
Convertible notes payable (“Tenth convertible Note”); interest rate 10% per annum (default interest 15% per annum); due three years from the date of the note; note holder has the option to convert unpaid note principal the Company’s common stock at the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the twenty trading days before but not including conversion date.   The Company granted the note holder a security interest in substantially all of the Company’s assets and intellectual property and registration rights		671			-
	$	2,722,110		$	2,552,711
Less current maturities		(2,419,720	)		(2,344,711	)
Long term portion	$	302,390		$	208,000

First Convertible Note

The Company entered into a Securities Purchase Agreement with four accredited investors on June 10, 2004 for the issuance of an aggregate of $2,000,000 of convertible notes (“Convertible Notes”), and attached to the Convertible Notes were warrants to purchase 2,000,000 shares of the Company’s common stock.  The Convertible Notes accrues interest at 10% per annum, payable and due two years from the date of the note.  The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.35 or (ii) 50% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date. Effective August 31, 2005; the terms of the notes were changed for the remaining outstanding debt to a conversion rate from 50% of the average the day lowest intraday trading prices to a 40% rate.  Effective January 23, 2006, the terms of the notes were again changed for the remaining outstanding debt from a conversion rate of 40% (effective August 31, 2005) of the average day lowest intraday trading prices to a 30% rate.  During the year ended December 31, 2004, the Company issued to the investors Convertible Notes in a total amount of $2,000,000 in exchange for net proceeds of $1,356,565.  The proceeds that the Company received was net of prepaid interest of $400,000 calculated at 10% per annum for the aggregate of $2,000,000 of convertible notes for two years, and related fees and costs of $243,435.  Prepaid interest and capitalized financing costs were amortized over the maturity period (two years) of the convertible notes. In January 2007, the maturity of the outstanding notes was extended to December 31, 2008

F-23

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)

NOTE B - CONVERTIBLE PROMISSORY NOTES PAYABLE (continued)

Second Convertible Note

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

On January 23, 2006; the Securities Purchase Agreement was again amended to increase the aggregate from $3,250,000 to $3,430,000 of convertible notes (“Second Convertible Notes”), attached warrants were increased from 3,250,000 shares of the Company’s common stock to 3,430,000 shares.  The conversion rate to the noteholder was changed from 40% of the average of the three lowest intraday trading prices for common stock on the principal market for the 20 trading dates before but not including conversion date to a rate of 30%.  On January 23, 2006, the Company issued to the investors an aggregate of $180,000 of secured convertible notes, and attached to the secured convertible notes were warrants to purchase 180,000 shares of our common stock. The Company received net proceeds of $145,000, net of related fees and costs of $35,000. Capitalized financing costs were amortized over the maturity period (three years) of the convertible notes.

As of March 31, 2008 and December 31, 2007, the Company issued to the investors a Second Convertible Note in the aggregate amount of $3,430,000, in exchange for net proceeds of $2,939,146, net of related fees and costs of $490,854. The capitalized financing costs are amortized over the maturity period (three years) of the convertible notes. Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing, which will include the common stock underlying the secured convertible notes and the warrants.  In January 2007, the maturity of the outstanding notes was extended to December 31, 2008.

Third Convertible Note

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

As of March 31, 2008 and December 31, 2007, the Company issued to the investors a Third Convertible Note in the amount of $250,000, in exchange for net proceeds of $205,000, net of related fees and costs of $45,000. The capitalized financing costs are amortized over the maturity period (three years) of the convertible notes. Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing, which will include the common stock underlying the secured convertible notes and the warrants.

F-24

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)

NOTE B - CONVERTIBLE PROMISSORY NOTES PAYABLE (continued)

Fourth Convertible Note

The Company entered into a Securities Purchase Agreement with four accredited investors on January 1, 2007 for the issuance of an aggregate of $30,000 of convertible notes (“Fourth Convertible Notes”), in exchange for $30,000 of working capital these investors advanced to the Company during the year ended December 31, 2006. The Fourth Convertible Notes accrues interest at 10% per annum (15% if the Company is in default under the terms of the note agreement), payable and due three years from the date of the note.  The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date. Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing.

Fifth Convertible Note

The Company entered into a Securities Purchase Agreement with four accredited investors on February 23, 2007 for the issuance of an aggregate of $100,000 of convertible notes (“Fifth Convertible Notes”), and attached to the Fifth Convertible Notes were warrants to purchase 10,000,000 shares of the Company’s common stock.  The Fifth Convertible Notes accrues interest at 10% per annum (15% if the Company is in default under the terms of the note agreement), payable and due three years from the date of the note.  The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date.

As of December 31, 2007, the Company issued to the investors a Fifth Convertible Note in the amount of $100,000, in exchange for proceeds of $100,000.  Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing, which will include the common stock underlying the secured convertible notes and the warrants

Sixth Convertible Note

The Company entered into a Securities Purchase Agreement with four accredited investors on May 11, 2007 for the issuance of an aggregate of $70,000 of convertible notes (“Sixth Convertible Notes”), and attached to the Sixth Convertible Notes were warrants to purchase 8,000,000 shares of the Company’s common stock.  The Sixth Convertible Notes accrues interest at 10% per annum (15% if the Company is in default under the terms of the note agreement), payable and due three years from the date of the note.  The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date.

As of March 31, 2008 and December 31, 2007, the Company issued to the investors a Sixth Convertible Note in the amount of $70,000, in exchange for proceeds of $65,000.  Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing, which will include the common stock underlying the secured convertible notes and the warrants

Seventh Convertible Note

The Company entered into a Securities Purchase Agreement with four accredited investors on June 12, 2007 for the issuance of an aggregate of $50,000 of convertible notes (“Seventh Convertible Notes”), and attached to the Seventh Convertible Notes were warrants to purchase 10,000,000 shares of the Company’s common stock.  The Seventh Convertible Notes accrues interest at 10% per annum (15% if the Company is in default under the terms of the note agreement), payable and due three years from the date of the note.  The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date.

F-25

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)

NOTE B - CONVERTIBLE PROMISSORY NOTES PAYABLE (continued)

Seventh Convertible Note (continued)

As of March 31, 2008 and December 31, 2007, the Company issued to the investors a Seventh Convertible Note in the amount of $50,000, in exchange for proceeds of $50,000.  Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing, which will include the common stock underlying the secured convertible notes and the warrants

Eighth Convertible Note

The Company entered into a Securities Purchase Agreement with three accredited investors on August 30, 2007 for the issuance of an aggregate of $120,000 of convertible notes (“Eighth Convertible Notes”), and attached to the Eighth Convertible Notes were warrants to purchase 8,000,000 shares of the Company’s common stock.  The Eighth Convertible Notes accrues interest at 10% per annum (15% if the Company is in default under the terms of the note agreement), payable and due three years from the date of the note.  The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date.

As of March 31, 2008 and December 31, 2007, the Company issued to the investors a Eighth Convertible Note in the amount of $120,000, in exchange for proceeds of $100,000.  Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing, which will include the common stock underlying the secured convertible notes and the warrants

Ninth Convertible Note

The Company entered into a Securities Purchase Agreement with three accredited investors on December 31, 2007 for the issuance of an aggregate of $507,718 of convertible notes (“Ninth Convertible Notes”).  The Ninth Convertible Notes accrues interest at 2% per annum (15% if the Company is in default under the terms of the note agreement), payable and due three years from the date of the note.  The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date.

As of December 31, 2007, the Company issued to the investors an Ninth Convertible Note in the amount of $507,718, in exchange for $907,570 of accrued interest relating to previously issued convertible notes. Interest forgiveness in the amount of $399,852 was recorded as other income at December 31, 2007. Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing.

Tenth Convertible Note

The Company entered into a Securities Purchase Agreement with four accredited investors on March 10, 2008 for the issuance of an aggregate of $35,000 of convertible notes (“Tenth Convertible Notes”). The Tenth Convertible Notes accrues interest at 10% per annum (15% if the Company is in default under the terms of the note agreement), payable and due three years from the date of the note.  The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date. As of March 31, 2008, the Company issued to the investors a Convertible Note in the amount of $35,000, in exchange for proceeds of $32,245. Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 30 days after demand by investors.

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

F-26

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)

NOTE B - CONVERTIBLE PROMISSORY NOTES PAYABLE (continued)

In accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging Activities and EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the Company accounted for identified embedded derivatives and related detachable warrants to purchase its common stock that provide for the payment of liquidated damages if the stipulated registration deadlines were not met as liabilities.

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

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

· Accreted principal of $2,722,110 and $2,552,711 as of March 31, 2008 and December 31, 2007, respectively.

Aggregate maturities of long-term debt as of March 31, 2008 are as follows:

Fiscal Year	Amount
2008	$	2,478,789
2009		430,000
2010		877,718
2011 and after		35,000
	$	3,821,507

During the three month period ended March 31, 2008, principal of the convertible notes in an aggregate amount of $3,134 was converted to the Company’s common stock.  In August 2007, the Company sold its economic interest in Operation Pilot for $2,500,000 in assumed the above convertible notes.  Extinguishment of derivative liabilities in connection with these convertible debentures amounted $8,817,778. The principal amount of outstanding convertible notes payable was $3,821,507 and $3,789,641 at March 31, 2008 and December 31, 2007, respectively.

NOTE C - NOTES PAYABLE

Notes payable at March 31, 2008 and December 31, 2007 are as follows:

	March 31, 2008		December 31, 2007
12 % convertible subordinated payable, unsecured and due December 31, 2000; Noteholder has the option to convert unpaid note principal together with accrued and unpaid interest to the Company’s common stock thirty (30) days following the effectiveness of the registration of the Company’s common stock under the Securities Act of 1933 at a rate of $1.25 per share. In the event the unpaid principal amount of the notes, together with any accrued and unpaid interest, are not converted, or paid in full by December 31, 2000, then interest accrues at 18% per annum until paid in full. The Company is in default under the terms of the Note Agreements. (a)	$	467,000	$	467,000
12 % convertible subordinated payable, unsecured and due December 31, 2001; Noteholder has the option to convert unpaid note principal together with accrued and unpaid interest to the Company’s common stock thirty (30) days following the effectiveness of the registration of the Company’s common stock under the Securities Act of 1933 at a rate of $1.25 per share. In the event the unpaid principal amount of the notes, together with any accrued and unpaid interest, are not converted, or paid in full by December 31, 2001, then interest accrues at 18% per annum until paid in full. The Company is in default under the terms of the Note Agreements.		342,500		342,500

F-27

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)

NOTE C - NOTES PAYABLE (continued)

	March 31, 2008			December 31, 2007
12 % convertible subordinated payable, unsecured and due December 31, 2001; Noteholder has the option to convert unpaid note principal together with accrued and unpaid interest to the Company’s common stock thirty (30) days following the effectiveness of the registration of the Company’s common stock under the Securities Act of 1933 at a rate of $1.25 per share. In the event the unpaid principal amount of the notes, together with any accrued and unpaid interest, are not converted, or paid in full by December 31, 2001, then interest accrues at 18% per annum until paid in full. The Company is in default under the terms of the Note Agreements.		342,500			342,500
12 % convertible subordinated payable, unsecured and due December 31, 2002; Noteholder has the option to convert unpaid note principal together with accrued and unpaid interest to the Company’s common stock thirty (30) days following the effectiveness of the registration of the Company’s common stock under the Securities Act of 1933 at a rate of $1.25 per share. In the event the unpaid principal amount of the notes, together with any accrued and unpaid interest, are not converted, or paid in full by December 31, 2002, then interest accrues at 18% per annum until paid in full. The Company is in default under the terms of the Note Agreements.		31,250			31,250
Note payable on demand to accredited investor; interest payable monthly at 18% per annum; unsecured; guaranteed by the Company’s President		52,415			52,415
Note payable on demand to accredited investor; interest payable monthly at 18% per annum; unsecured; guaranteed by the Company’s President		100,000			100,000
Note payable on demand to an investor; interest payable monthly at 10% per annum; unsecured		75,000			75,000
Note payable on demand to an investor; interest payable monthly at 10% per annum; unsecured		50,000			50,000
Total		1,118,165			1,118,165
Less: current portion		(1,118,165	)		(1,118,165	)
Notes payable, long-term portion	$	-		$	-

(a) During the year ended December 31, 2004, one of the note holders claimed that the common shares that the noteholder received in prior years in connection with conversion of $10,000 of notes payable had low market value and demanded the Company to issue additional shares.  As of March 31, 2008, the Company has not yet resolved the issue with the noteholder and has accounted for the $10,000 of notes payable as notes payable outstanding.  During the year ended December 31, 2003, the Company issued an aggregate of 127,038 shares of its common stock to note holders in exchange for notes payable and unpaid accrued interest.  As of March 31, 2008, the conversion of debt to equity has not been completed and the additional numbers of shares to be issued are still to be determined.  The Company accounted the 127,038 shares issued to notes holders during the year ended December 31, 2003 as financing expenses at the fair market value of the time the shares were issued.  In January 2004, the Company issued an aggregate of 145,166 shares of its common stock to note holders in exchange for accrued interest.  The shares were valued at $146,617, which approximately the fair market value at the day the shares were issued.

��

F-28

 PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)

NOTE D - CAPITAL STOCK

The Company has authorized 50,000,000 shares if preferred stock, with a par value of $.001 per share. As of March 31, 2008 and December 31, 2007, the Company has no preferred stock issued and outstanding. In November 2007, the Company increased the authorized shares of common stock from 300,000,000 to 3,000,000,000 shares, with a par value of $.001 per share.. On September 4, 2003, the Company effected a one one-for-thirty reverse stock split of its authorized and outstanding shares of common stock, $.001 par value. Total authorized shares and par value remain the unchanged.  All references in the financial statements and notes to financial statements, numbers of shares and share amounts have been retroactively restated to reflect the reverse split.  The Company has 344,439,092 and 299,668,892 shares of common stock issued and outstanding as of March 31, 2008 and December 31, 2007, respectively.

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

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

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

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

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

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

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

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

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

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

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

F-29

 PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)

NOTE D - CAPITAL STOCK (continued)

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

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

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

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

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

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

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

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

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

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

F-30

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)

NOTE D - CAPITAL STOCK (continued)

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

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

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

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

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

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

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

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

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

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

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

F-31

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)

NOTE D - CAPITAL STOCK (continued)

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

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

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

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

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

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

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

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

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

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

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

F-32

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)

NOTE D - CAPITAL STOCK (continued)

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

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

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

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

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

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

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

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

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

In October 2006, the Company issued an aggregate of 22,150,000 shares of common stock in exchange for convertible note payable of $13,165.

In November 2006, the Company issued an aggregate of 31,010,000 shares of common stock in exchange for convertible note payable of $10,814.

In December 2006, the Company issued an aggregate of 22,150,000 shares of common stock in exchange for convertible note payable of $6,406.

In January 2007, the Company issued an aggregate of 39,870,000 shares of common stock in exchange for convertible note payable of $10,721.

In February 2007, the Company issued an aggregate of 17,720,000 shares of common stock in exchange for convertible note payable of $5,272.

In March 2007, the Company issued an aggregate of 31,010,000 shares of common stock in exchange for convertible note payable of $6,202.

In April 2007, the Company issued an aggregate of 13,290,000 shares of common stock in exchange for convertible note payable of $2,170.

In May 2007, the Company issued an aggregate of 1,000,000 shares of common stock in exchange for convertible note payable of $150.

F-33

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)

NOTE D - CAPITAL STOCK (continued)

In January 2008, the Company issued an aggregate of 29,846,800 shares of common stock in exchange for convertible note payable of $1,791.

In February 2008, the Company issued an aggregate of 14,923,400 shares of common stock in exchange for convertible note payable of $1,343.

NOTE E – STOCK OPTIONS AND WARRANTS

Stock Options

The Company did not grant any stock options during the three months ended March 31, 2008.  All previously granted stock options expired as of December 31, 2004.

Warrants

The Company granted an aggregate of 20,180,000 and 1,850,000 warrants during the years ended December 31, 2006 and 2005, respectively, in connection with issuance of convertible notes payable. During the year ended December 31, 2007, the Company granted additional 54,000,000 warrants in connection with issuance of convertible notes payable (see Note B).  The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company’s common stock, after giving effect to 1:30 reverse split in common stock in September 2003.

Warrants Outstanding								Warrants Exercisable
Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighed Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$	0.24		2,000,000		1.27	$	0.24		2,000,000	$	0.24
$	0.02		3,430,000		2.10		0.02		3,430,000		0.02
$	0.01		10,000,000		3.16		0.01		10,000,000		0.01
$	0.005		56,000,000		3.96		0.005		56,000,000		0.005
			71,430,000		3.69	$	0.0144		71,430,000	$	0.0144

F-34

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)

NOTE E – STOCK OPTIONS AND WARRANTS (continued)

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

	Number of Shares		Weighted Average Price Per Share
Outstanding at January 1, 2006		5,250,000	$	0.10
Granted		20,180,000		0.0075
Exercised		-		-
Canceled or expired				-
Outstanding at December 31, 2006		25,430,000	$	0.04
Granted		46,000,000		0.005
Exercised		-		-
Canceled or expired				-
Outstanding at December 31, 2007		-		-
Granted		71,430,000		0.0144
Exercised		-		-
Canceled or expired		-		-
Outstanding at March 31, 2008		71,430,000	$	0.0144

NOTE F - RELATED PARTY TRANSACTIONS

As of December 31, 2006, the Company has accrued unpaid salaries and advances due Mr. Litwak in an aggregate amount of $449,247.  In the forth quarter of fiscal year 2006, Mr. Litwak agreed to receive $217,000 to settle all unpaid accrued salaries and advances as of December 31, 2006.  A formal agreement, Separation, Release and Consulting Agreement (the “Agreement”), was signed by both parties in January 2007.  Pursuant to the Agreement, Mr. Litwak shall receive an aggregate amount of $217,000, payable (i) $25,000 upon the execution of the agreement and (ii) $192,000 over a 64 month period at a rate of $3,000 per month, and Mr. Litwak resigned as President and Director of the Company.  At December 31, 2006, the Company has accounted for a gain from settlement of accrued liabilities due Mr. Litwak in the amount of $232,247 and included in its other income. The Company made payments to Mr. Litwak in the amount of $46,000 pursuant to the Agreement during the year ended December 31, 2007. In September 2007, Mr. Litwak resigned his consulting position with the Company and waived the remaining liabilities due to him in the amount of $171,000. The Company accounted for the forgiveness of debt as other income during the year ended December 31, 2007.

The Company’s former Chairman of the Board, Mr. Michael Riley, paid $90,090 of office expenses on behalf of the Company during the year ended December 31, 2003.   No formal repayment terms or arrangements exist. The Company has repaid Mr. Riley from time to time, and the net amount of the advances due at March 31, 2008 and December 31, 2007 was $5,090.  In January 2007, Mr. Riley resigned as members of the Board of Directors of the Company.

NOTE G – ASSET PURCHASE AGREEMENT

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

F-35

PACIFICAP ENTERTAINMENT HOLDINGS, INC.

(A DEVELOPMENT STAGE CORPORATION) 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION      

    MARCH 31, 2008

(Unaudited)

NOTE H – SALE OF FILM DISTRIBUTION RIGHTS

In August 2007, the Company sold its economic interest in the distribution rights of “Operation Pilot” as described in Note A in exchange for the assumption of $2,500,000 of convertible debentures (Note B).  The Company recognized a gain of $11,082,695 comprised of the following:

Debt assumed in sale of film distribution rights	$	2,500,000
Reduction in derivative liability relating to the assumption of the convertible debentures		8,817,778
Reduction in accrued interest		730,470
Write-off of prepaid finance costs		(113,163	)
Accretion adjustment relating to the assumption of the convertible debentures		(852,390	)
Net gain on sale of film distribution rights	$	11,082,695

NOTE I - GOING CONCERN MATTERS

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  As shown in the accompanying unaudited condensed consolidated financial statements the Company has incurred losses from operations of $59,036,363 from date of inception (July 29, 1997) to March 31, 2008.  In addition, the Company is currently in default under the terms of the Capital Notes and notes payable obligations (Note C). These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.

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

NOTE J – SUBSEQUENT EVENTS

Subsequent to the date of the financial statements, the Company issued an aggregate of 32,819,600 shares of its common stock in exchange for approximately $1,000 in convertible debentures.

The Company entered into a Securities Purchase Agreement with three accredited investors on July 31, 2008 for the issuance of an aggregate of $110,000 of convertible notes.  The Convertible Notes accrues interest at 12% per annum and are due three years from the date of the note.  The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date.   In connection with the issuance of the Securities Purchase Agreement dated July 31, 2008, the Company issued 2,400,000,000 warrants to purchase the Company’s common stock at $0.001 per share expiring seven years from issuance.

On July 31, 2008, the Company amended the annual interest rate on all outstanding convertible debentures as described in Note B from 10% per annum to 12% effective January 1, 2008.

F-36

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

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

As previously reported, we are in a development stage and have not yet conducted any business so as to become an income producing entity. We intend to continue utilizing capital raised from the sale of Capital Notes and or equity. Our annual report (10-KSB) filed on November 12, 2008 includes a detailed Plan of Operations for this year. That annual report can be accessed on EDGAR.

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

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:

o stock-based compensation;

o revenue recognition;

o capitalized film costs;

o manufacturing costs; and

o exploitation costs and advertising.

Stock-Based Compensation

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

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

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

Revenue Recognition

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

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

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

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

· The arrangement fee is fixed or determinable; and

· Collection of the arrangement fee is reasonably assured.

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

Capitalized Film Costs

We follow the policy of capitalizing the costs of producing a film and bringing that film to market, and reporting the film costs as a separate asset on our balance sheet. We account for interest costs related to the production of a film in accordance with the provisions in FASB Statement No. 34, Capitalization of Interest Cost . Production overhead, includes allocable costs of individuals or departments with exclusive or significant responsibility for the production of films. Production overhead does not include administrative and general expenses, the costs of certain overall deals, or charges for losses on properties sold or abandoned.

For an episodic television series, ultimate revenue for an episodic television series can include estimates from the initial market and secondary markets. Until we can establish estimates of secondary market revenue, we follow the policy of capitalizing costs for each episode produced that does not exceed an amount equal to the amount of revenue contracted for that episode. Film costs in excess of this limitation on an episode-by-episode basis will be expensed as incurred, and such amounts will not be restored as film cost assets in subsequent periods. We expense all capitalized costs for each episode as we recognize the related revenue for each episode. Once we can establish estimates of secondary market revenue, we will capitalize subsequent film costs.

We amortize film costs using the individual-film-forecast-computation method, which amortizes such costs in the same ratio that current period actual revenue (numerator) bears to estimated remaining unrecognized ultimate revenue as of the beginning of the current fiscal year (denominator).

If an event or change in circumstance indicates that we should assess whether the fair value of a film is less than its unamortized film costs, we will determine the fair value of the film (the determination of which is affected by estimated future exploitation costs still to be incurred) and charge to operations the amount by which the unamortized capitalized costs exceeds the film's fair value.

Manufacturing Costs

We follow the policy of charging manufacturing and/or duplication costs of products for sale, such as videocassettes and digital video discs, to expense on a unit-specific basis when the related product revenue is recognized. We will at each balance sheet date, evaluate inventories of such products for net realizable value and obsolescence exposures, with appropriate adjustments recorded as necessary. We follow the policy of charging the cost of theatrical film prints to expense over the period benefited.

Exploitation Costs and Advertising

We account for advertising costs in accordance with the provisions of SOP 93-7, Reporting on Advertising Costs . All other exploitation costs, including marketing costs, are expensed as incurred.

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose to measure many financial instruments, and certain other items, at fair value. SFAS 159 applies to reporting periods beginning after November 15, 2007. The adoption of SFAS 159 did have a material impact on the Company’s financial condition or results of operations.

-2-

In December 2007, the FASB issued SFAS No. 141(R),"Business Combinations" ("SFAS No. 141(R)"), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141R is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008.  Earlier adoption is prohibited and the Company does not expect the adoption to have a significant impact on its financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS No. 160"), which will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets.  SFAS No. 160 is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008.  Earlier adoption is prohibited and the Company does not expect the adoption to have a significant impact on its financial position, results of operations or cash flows..

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133”. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 for derivative instruments and hedging activities. SFAS No. 161 requires qualitative disclosure about objectives and strategies for using derivative and hedging instruments, quantitative disclosures about fair value amounts of the instruments and gains and losses on such instruments, as well as disclosures about credit-risk features in derivative agreements. The Company does not expect the adoption to have a significant impact on on its financial position, results of operations or cash flows..

In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The Company does not expect the adoption to have a significant impact on on its financial position, results of operations or cash flows..

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). SFAS 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company does not currently expect the adoption of SFAS 162 to have a material effect on its consolidated results of operations and financial condition.

In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting for Convertible Debt instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis. The Company does not believe the adoption of FSP APB 14-1 will have significant effect on its consolidated results of operations and financial condition.

In May 2008, the FASB issued FASB Statement No. 163, “Accounting for Financial Guarantee Insurance Contracts”, which clarifies how FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises”, applies to financial guarantee insurance contracts issued by insurance enterprises.    The standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, including interim periods in that year. The Company does not expect the adoption of SFAS 163 to have a material effect on its consolidated financial statements.

In June 2008, the FASB issued FSP Emerging Issues Task Force (EITF) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under the FSP, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company does not expect the adoption of FSP EITF No. 03-6-1 to have a material effect on its consolidated financial statements.

Results of Operations

We are in the development stage and to date, have not generated revenues. The risks specifically discussed are not the only factors that could affect future performance and results. In addition the discussion in this prospectus concerning us, our business and our operations contain forward-looking statements. Such forward-looking statements are necessarily speculative and there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. We do not have a policy of updating or revising forward-looking statements and thus it should not be assumed that silence by our management over time means that actual events or results are occurring as estimated in the forward-looking statements herein.

-3-

As a development stage company, we have yet to earn revenues from operations. We may experience fluctuations in operating results in future periods due to a variety of factors., including our ability to obtain additional financing in a timely manner and on terms favorable to us, our ability to successfully develop our business model, the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations and infrastructure and the implementation of marketing programs, key agreements, and strategic alliances, and general economic conditions specific to our industry.

Revenues

We have generated no operating revenues from operations from our inception. We believe we may begin earning revenues from operations in 2009 as we transition from a development stage company to that of an active, operating company.  

Costs And Expenses

From our inception through March 31, 2008, we have not generated any revenues. We have incurred losses of $59,036,363 during this period. These losses stem from expenses associated principally with compensation to consultants who have provided marketing, public relations and investor services, acquisition costs and professional service (legal and accounting) fees, as well as non-cash interest and derivative liability valuation adjustments in connection with issuance of convertible debentures.  

Liquidity And Capital Resources

As of March 31, 2008 we had a working capital deficit of $6,463,273. As a result of our operating losses from our inception through March 31, 2008, we generated a cash flow deficit of $6,689,455 from operating activities from our inception on July 29, 1997 through March 31, 2008. Cash flows used in investing activities was $167,198 during this period. We met our cash requirements during this period through the private placement of $272,200 of common stock, $4,791,956 (net of repayments) and $1,240,665 from the issuance of convertible and capital notes, respectively, and $558,111 from advances from our principal shareholders and third parties.

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

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

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

The independent auditor's report on our December 31, 2006 financial statements states that our recurring losses raise substantial doubts about our ability to continue as a going concern.

The Company entered into a Securities Purchase Agreement with four accredited investors on June 10, 2004 for the issuance of an aggregate of $2,000,000 of convertible notes (“Convertible Notes”), and attached to the Convertible Notes were warrants to purchase 2,000,000 shares of the Company’s common stock.  The Convertible Notes accrues interest at 10% per annum, payable and due two years from the date of the note.  The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.35 or (ii) 50% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date. Effective August 31, 2005; the terms of the notes were changed for the remaining outstanding debt to a conversion rate from 50% of the average the day lowest intraday trading prices to a 40% rate.  Effective January 23, 2006, the terms of the notes were again changed for the remaining outstanding debt from a conversion rate of 40% (effective August 31, 2005) of the average day lowest intraday trading prices to a 30% rate.  During the year ended December 31, 2004, the Company issued to the investors Convertible Notes in a total amount of $2,000,000 in exchange for net proceeds of $1,356,565.  The proceeds that the Company received was net of prepaid interest of $400,000 calculated at 10% per annum for the aggregate of $2,000,000 of convertible notes for two years, and related fees and costs of $243,435.  Prepaid interest and capitalized financing costs were amortized over the maturity period (two years) of the convertible notes. In January 2007, the maturity of the outstanding notes was extended to December 31, 2008

-4-

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

On January 23, 2006; the Securities Purchase Agreement was again amended to increase the aggregate from $3,250,000 to $3,430,000 of convertible notes (“Second Convertible Notes”), attached warrants were increased from 3,250,000 shares of the Company’s common stock to 3,430,000 shares.  The conversion rate to the noteholder was changed from 40% of the average of the three lowest intraday trading prices for common stock on the principal market for the 20 trading dates before but not including conversion date to a rate of 30%.  On January 23, 2006, the Company issued to the investors an aggregate of $180,000 of secured convertible notes, and attached to the secured convertible notes were warrants to purchase 180,000 shares of our common stock. The Company received net proceeds of $145,000, net of related fees and costs of $35,000. Capitalized financing costs were amortized over the maturity period (three years) of the convertible notes.

As of March 31, 2008 and December 31, 2007, the Company issued to the investors a Second Convertible Note in the aggregate amount of $3,430,000, in exchange for net proceeds of $2,939,146, net of related fees and costs of $490,854. The capitalized financing costs are amortized over the maturity period (three years) of the convertible notes. Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing, which will include the common stock underlying the secured convertible notes and the warrants.  In January 2007, the maturity of the outstanding notes was extended to December 31, 2008.

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

As of March 31, 2008 and December 31, 2007, the Company issued to the investors a Third Convertible Note in the amount of $250,000, in exchange for net proceeds of $205,000, net of related fees and costs of $45,000. The capitalized financing costs are amortized over the maturity period (three years) of the convertible notes. Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing, which will include the common stock underlying the secured convertible notes and the warrants.

The Company entered into a Securities Purchase Agreement with four accredited investors on January 1, 2007 for the issuance of an aggregate of $30,000 of convertible notes (“Fourth Convertible Notes”), in exchange for $30,000 of working capital these investors advanced to the Company during the year ended December 31, 2006. The Fourth Convertible Notes accrues interest at 10% per annum (15% if the Company is in default under the terms of the note agreement), payable and due three years from the date of the note.  The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date. Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing.

The Company entered into a Securities Purchase Agreement with four accredited investors on February 23, 2007 for the issuance of an aggregate of $100,000 of convertible notes (“Fifth Convertible Notes”), and attached to the Fifth Convertible Notes were warrants to purchase 10,000,000 shares of the Company’s common stock.  The Fifth Convertible Notes accrues interest at 10% per annum (15% if the Company is in default under the terms of the note agreement), payable and due three years from the date of the note.  The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date.

As of December 31, 2007, the Company issued to the investors a Fifth Convertible Note in the amount of $100,000, in exchange for proceeds of $100,000.  Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing, which will include the common stock underlying the secured convertible notes and the warrants

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The Company entered into a Securities Purchase Agreement with four accredited investors on May 11, 2007 for the issuance of an aggregate of $70,000 of convertible notes (“Sixth Convertible Notes”), and attached to the Sixth Convertible Notes were warrants to purchase 8,000,000 shares of the Company’s common stock.  The Sixth Convertible Notes accrues interest at 10% per annum (15% if the Company is in default under the terms of the note agreement), payable and due three years from the date of the note.  The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date.

As of March 31, 2008 and December 31, 2007, the Company issued to the investors a Sixth Convertible Note in the amount of $70,000, in exchange for proceeds of $65,000.  Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing, which will include the common stock underlying the secured convertible notes and the warrants

The Company entered into a Securities Purchase Agreement with four accredited investors on June 12, 2007 for the issuance of an aggregate of $50,000 of convertible notes (“Seventh Convertible Notes”), and attached to the Seventh Convertible Notes were warrants to purchase 10,000,000 shares of the Company’s common stock.  The Seventh Convertible Notes accrues interest at 10% per annum (15% if the Company is in default under the terms of the note agreement), payable and due three years from the date of the note.  The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date.

As of March 31, 2008 and December 31, 2007, the Company issued to the investors a Seventh Convertible Note in the amount of $50,000, in exchange for proceeds of $50,000.  Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing, which will include the common stock underlying the secured convertible notes and the warrants

The Company entered into a Securities Purchase Agreement with three accredited investors on August 30, 2007 for the issuance of an aggregate of $120,000 of convertible notes (“Eighth Convertible Notes”), and attached to the Eighth Convertible Notes were warrants to purchase 8,000,000 shares of the Company’s common stock.  The Eighth Convertible Notes accrues interest at 10% per annum (15% if the Company is in default under the terms of the note agreement), payable and due three years from the date of the note.  The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date.

As of March 31, 2008 and December 31, 2007, the Company issued to the investors a Eighth Convertible Note in the amount of $120,000, in exchange for proceeds of $100,000.  Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing, which will include the common stock underlying the secured convertible notes and the warrants

The Company entered into a Securities Purchase Agreement with three accredited investors on December 31, 2007 for the issuance of an aggregate of $507,718 of convertible notes (“Ninth Convertible Notes”).  The Ninth Convertible Notes accrues interest at 2% per annum (15% if the Company is in default under the terms of the note agreement), payable and due three years from the date of the note.  The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date.

As of December 31, 2007, the Company issued to the investors an Ninth Convertible Note in the amount of $507,718, in exchange for $907,570 of accrued interest relating to previously issued convertible notes. Interest forgiveness in the amount of $399,852 was recorded as other income at December 31, 2007. Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 45 days after closing.

The Company entered into a Securities Purchase Agreement with four accredited investors on March 10, 2008 for the issuance of an aggregate of $35,000 of convertible notes (“Tenth Convertible Notes”). The Tenth Convertible Notes accrues interest at 10% per annum (15% if the Company is in default under the terms of the note agreement), payable and due three years from the date of the note.  The noteholder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of (i) $0.02 or (ii) 25% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date. Pursuant to the Securities Purchase Agreement, the Company was required to file a registration statement with the Securities and Exchange Commission within 30 days after demand by investors.

In connection with the sale of the secured convertible notes, we granted the investors registration rights and security interests in all of our assets. We do not have the capital resources to pay the amounts required under these agreements. The investors have been willing in the past to provide us with capital as needed to sustain our day-to-day operations, however, no assurance can be given that they will provide such capital in the future, which they are under no obligation to do so. In the event that we need additional capital in the future for our day-to-day operations, and the investors do not provide such funds, we will have to seek capital from new investors. As a result  that all of our assets are secured by the current investors, it is highly unlikely that we would be able to obtain additional capital from other investors. If we are unable to obtain additional capital, we would likely be required to curtail or cease our operations. As all of our assets are secured by our existing lendors, we do not anticipate filing for bankruptcy protection, as all of our assets would be transferred to our lendors pursuant to our existing security agreements.

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All of the above securities purchase agreements we entered into were with the same four institutional investors.

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

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

Product Research and Development

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

Acquisition or Disposition of Plant and Equipment

We do not anticipate the sale of any significant property, plant or equipment during the next twelve months. We do not anticipate the acquisition of any significant property, plant or equipment during the next 12 months, other than computer equipment and peripherals used in our day-to-day operations. We believe we have sufficient resources available to meet these acquisition needs.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements as of March 31, 2008 or as of the date of this report.

Inflation

The effect of inflation on the Company's revenue and operating results was not significant.

ITEM 3 – CONTROLS AND PROCEDURES

a)   Evaluation of Disclosure Controls and Procedures. As of March 31, 2008, our management carried out an evaluation, under the supervision of our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our system of disclosure controls and procedures pursuant to the Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e) under the Exchange Act).  Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

b)   Changes in internal controls. There were no changes in internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially effect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

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

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

In January 2008, the Company issued an aggregate of 29,846,800 shares of common stock in exchange for convertible note payable of $1,791.  In February 2008, the Company issued an aggregate of 14,923,400 shares of common stock in exchange for convertible note payable of $1,343.  These transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5 – OTHER INFORMATION

None.

ITEM 6 – EXHIBITS

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

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

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

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

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SIGNATURES

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

	PACIFICAP ENTERTAINMENT HOLDINGS, INC.
Date:  December 18, 2008	By: /s/ Mark Schaftlein
	Mark Schaftlein
	President (Principal Executive Officer), Director, Principal Financial Officer, Principal Accounting Officer

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