Conspiracy Entertainment (CPYE) 10-Q 2008 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008.

OR

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE TRANSITION FROM _______ TO ________.

COMMISSION FILE NUMBER 000-32427

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

Utah	87-0386790
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

612 Santa Monica Boulevard, Santa Monica, CA	90401
(Address of principal executive offices)	(Zip code)

Issuer's telephone number: (310) 260-6150

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes o No o

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of May 12, 2008, there were 51,189,065 outstanding shares of the Registrant's Common Stock, $0.001 par value.

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

MARCH 31, 2008 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	35
Item 4T. Controls and Procedures	35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	36
Item 1A. Risk Factors	36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3. Defaults Upon Senior Securities	36
Item 4. Submission of Matters to a Vote of Security Holders	36
Item 5. Other Information	36
Item 6. Exhibits	36
SIGNATURES	37

2

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IINDEX TO FINANCIAL STATEMENTS

Consolidated Balance Sheets	4
Consolidated Statements of Operations	6
Consolidated Statements of Cash Flows	8
Notes to the Consolidated Financial Statements	10

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Balance Sheets

ASSETS
	March 31, 2008		December 31, 2007
	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	179,113	$	539,990
Accounts receivable, net of allowance for doubtful accounts of $0 and $62,500 in 2008 and 2007 respectively		429,400		110,195
Prepaid manufacturing		-		277,200
Total Current Assets		608,513		927,385
PROPERTY AND EQUIPMENT, NET		3,805		4,449
OTHER ASSETS
Capitalized development costs and licenses, net		1,931,371		1,901,330
Deposits		6,906		6,906
Other receivable		132,500		132,500
Total Other Assets		2,070,777		2,040,736
TOTAL ASSETS	$	2,683,095	$	2,972,570

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

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Balance Sheets (Continued)

LIABILITIES AND STOCKHOLDERS' DEFICIT
	March 31, 2008			December 31, 2007
	(Unaudited)
CURRENT LIABILITIES
Accounts payable	$	545,238		$	707,437
Accrued expenses		407,811			332,049
Payroll taxes payable		759,369			782,554
Deferred compensation		429,868			533,010
Deferred revenue		999,695			1,326,653
Notes payable, net of discount of $20,344		531,654			344,221
Derivative liability		10,912,928			3,397,012
Convertible notes payable, net of discount of $42,471and $74,323 in 2008 and 2007, respectively		2,174,930			2,143,077
Total Current Liabilities		16,761,493			9,566,013
Total Liabilities		16,761,493			9,566,013
COMMITMENTS
MINORITY INTEREST		279,400			279,400
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 100,000,000 shares authorized, 51,189,065 shares issued and outstanding		51,190			51,190
Additional paid in capital		4,973,450			4,973,450
Accumulated deficit		(19,382,438	)		(11,897,483	)
Total Stockholders' Deficit		(14,357,798	)		(6,872,843	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	2,683,095		$	2,972,570

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

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statements of Operations

(Unaudited)

	For the Three Months Ended March 31,
	2008			2007
				(as restated)
NET SALES	$	3,240,866		$
COST OF SALES		2,450,012
GROSS PROFIT		790,854
OPERATING EXPENSES
Professional fees		177,412			12,500
Wages and salaries		151,852			86,350
Selling, general and administrative		353,552			74,090
Total Operating Expenses		682,816			172,940
NET INCOME (LOSS) FROM OPERATIONS		108,038			(172,940	)
OTHER INCOME (EXPENSE)
Interest expense		(45,224	)		(30,458	)
Net financing income (expense)		(31,853	)		(69,226	)
Gain (loss) on valuation of derivative liability		(7,515,916	)		796,831
Total Other Income (Expense)		(7,592,993	)		697,147
NET INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST		(7,484,955	)		524,207
PROVISION FOR INCOME TAXES		-			-
NET INCOME (LOSS) BEFORE MINORITY INTEREST		(7,484,955	)		524,207
MINORITY INTEREST		-			-
NET INCOME (LOSS)	$	(7,484,955	)	$	524,207

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

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statements of Operations (Continued)

(Unaudited)

	For the Three Months Ended March 31
	2008			2007
				(as restated)
BASIC INCOME (LOSS) PER SHARE	$	(0.15	)	$	0.01
DILUTED INCOME (LOSS) PER SHARE	$	(0.15	)	$	0.00
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC		51,189,065			51,189,065
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED		51,189,065			233,203,965

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

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statements of Cash Flows

(Unaudited)

	For the Three Months Ended March 31,
	2008			2007
				(as restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(7,484,955	)	$	524,207
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		644			1,634
Minority interest		-			29,400
Amortization of discount on convertible notes payable		31,853			69,226
Amortization of capitalized development costs and licenses		523,000			-
Amortization of discount on on notes payable		2,433			-
Net change in derivative liability		7,515,916			(796,831	)
Change in operating assets and liabilities:
Accounts receivable and other receivable		(319,205	)		114,732
Prepaid expenses		277,200			4,411
Accounts payable and accrued expenses		(109,622	)		58,840
Deferred compensation		(103,142	)		13,100
Deferred revenue		(326,958	)		-
Net Cash Provided by Operating Activities		7,164			18,719
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for development costs and licenses		(553,041	)		(448,231	)
Net Cash Used in Investing Activities		(553,041	)		(448,231	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from advances		-			475,000
Proceeds from convertible notes payable		-			80,000
Proceeds from notes payable		205,000			-
Payments on notes payable		(20,000	)		(2,500	)
Net Cash Provided by Financing Activities	$	185,000		$	552,500

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

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statements of Cash Flows (Continued)

(Unaudited)

	For the Three Months Ended March 31,
	2008			2007
				(as restated)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	(360,877	)	$	122,988
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		539,990			24,976
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	179,113		$	147,964
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	-		$
Cash paid for income taxes	$	-		$
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Beneficial conversion feature of convertible notes payable	$	-		$	60,500

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

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statements of Cash Flows (Continued)

(Unaudited)

NOTE 1 - NATURE OF ORGANIZATION   The financial statements presented are those of Conspiracy Entertainment Holdings, Inc., (formerly Lance Systems, Inc.) (the Company). The Company was incorporated under the laws of the state of Utah on July 29, 1982 as Strategic Recovery Corporation. On February 16, 1987, the Company merged with Lance, Inc., (a Utah Corporation), and changed its name to Lance Systems, Inc. The Company was organized for the purpose of acquiring investments. However, subsequent to the merge, the Company changed its purpose from acquiring investments to creating, developing and selling micro computer software.
On October 7, 2003, the Company effected a reorganization and acquisition agreement with Conspiracy Entertainment Corporation (CEC), organized in November 1997. The reorganization agreement provided for the issuance of 21,552,900 shares of common stock to the shareholder of CEC, for all outstanding shares of CEC. Pursuant to the acquisition, CEC became a wholly-owned subsidiary of the Company, and the name of the Company was changed to Conspiracy Entertainment Holdings, Inc. The reorganization was recorded as a reverse acquisition using the purchase method of business combination. In a reverse acquisition all accounting history becomes that of the accounting acquirer, therefore all historical information prior to the acquisition is that of CEC. The shares issued to the shareholders of CEC have been stated retroactively, as though a 1,026 for 1 stock split occurred on January 1, 2003. The reverse merger adjustment is therefore all the shares held by the Lance shareholders prior to the acquisition.
In early 2004, the Company acquired a 51% interest in Conspiracy Entertainment Europe, LTD (CEE), a United Kingdom Corporation, to develop and distribute certain game titles in Europe. During 2004, the Company advanced $60,000 to this majority owned subsidiary to cover operating expenses. During 2006, the Company sold its 51% interest in CEE for $41,000. The financial statements of CEE are consolidated with the Company through the date of sale, with a minority interest adjustment.
During July, 2005, the Company entered into a Settlement Agreement and Mutual Release with a merchandising service company related to a dispute.  Pursuant to the agreement, the Company received during 2007 and 2006 advances of $91,900 and $187,500 and may receive additional advances of $220,600 from the company for Conspiracy to develop a cellular fan club for certain artists of the merchandising service company. The advances have been recorded as minority interest in the accompanying financial statements at December 31, 2007 and 2006 as the Company has rights to receive an equal share of the profits. All inter-company balances and transactions have been eliminated in consolidation.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   a. Accounting Method
The Company recognizes income and expense on the accrual basis of accounting. The Company has elected a December 31 year end.
b. Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Consolidated Financial Statements

March 31, 2008 (Unaudited) and December 31, 2007

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)   c. Fair Value of Financial Instruments
The fair value of the Company's cash and cash equivalents, receivables, accounts payable, accrued liabilities and notes payable approximate carrying value based on their effective interest rates compared to current market prices.
d. Receivables
The Company sells its products throughout the United States. The Company evaluates its accounts receivable on a regular basis for collectibility and provides for an allowance for potential credit losses as deemed necessary. As of March 31, 2008 and December 31, 2007, the allowance for doubtful accounts was $0 and $62,500, respectively.
e. Assignment of Accounts Receivable
Regularly, the Company assigns its receivables to vendors with recourse and accounts for such assignments in accordance with Statement of Financial Accounting Standards ("SFAS") No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Assigned accounts receivable are shown on the accounts receivable section of the balance sheet until collected by the beneficiary. Should the accounts receivable become uncollectible, the Company is ultimately responsible for paying the vendor and recording an allowance for potential credit losses as deemed necessary. The assigned accounts receivable are generally collected within 90 days; therefore, the balance shown approximates its fair value.
f. Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
g. Capitalized Development Costs and Licenses
Capitalized development costs include payments made to independent software developers under development agreements, as well as direct costs incurred for internally developed products.
The Company accounts for software development costs in accordance with SFAS No. 86 “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a product encompasses both technical design documentation and game design documentation.

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Consolidated Financial Statements

March 31, 2008 (Unaudited) and December 31, 2007

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)   g. Capitalized Development Costs and Licenses (Continued)
Capitalized Development Costs
For products where proven technology exits, this may occur early in the development cycle. Technological feasibility is evaluated on a product-by-product basis. Prior to a product's release, the Company expenses, as part of cost of sales, when the Company believes such amounts are not recoverable. Amounts related to capitalized development costs that are not capitalized are charged immediately to cost of sales. The Company evaluated the future recoverability of capitalized amounts on a quarterly basis. The recoverability of capitalized development costs is evaluated based on the expected performance of the specific products for which the costs relate. The following criteria are used to evaluate expected product performance: historical performance of comparable products using comparable technology and orders of the product prior to its release.
Commencing upon product release, capitalized development costs are amortized to cost of sales - software royalties and amortization is based on the ratio of current revenues to total projected revenues, generally resulting in an amortization period of one year or less. For products that have been released in prior periods, the Company evaluates the future recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.
Capitalized Licenses
Capitalized license costs represent license fees paid to intellectual property rights holders for use of their trademarks or copyrights in the development of the products. Depending on the agreement with the rights holder, the Company may obtain the rights to use acquired intellectual property in multiple products over multiple years, or alternatively, for a single product over a shorter period of time. Most license agreements include a "per unit" royalty obligation; however, royalties are offset against the prepaid license amount first and then accrued as sales continue.
The Company evaluates the future recoverability of capitalized licenses on a quarterly basis. The recoverability of capitalized license costs is evaluated based on the expected performance of the specific products in which the licensed trademark or copyright is to be used. Prior to the related product’s release, the Company expenses, as part of cost of sales, licenses when the Company believes such amounts are not recoverable. Capitalized development costs for those products that are cancelled or abandoned are charged to cost of sales. The following criteria are used to evaluate expected product performance: historical performance of comparable products using comparable technology and orders for the product prior to its release.

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Consolidated Financial Statements

March 31, 2008 (Unaudited) and December 31, 2007

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)   g. Capitalized Development Costs and Licenses (Continued)
Commencing upon the related products release, capitalized license costs are amortized to cost of sales - licenses based on the number of units sold, multiplied by the "per unit" royalty amount. As license contracts may extend for multiple years, the amortization of capitalized intellectual property license costs relating to such contracts may extend beyond one year. For intellectual property included in products that have been released, the Company evaluates the future recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance. License agreements vary in length between two and five years. Royalty unit rates vary from $1.50 per unit to $5.00 per unit.
At March 31, 2008 and December 31, 2007, $523,000 and $558,588, respectively, of amortization expense has been included in cost of sales for the period on the titles that have been released during the year.
h. Property and Equipment
Property and equipment as of March 31, 2008 and December 31, 2007 consists of the following and are recorded at cost:

	Life		March 31, 2008			December 31, 2007
			(Unaudited)
Furniture and equipment	4-5 years		52,687			52,687
Development tools		3 years		41,606			41,606
Computer equipment		3 years		43,068			43,068
Automobile		4 years		51,549			51,549
Leasehold improvements		5 years		24,457			24,457
Total property and equipment				213,367			213,367
Less: accumulated depreciation				(209,562	)		(208,918	)
Property and equipment, net				3,805			4,449

Provision for depreciation of property and equipment is computed on the straight-line method for financial reporting purposes. Maintenance, repairs and renewals which neither materially add to the value of the equipment nor appreciably prolong its life are charged to expense as incurred.

Depreciation charged to operations was $644 and $1,634 for the three months ended March 31, 2008 and 2007, respectively.

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Consolidated Financial Statements

March 31, 2008 (Unaudited) and December 31, 2007

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)   h. Property and Equipment (continued)
In accordance with Financial Accounting Standards Board Statement No. 144, the Company records impairment of long-lived assets to be held and used or to be disposed of when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. At March 31, 2008 and December 31, 2007, no impairments were recognized. i. Revenue Recognition
Revenue from video game distribution contracts, which provide for the receipt of non-refundable guaranteed advances, is recognized when the games are delivered to the distributor by the manufacturer under the completed contract method, provided the other conditions of sale as established by the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101 (revised SAB No. 104), "Revenue Recognition," are satisfied:
i.  Persuasive evidence of an arrangement exists.
ii.  Delivery has occurred or services have been rendered.
iii. The seller's price to the buyer is fixed or determinable.
iv.  Collectibility is reasonably assured
Until all of the conditions of the sale have been met, amounts received on such distribution contracts are recorded as deferred income. Although the Company regularly enters into the assignment of accounts receivable to vendors, the Company presents revenues on gross basis per Emerging Issues Task Force ("EITF") No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," since the Company:
i. Acts as the principal in the transaction.
ii.  Takes title to the products.   iii.  Has risks and rewards of ownership, such as the risk of loss for collection, delivery, or returns.
iv. Does not act as an agent or broker.
At all times, the Company maintains control of the development process and is responsible for directing the vendor. Other than for payment, the customer does not communicate with the vendor.

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Consolidated Financial Statements

March 31, 2008 (Unaudited) and December 31, 2007

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)   i. Revenue Recognition (Continued)
The Company utilizes the completed contract method of revenue recognition as opposed to the percentage-of-completion method of revenue recognition for substantially all of its products since the majority of its products are completed within six to eight months. The Company completes the products in a short period of time since the Company obtains video games that are partially complete or obtains foreign language video games published by foreign manufacturers that are completed.   License revenue is generated when the Company sells the acquired license to another publisher to develop and sell. Revenues are recorded when the royalty payments are received from that publisher upon sale of the product.
j. Income Taxes   At March 31, 2008, the Company had net operating loss carryforwards of approximately $8,421,082 that may be offset against future taxable income. These operating loss carryforwards expire through 2028. No tax benefit has been reported in the financial statements because the potential tax benefit of the net operating loss carryforwards, resulting in a deferred tax asset of $3,284,222, is effectively offset by a 100% valuation allowance primarily because of significant uncertainty as to the Company’s ability to continue as a going concern (Note 3). In addition, the Company may be limited in its ability to fully utilize its net operating loss carryforwards and realize any benefit there-from in the event of certain ownership changes described in Internal Revenue Code Section 382.

Operating loss carryforwards	$	3,284,222
Less: valuation allowance		(3,284,222	)
Net deferred tax assets

The income tax benefit differs from the amount computed at federal and state statutory rates of approximately 39% as follows:

	For the Three Months Ended March 31,
	2008			2007
Income tax benefit (expense) at statutory rates	$	2,919,132		$	(204,441	)
Unrecognizable gains: gain on change in derivative liabilities					310,764
Non-deductible expenses: loss on valuation of derivative liabilities		(2,931,207	)		-
		(12,075	)		106,323
Change in valuation allowance		12,075			(106,323	)
	$	-		$	-

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Consolidated Financial Statements

March 31, 2008 (Unaudited) and December 31, 2007

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)   k. Advertising and Marketing Expense
The Company expenses advertising and marketing costs as incurred. Advertising and marketing expense for the three months ended March 31, 2008 and 2007 was $199,427 and $14,924, respectively.

i. Earnings (Loss) Per Share of Common Stock

The Company reports loss per share in accordance with SFAS No. 128 "Earnings per Share." Basic net loss per common share is computed by dividing net loss available to common stockholder by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares and dilutive potential common share equivalents then outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants. The calculation of the net income (loss) per share available to common stockholders for the periods presented with net losses does not include potential shares of common stock equivalents, as their impact would be anti-dilutive.

	For the Three Months Ended March 31,
	2008			2007
Earnings (loss) per share:
Income (loss) (numerator) - basic	$	(7,484,955	)	$	524,207
Effect of dilutive securities, convertible notes payable		-			-
Income (loss) (numerator) - diluted	$	(7,484,955	)	$	524,207
Shares (denominator) - basic		51,189,065			51,189,065
Effect of dilutive securities, convertible notes payable		-			112,014,900
Warrants		-			70,000,000
Shares (denominator) - diluted		51,189,065			233,203,965
Per share amount - basic	$	(0.15	)	$	0.01
Per share amount - diluted	$	(0.15	)	$	0.00

For the year three months ended March 31, 2008, the Company had warrants to purchase 70,000,000 common shares at a weighted average price of $0.125 and notes payable convertible into 129,517,063 common shares that were not included in the computation of diluted earnings per share as their effect was anti-dilutive.

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Consolidated Financial Statements

March 31, 2008 (Unaudited) and December 31, 2007

NOTE 3 - GOING CONCERN   The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. During the year ended December 31, 2007, the Company had an accumulated deficit of approximately $11,900,000, negative working capital and a net loss. These factors raise substantial doubt about the Company's ability to continue as a going concern.
Recovery of the Company's assets is dependent upon future events, the outcome of which is indeterminable. Successful completion of the Company's development program and its transition to the attainment of profitable operations is dependent upon the company achieving a level of sales adequate to support the Company’s cost structure. In addition, realization of a major portion of the assets in the accompanying balance sheet is dependent upon the Company's ability to meet its financing requirements and the success of its plans to develop and sell its products. Management plans to issue additional debt and equity to fund the release of new products in 2008. The consolidated financial statements do no include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

NOTE 4 - CONVERTIBLE NOTES PAYABLE   On July 7, 2007, the Company closed two Securities Purchase Agreement for 15% Secured Convertible Debentures having a total principal amount of $200,000, convertible into common shares of the Company's common stock at a price of the lesser of $0.02 per share or 70% of the average three lowest closing bid prices for the Company’s Common Stock for the 30 trading days prior to a conversion date. The notes are due on August 1, 2008.
Of the $200,000 in proceeds from the convertible debentures the intrinsic value of the beneficial conversion feature of $138,028 has been recorded as paid in capital and as a discount on the note. The Company has accreted $95,557 of the discount to interest expense through March 31, 2008.
On March 30, 2007, the Company closed a Securities Purchase Agreement for 15% Secured Convertible Debentures having a total principal amount of $80,000, convertible into common shares of the Company's common stock at a price of the lesser of $0.02 per share or 70% of the average five lowest closing bid prices for the Company’s Common Stock for the 30 trading days prior to a conversion date. The note was due on August 1, 2007 and is currently in default.
Of the $80,000 in proceeds from the convertible debentures the intrinsic value of the beneficial conversion feature of $80,000 has been recorded as paid in capital and as a discount on the note. The Company has accreted $80,000 of the discount to interest expense through March 31, 2008.

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Consolidated Financial Statements

March 31, 2008 (Unaudited) and December 31, 2007

NOTE 4 - CONVERTIBLE NOTES PAYABLE (Continued)   On August 11, 2006, the Company closed a Securities Purchase Agreement for 15% Secured Convertible Debentures having a total principal amount of $247,000, convertible into common shares of the Company's common stock at a price of the lesser of $0.02 per share or 70% of the average five lowest closing bid prices for the Company’s Common Stock for the 30 trading days prior to a conversion date. Interest and principal of the note was due on February 1, 2007. The note is in default.
Of the $247,000 in proceeds from the convertible debentures the intrinsic value of the beneficial conversion feature of $247,000 has been recorded as paid in capital and as a discount on the note. The Company has accreted $247,000 of the discount to interest expense through March 31, 2008.
On February 9, 2005, the Company closed a Securities Purchase Agreement for 5% Secured Convertible Debentures having a total principal amount of $650,000, convertible into 13,000,000 shares of the Company's common stock at a price of $0.05 per share, plus Class A Common Stock Purchase Warrants to purchase a total of 13,000,000 shares of common stock at a price of $0.20 per share; and Class B Common Stock Purchase Warrants to purchase a total of 13,000,000 shares of common stock at a price of $0.05 per share. Interest and principal of the note was due on February 9, 2007 and is currently in default.
Of the $650,000 in proceeds from the convertible debentures, $225,000 has been recorded as paid in capital and $425,000 has been recorded as a derivative liability (in accordance with EITF 00-19) based on the intrinsic and relative fair values of $225,000, $200,000 and $225,000, for the beneficial conversion feature of the Secured Convertible Notes Payable, Class A Common Stock Purchase Warrants and Class B Common Stock Purchase Warrants, respectfully. The Company upon issuance recorded an initial discount on the note of $650,000 and has accreted $650,000 through March 31, 2008.
On August 31, 2004, the Company sold an aggregate of $1,050,000 principal amount of 5% Secured Convertible Debentures, Class A Common Stock Purchase Warrants to purchase 21,000,000 shares of the Company’s common stock, and Class B Common Stock Purchase Warrants to purchase 21,000,000 shares of the Company’s common stock, to four institutional investors. The Company received gross proceeds totaling $1,050,000 from the sale of the Debentures and the Warrants.
On September 28, 2004, the Company sold a $50,000 principal amount 5% Secured Convertible Debenture, Class A Common Stock Purchase Warrant to purchase 1,000,000 share of the Company’s common stock, and Class B Common Stock Purchase Warrants to purchase 1,000,000 shares of the Company’s common stock, to one institutional investor. The Company received gross proceeds totaling $50,000 from the sale of the Debentures and the Warrants.

18

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Consolidated Financial Statements

March 31, 2008 (Unaudited) and December 31, 2007

NOTE 4 - CONVERTIBLE NOTES PAYABLE (Continued)   Of the $1,100,000 in proceeds from the convertible debentures $355,000 has been recorded as paid in capital and $745,000 has been recorded as derivative liability (in accordance with EITF 00-19) based on the intrinsic and relative fair values of $355,000, $390,000 and $355,000, for the beneficial conversion feature of the Secured Convertible Notes Payable, Class A Common Stock Purchase Warrants and Class B Common Stock Purchase Warrants, respectfully. The Company upon issuance recorded an initial discount on the note of $1,100,000 and has accreted $1,100,000 through March 31, 2008.
In August 2005, the Company amended the conversion terms of all existing convertible notes payable. The amendment changes the conversion rates from $0.02, to the lesser of $0.02 or 70% of the average five lowest closing bid prices for the Company’s Common Stock for the 30 trading days prior to a conversion date (effectively $0.02 per share at March 31, 2008).
As of March 31, 2008 and December 31, 2007 the balance of the Company’s convertible notes payable totaled, $2,174,930 and $2,143,077 net of discounts of $42,471 and $74,323, respectively. If the notes and interest were converted at March 31, 2008, the Company would have to issue 129,517,063 shares effectively changing control of the Company.

19

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Consolidated Financial Statements

March 31, 2008 (Unaudited) and December 31, 2007

NOTE 4 - CONVERTIBLE NOTES PAYABLE (Continued)   Convertible notes payable are detailed as follows:

	March 31,			December 31,
	2008			2007
	(Unaudited)
Convertible debentures to partnerships and funds; 5% interest payable annually; secured by the Company’s assets, matured ugust 2006, convertible anytime at a rate of the lesser of $0.05 per common share or 70% of the 5 lowest closing bid prices for the last 30 days trading prior to the conversion; net of discount of $-0- at March 31, 2008 and December 31, 2007.	$	1,690,400		$	1,690,400
Convertible debentures to partnerships and funds; 15% interest payable annually; secured by the Company’s assets, matured February 2007, convertible anytime at the Holder’s option at a rate of the lesser of $0.02 per common share or 70% of the average of the 5 lowest closing bid prices for the last 30 days trading prior to the conversion date; net of discount of $-0- at March 31, 2008 and December 31, 2007.		247,000			247,000
Convertible debentures to partnerships and funds; 15% interest payable annually; secured by the Company’s assets, matured August 1, 2007, convertible anytime at the Holder’s option at a rate of the lesser of $0.02 per common share or 70% of the average of the 5 lowest closing bid prices for the last 30 days trading prior to the conversion date; net of discount of $-0- at March 31, 2008 and December 31, 2007.		80,000			80,000
Convertible debentures to an entity; 15% interest payable annually; secured by the Company’s assets, matures August 1, 2008, convertible anytime at the Holder’s option at a rate of the lesser of $0.02 per common share or 70% of the average of the 3 lowest closing bid prices for the last 30 days trading prior to the conversion date; net of discount of $21,235 and $37,161 at March 31, 2008 and December 31, 2007, respectively.		78,765			62,839
Convertible debentures to an entity; 15% interest payable annually; secured by the Company’s assets, matures August 1, 2008, convertible anytime at the Holder’s option at a rate of the lesser of $0.02 per common share or 70% of the average of the 3 lowest closing bid prices for the last 30 days trading prior to the conversion date; net of discount of $21,235 and $37,162 at March 31, 2008 and December 31, 2007, respectively.		78,765			62,838
Total convertible notes payable, net of discount of $42,471 and $74,323 at March 31, 2008 and December 31, 2007, respectively.		2,174,930			2,143,077
Less: current portion		(2,174,930	)		(2,143,077	)
Long-term convertible notes payable	$	-		$	-

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Consolidated Financial Statements

March 31, 2008 (Unaudited) and December 31, 2007

NOTE 4 - CONVERTIBLE NOTES PAYABLE (Continued)   Future minimum principal payments on the convertible notes payable are as follows:

2009	$	2,174,930
Thereafter		-
Total	$	2,174,930

NOTE 5 - NOTES PAYABLE   Notes payable are detailed as follows:

	March 31, 2008			December 31, 2007
	(Unaudited)
Note payable to institutional investors; no interest; profit sharing of 50% for the game "Ultimate Block Party" up to a maximum of $300,000; secured by the Company's assets; matured in February 2006.	$	194,093		$	194,093
Note payable to an entity; interest at 8% per annum, interest and principal due at maturity on February 20, 2009. The note was issued at a 10% discount with the Company receiving $102,500 for a $113,889 face value note. The discount is being amortized over the life of the note (1 year) and recorded as interest expense, secured by a security interest.		103,717			-
Note payable to an entity; interest at 8% per annum, interest and principal due at maturity on February 20, 2009. The note was issued at a 10% discount with the Company receiving $102,500 for a $113,889 face value note. The discount is being amortized over the life of the note (1 year) and recorded as interest expense, secured by a security interest.		103,716			-
Note payable to an individual; total interest of $88,000 (50,000 pounds) due; principal and interet due upon receipt of first $355,000 of product sales from British publisher, unsecured.		130,128			150,128
Less: current portion		531,654			344,221
Total notes payable Less: current portion		(531,654	)		(344,221	)
Long-term notes payable	$	-		$	-

21

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Consolidated Financial Statements

March 31, 2008 (Unaudited) and December 31, 2007

NOTE 5 - NOTES PAYABLE (Continued)   Future minimum principal payments on the notes payable are as follows:

2009	$	531,654
Thereafter		-
Total	$	531,654

NOTE 6 - LEASE COMMITMENTS   On January 22, 2008, the Company signed an addendum to its current lease for a term of thirteen months commencing March 2008 through April 2009 for its office space.
Future minimum lease payments under non-cancelable operating leases at December 31, 2007 were as follows:

For the Years Ending December 31,
2008	$	116,611
2009		31,234
Thereafter		-
Total	$	147,845

Rent expense was $15,535 and $18,036 for the three months ended March 31, 2008 and 2007, respectively.

NOTE 7 - AGREEMENTS   Employment Agreements
On January 1, 2002, the Company entered into three-year employment agreements with its President and its Chief Financial Officer, providing for annual salaries of $324,000, plus benefits, and $134,400, plus benefits, respectively. In addition, per the agreement, each employee is entitled to a corporate vehicle monthly allowance of $800 and $500, respectively. The Chief Financial Officer is also entitled to 10% of the Company’s total issued and outstanding common shares as of the date of the agreement. The employment agreements expired January 2005 and were not renewed; however, compensation for the President and Chief Operating Officer did not change.
At March 31, 2008 and December 31, 2007, total deferred compensation related to these employment agreements was $429,868 and $533,010, respectively.

22

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Consolidated Financial Statements

March 31, 2008 (Unaudited) and December 31, 2007

NOTE 7 - AGREEMENTS (Continued)   Settlement Agreements
During July 2005, the Company entered into a Settlement Agreement and Mutual Release with a merchandising service company related to a dispute.  Pursuant to the agreement, the Company received an advance of $125,000 and may receive three additional advances of $125,000 from the company for Conspiracy to develop a cellular fan club for certain artists of the merchandising service company.
Withholding Tax Payable
The Company withholds 10% of all foreign sales intended to be remitted to the Internal Revenue Service (“IRS”). As of March 31, 2008 and December 31, 2007 the Company had withholding tax payable of $409,795 and $376,823 respectively. As of March 31, 2008, the Company had not remitted any of the 2001-2006 withholdings to the IRS for which is most likely subject to penalties and interest which have been estimated and accrued. As of March 31, 2008, the Company had not been audited or invoiced by the IRS. The amounts due at March 31, 2008 and December 31, 2007 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet.

NOTE 8 - CONTINGENCIES, CONCENTRATIONS AND UNCERTAINTIES   The Company operates in the computer software industry, which is highly competitive and changes rapidly. The Company’s operating results could be significantly affected by its ability to develop new products and find new distribution channels for new and existing products.
Authorized Shares of Common Stock
The Company has authorized for issuance 100,000,000 shares of common stock at $0.001 par value. At March 31, 2008 and December 31, 2007 the Company had 51,189,065 common shares issued and outstanding. In addition to the issued shares, the Company has 70,000,000 warrants outstanding and notes payable convertible into 129,517,063 and 127,472,450 shares as of March 31, 2008 and December 31, 2007, respectively. If each of the equity instruments were exercised for conversion to common stock, the Company does not have enough authorized shares to satisfy each of the equity conversions. As a result, the Company has recorded a derivative liability to account for the shortfall and potential liability if amounts were demanded for conversion (see Note 13). The Company is currently in the process of increasing its authorized shares to compensate for the difference.

23

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Consolidated Financial Statements

March 31, 2008 (Unaudited) and December 31, 2007

NOTE 9 - CAPITALIZED DEVELOPMENT COSTS AND LICENSES   Capitalized development costs and licenses at March 31, 2008 consisted of the following:

	Development Costs			License Costs			Combined Totals
Capitalized development costs and licenses	$	1,127,035		$	1,782,766		$	2,909,801
Less: impairment		(129,930	)		(156,500	)		(286,430	)
Less: accumulated amortization		-			(692,000	)		(692,000	)
Net balance	$	997,105		$	934,266		$	1,931,371

Amortization expense was $523,000 and $-0- for the three months ended March 31, 2008 and 2007, respectively.

The estimated amortization of capitalized development costs and licenses are as follows for the next five years:

2009	$	889,025
2010		590,253
2011		452,093
2012		-
Thereafter		-
Total	$	1,931,371

NOTE 10 - NEW TECHNICAL PRONOUNCEMENTS   In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115”. This statements objective is to improve financial reporting by providing the Company with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objective for accounting for financial instruments. The adoption of SFAS 159 did not have an impact on the Company’s financial statements. The Company presently comments on significant accounting policies (including fair value of financial instruments) in Note 2 to the consolidated financial statements.

24

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Consolidated Financial Statements

March 31, 2008 (Unaudited) and December 31, 2007

NOTE 10 - NEW TECHNICAL PRONOUNCEMENTS (Continued)   In December 2007, the FASB issued SFAS No. 160, “Non-controlling interests in Consolidated Financial Statements - an Amendment of ARB No. 51”. This statements objective is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require ownership interests in the subsidiaries held by parties other than the parent be clearly identified. The adoption of SFAS 160 did not have an impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised), “Business Combinations”. This revision statements objective is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its effects on recognizing identifiable assets and measuring goodwill. The adoption of SFAS 141 (revised) did not have an impact on the Company’s consolidated financial statements.

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 establishes, among other things, the disclosure requirements for derivative instruments and for hedging activities. This Statement amends and expands the disclosure requirements SFAS No. 133 with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. To meet those objectives, this Statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The Company does not expect the adoption of SFAS No. 161 to have an impact on the Company’s consolidated financial statements.  

NOTE 11 - SHAREHOLDERS EQUITY   Warrants
Warrants - The Company has issued warrants to non-employees under various agreements expiring through February 2009. A summary of the status of warrants granted at March 31, 2008 and December 31, 2007, and changes during the periods then ended is as follows:

	For the Period Ended March 31, 2008				For the Period Ended December 31, 2007
			Weighted Average				Weighted Average
	Shares		Exercise Price		Shares		Exercise Price
Outstanding at beginning of year		70,000,000	$	0.125		70,000,000	$	0.125
Granted		-		-		-		-
Exercised		-		-		-		-
Forfeited		-		-		-		-
Expired		-		-		-		-
Outstanding at end of period		70,000,000	$	0.125		70,000,000	$	0.125
Exercisable at end of period		70,000,000	$	0.125		70,000,000	$	0.125

25

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Consolidated Financial Statements

March 31, 2008 (Unaudited) and December 31, 2007

NOTE 11 - SHAREHOLDERS EQUITY (Continued)   Warrants (Continued)
A summary of the status of warrants outstanding at December 31, 2007 is presented below:

	Warrants Outstanding						Warrants Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$0.05		35,000,000		2.00 years	$	0.050		35,000,000	$	0.050
$0.20		35,000,000		0.85 years		0.200		35,000,000		0.200
		70,000,000			$	0.125		70,000,000	$	0.125

On August 31, 2004, the Company sold an aggregate of $1,050,000 principal amount of 5% Secured Convertible Debentures, Class A Common Stock Purchase Warrants to purchase 21,000,000 shares of the Company’s common stock at $0.20 per share expiring August 2008, and Class B Common Stock Purchase Warrants to purchase 21,000,000 shares of the Company’s common stock at $0.05 per share expiring a year and half after the registration of the underlying shares goes effective, to four institutional investors. The Company received gross proceeds totaling $1,050,000 from the sale of the Debentures and the Warrants.

On September 28, 2004, the Company sold an aggregate of $50,000 principal amount of 5% Secured Convertible Debentures, Class A Common Stock Purchase Warrants to purchase 1,000,000 shares of the Company’s common stock at $0.20 per share expiring September 2008, and Class B Common Stock Purchase Warrants to purchase 1,000,000 shares of the Company’s common stock at $0.05 per share expiring a year and half after the registration of the underlying shares goes effective, to four institutional investors. The Company received gross proceeds totaling $50,000 from the sale of the Debentures and the Warrants.

On February 9, 2005, the Company sold an aggregate of $650,000 principal amount of 5% Secured Convertible Debentures, Class A Common Stock Purchase Warrants to purchase 13,000,000 shares of the Company’s common stock at $0.20 per share expiring February 2009, and Class B Common Stock Purchase Warrants to purchase 13,000,000 shares of the Company’s common stock at $0.05 per share expiring a year and half after the registration of the underlying shares goes effective, to four institutional investors. The Company received gross proceeds totaling $650,000 from the sale of the Debentures and the Warrants.

Warrant pricing models require the input of highly sensitive assumptions, including expected stock volatility. Also, the Company’s warrants have characteristics significantly different from those of traded warrants, and changes in the subjective input assumptions can materially affect the fair value estimate. Management believes the best input assumptions available were used to value the warrants and that the resulting warrant values are reasonable.

26

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Consolidated Financial Statements

March 31, 2008 (Unaudited) and December 31, 2007

NOTE 12 - PREPAID MANUFACTURING   Prepaid manufacturing costs consist of fees paid in advance to the manufacturer for the production and packaging of the video games. These prepaid costs are generally short-term in nature and the Company expects to receive and ship the related finished products during the following quarter. The balance of prepaid manufacturing at March 31, 2008 and December 31, 2007 was $-0- and $277,200, respectively.

NOTE 13 - DERIVATIVE LIABILITY AND RESTATEMENT OF PRIOR PERIODS   During the annual audit for the year ended December 31, 2007, an error was discovered related to the consolidated financial statements as of December 31, 2006. The error relates to the Company’s shortfall in common shares authorized compared to the potential conversion obligations. The Company has authorized 100,000,000 shares of common stock. At both December 31, 2007 and 2006, the number of shares available for issuance (authorized shares less shares issued and outstanding) was significantly less than the shares the Company would need to convert all of the outstanding warrants and convertible debt at both periods. Pursuant to Emerging Issues Task Force (“EITF”) No. 00-19, this creates a situation that does not allow the Company to satisfy these obligations with stock, and therefore, the Company would have to settle the conversions in cash creating a derivative liability. As of March 31, 2008 and December 31, 2007, the balance of the derivative liability was $10,912,928 and $3,397,012, respectively. During the three months ended March 31, 2008 and 2007, the gain (loss) on valuation of derivative liability was ($7,515,916) and $796,831 (as restated), respectively.
The Company has restated the consolidated financial statements for the three months ended March 31, 2007 to reflect this error as follows:

	As Restated		As Previously Recorded			Net Change
Consolidated Statement of Operations
for the Three Months Ended March 31, 2007
Gain on valuation of derivative liability	$	796,831	$	-		$	796,831
Net income (loss)	$	524,207	$	(272,624	)	$	796,831
Basic income (loss) per share	$	0.01	$	(0.01	)	$	0.02
Diluted income (loss) per share	$	0.00	$	(0.01	)	$	0.01

27

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The information in this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.

28

The following discussion and analysis should be read in conjunction with the financial statements and notes thereto included elsewhere in this report and with our annual report on Form 10-KSB for the fiscal year ended December 31, 2007. 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 of our management.

Results of Operations

Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

Revenues for the three months ended March 31, 2008 were $3,240,866, compared to $0 and for the three months ended March 31, 2007. This represents a 100% change from the previous year. Last year the company had one title ready for release but upon the request of our distributor held off the release until 2 ^nd quarter 2007, but this year we released 5 new titles as well as strong reorders for titles released in 2007.

There was a 100% change in Gross profit for the three months ended March 31, 2008 which was $790,854, compared to $0 for the three months ended March 31, 2007. This is the result of no sales for the period in 2007 as compared to the release of 5 new titles in the quarter ended March 31, 2008 in addition to the strong reorders received for titles released in 2007.

For the three months ended March 31, 2008, operating expenses totaled $682,816 as compared to $172,940 for the three months ended March 31, 2007. This was an increase of $509,876 or 294.8%. The increase in operating expenses resulted from Entertainment increasing $20,270 or 616.1% due to the necessity of entertaining clients and prospective distribution and licensing partners, corporate marketing increasing $126,827 or 2536.6% to $131,827 due to the company’s efforts to increase shareholder awareness and to promote our stock, games marketing of $61,602 an increase of $51,678 or 520.7% due to the release of 5 new titles during the quarter, payroll expenses increased $65,502 or 75.9% to $151,852 due to the increase in employees, professional fees increasing from $12,500 for the 3 months ending March 31, 2007 to $177,412 an increase of $164,912 or 1319.3% for the three months ending March 31, 2008 due to increases in attorney fees of $33,279 due to our February 2008 financing and an increase in professional fees paid to consultants. Travel also increased $29,928 or 6058.3% to $30,422 for the three months ended March 31, 2008 due to our attendance in an international trade show and required meetings with consultants to help secure product lines for 2008 and 2008. There were no significant decreases in operating expenses due to the fact that we released 5 new titles during the quarter and hired additional staff to support our efforts.

Interest expense was $45,224 and $30,458 for the three months ended March 31, 2008 and 2007, respectively. This was an increase of $48.5%, or14,766 which was a result of our February 2008 financing as well as additional interest on our other notes from investors.  

We had $7,547,769 in Financing Costs for the three months ended March 31, 2008 compared to $727,605 of Financing Income for the three months ended March 31, 2008. This was due to a recalculation of our derivative liability which was a direct reflection of the increase in our share price.

Our net loss was $ 7,484,955 for the three months ended March 31, 2008 compared to a net gain of $ 524,207 for the three months ended March 31, 2007. The decrease in profitability for the three months ended March 31, 20087 was entirely due to loss on valuation of derivative liability as had a operational profit of $108,038 as compared to a $172,940 loss for the three months ended March 31, 2007.

Liquidity and Capital Resources

29

As of March 31, 2008 our cash balance was $179,113 compared to $539,990 at December 31, 2007. Total current assets at March 31, 2008 were $608,513 compared to $927,385 at December 31, 2007. We currently plan to use the cash balance and cash generated from operations for increasing our working capital reserves and, along with additional debt financing, for new product development, securing new licenses, building up inventory, hiring more sales staff and funding advertising and marketing. Management believes that the current cash on hand and additional cash expected from operations in fiscal 2007 will be sufficient to cover our working capital requirements for fiscal 2007.

For the three months ended March 31, 2008, net cash provided in operating activities was $7,162 as compared to $18,719 for the three months ended March 31, 2007.  The decrease in cash used in operating activities can be attributed to significant decreases in Accounts Receivable, Accounts Payable and Accrued Expenses and Deferred Compensation and Deferred Revenue as well as an increase in Prepaid Expenses and the Amortization of capitalized development costs and licenses.

For the three months ended March 31, 2008, net cash used in investing activities was $553,041, compared to net cash used in investing activities of $448,231for the three months ended March 31, 2007. The increase in cash used in investing activities of $104,810 for the three months ending March 31, 2008, was due to the increase in payment made for capitalized development and licenses.

For the three months ended March 31, 2008, net cash provided by Financing Activities was $185,000 compared to $552,500 for the three months ended March 31, 2007. We received proceeds from a secured Note transaction of $205,000 during the period ending March 31, 2008 as compared to $80,000 received from our convertible notes agreement of February 2006, plus advances for our upcoming product releases of $475,000 which comprise the majority of this balance ending March 31, 2007.

Our accounts receivable at March 31, 2008 was $429,400, compared to $110,195 at December 31, 2007. The change in accounts receivable is primarily due to the fact that we issued four invoices near quarter end which remained unpaid.

As of March 31, 2008 we had a working capital deficiency of $16,152,980. $10,912,928 is attributed to Derivative Liability related to our historical financing agreements, other major portions of our debt is attributed to consulting fees, attorney fees, and payroll taxes payable. We plan to reduce these debts with proceeds generated from normal operational cash flow as well as the issuance of company stock.

The current portion of long-term debt at March 31, 2008 was $0 compared to $0 as of December 31, 2007. We paid off the entire long term debt balance by year end and had no new long term arrangements during the quarter.

At March 31, 2008 we had no bank debt. 

Financings

On January 16, 2004, we received $50,000 from Calluna Capital Corporation under the terms of a February 25, 2003 convertible notes payable agreement bringing the total amount borrowed from Calluna Capital Corporation to $500,000. 

On May 17, 2004, we sold 2,792,200 shares of common stock to accredited investors for $.10 per share, or an aggregate of $279,220.

On August 31, 2004, we sold an aggregate of $1,050,000 principal amount of 5% Secured Convertible Debentures, Class A Common Stock Purchase Warrants to purchase 21,000,000 shares of our common stock, and Class B Common Stock Purchase Warrants to purchase 21,000,000 shares of our common stock, to four institutional investors. We received gross proceeds totaling $1,050,000 from the sale of the Debentures and the Warrants.

30

On September 28, 2004, we sold a $50,000 principal amount 5% Secured Convertible Debenture, Class A Common Stock Purchase Warrants to purchase 1,000,000 shares of our common stock, and Class B Common Stock Purchase Warrants to purchase 1,000,000 shares of our common stock, to one institutional investor. We received gross proceeds totaling $50,000 from the sale of the Debentures and the Warrants.

On February 9, 2005, we sold an aggregate of $650,000 principal amount of 5% Secured Convertible Debentures, 13,000,000 Class A Common Stock Purchase Warrants, and 13,000,000 Class B Common Stock Purchase Warrants, to four accredited institutional investors for gross proceeds totaling $650,000.

On August 11, 2006, we sold an aggregate of $247,000 principal amount of 15% secured convertible notes to two accredited institutional investors for gross proceeds totaling $247,000 less expenses of $4,000.

On March 30, 2007, we sold an aggregate of $80,000 principal amount of 15% secured convertible notes to two accredited institutional investors for gross proceeds of $80,000 less expenses of $12,500.

We do not have any current plans to obtain additional debt or equity financing. We plan to satisfy our capital expenditure commitments and other capital requirements through cash generated from operations and through funds received upon exercise of outstanding warrants. We believe the proceeds from exercise of our outstanding warrants will be sufficient to fund any need for additional capital. We currently have outstanding 35,000,000 Class A Warrants and 35,000,000 Class B Warrants with exercise prices of the lower of $0.02 per share or 70% of the average five lowest closing bid prices of our Common Stock for the 30 trading days prior to the conversion date. Exercise of all of these warrants would provide gross proceeds of $8,750,000. However, at recent market prices of our common stock, none of these warrants are in the money. Thus, if the market price of our common stock does not increase and warrant holders do not exercise their warrants, we may be required to seek additional debt or equity financing. If additional financing is required and we cannot obtain additional financing in sufficient amounts or on acceptable terms when needed, our financial condition and operating results will be materially adversely affected.

Contractual Obligations

The following table summarizes our contractual obligations as of March 31, 2008:

	Payments due by period		Less than				More
Contractual Obligations	Total		One Year		Years 1-2		than 2 years
Notes Payable	$	2,706,584	$	2,706,584
Operating Lease Obligations	$	147,845	$	116,611	$	31,234
License Fee Obligations	$	60,000	$	60,000
Total	$	2,914,429	$	2,883,195	$	31,234

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In March 2007, we entered into a convertible notes agreement totaling $80,000. The notes if called would be payable August 2007.

In August 2006, we entered into a convertible notes agreement totaling $247,000. The notes if called would be payable February 2007. 

On August 5, 2005 and August 8, 2005, two accredited investors loaned us an aggregate of $223,600 in gross proceeds in exchange for two notes payable. The notes bear no interest and were due February 1, 2006. 

On February 9, 2005, we entered into three convertible notes payable agreements totaling $650,000. To date, these notes are past due and have not been called. 

In September and October 2004, we entered into two convertible notes payable agreements totaling $1.1 million. To date, these notes are past due and have not been called. 

In August 2003, we obtained an unsecured loan from an individual in the amount of $355,000 including interest. We have repaid approximately $184,872 with the remaining balance to be paid in the year 2007.

In February 2008, we obtained an secured loan from two accredited investors in the amount of $227,778. The note was issued at a 10% discount and is being amortized over the one year note. We received a net of $205,000 from this loan.

We currently lease office spaces at 612 and 608 Santa Monica Boulevard in Santa Monica, California. Through the remainder of the lease term, our minimum lease payments are as follows: 

2008	$	116,611
2009	$	31,234

Our license agreement with Discovery for "The Jeff Corwin Experience" requires payments of the remaining $80,000 to be paid in full during the year 2005. Although we have only made $20,000 in payments during 2006, we are looking into our options on how to best handle this matter and plan to pay the balance in full by the end of 2007. 

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.

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Summary of Significant Accounting Policies

Assignment of Accounts Receivable. We regularly assign our receivables to vendors with recourse. Assigned accounts receivable are shown on the accounts receivable section of the balance sheet until collected by the beneficiary. Should the accounts receivable become uncollectible, we are ultimately responsible for paying the vendor and recording an allowance for potential credit losses as deemed necessary. The assigned accounts receivable are generally collected within 90 days; therefore, the balance shown approximates its fair value.

Capitalized Development Costs and Licenses. Capitalized development costs include payments made to independent software developers under development agreements, as well as direct costs incurred for internally developed products. Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a product encompasses both technical design documentation and game design documentation.

Capitalized Development Costs. For products where proven technology exits, this may occur early in the development cycle. Technological feasibility is evaluated on a product-by-product basis. Prior to a product's release, we expense, as part of cost of sales, development costs when we believe such amounts are not recoverable. Amounts related to capitalized development costs that are not capitalized are charged immediately to cost of sales. We evaluate the future recoverability of capitalized amounts on a quarterly basis. The recoverablility of capitalized development costs is evaluated based on the expected performance of the specific products for which the costs relate. The following criteria are used to evaluate expected product performance: historical performance of comparable products using comparable technology and orders of the product prior to its release. Commencing upon product release, capitalized development costs are amortized to cost of sales - software royalties and amortization is based on the ratio of current revenues to total projected revenues, generally resulting in an amortization period of one year or less. For products that have been released in prior periods, we evaluate the future recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.

Capitalized Licenses. Capitalized license costs represent license fees paid to intellectual property rights holders for use of their trademarks or copyrights in the development of the products. Depending on the agreement with the rights holder, we may obtain the rights to use acquired intellectual property in multiple products over multiple years, or alternatively, for a single product over a shorter period of time.

We evaluate the future recoverability of capitalized licenses on a quarterly basis. The recoverability of capitalized license costs is evaluated based on the expected performance of the specific products in which the licensed trademark or copyright is to be used. Prior to the related product's release, we expense, as part of cost of sales, licenses when we believe such amounts are not recoverable. Capitalized development cost for those products that are cancelled or abandoned are charged to cost of sales. The following criteria are used to evaluate expected product performance: historical performance of comparable products using comparable technology and orders for the product prior to its release.

Commencing upon the related products release, capitalized license costs are amortized to cost of sales - licenses based on the ratio of current revenues for the specific product to total projected revenues for all products in which the licensed trademark or copyright will be utilized. As license contracts may extend for multiple years, the amortization of capitalized intellectual property license costs relating to such contracts may extend beyond one year. For intellectual property included in products that have been released, we evaluate the future recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.

Revenue Recognition. Revenue from video game distribution contracts, which provide for the receipt of non-refundable guaranteed advances, is recognized when the games are delivered to the distributor by the manufacturer under the completed contract method, provided the other conditions of sale are satisfied.

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Until all of the conditions of the sale have been met, amounts received on such distribution contracts are recorded as deferred income. Although we regularly enter into the assignment of accounts receivable to vendors, we do not record revenues net versus gross since we:

i. Act as the principal in the transaction.

ii. Take title to the products.

iii. Have risks and rewards of ownership, such as the risk of loss for collection, delivery, or returns.

iv. Do not act as an agent or broker.

At all times, we maintain control of the development process and is responsible for directing the vendor. Other than for payment, the customer does not communicate with the vendor.

We utilize the completed contract method of revenue recognition as opposed to the percentage-of-completion method of revenue recognition for substantially all of its products since the majority of its products are completed within six to eight months. We complete the products in a short period of time since we obtain video games that are partially complete or obtain foreign language video games published by foreign manufacturers that are completed.

Allowance For Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We regularly review the adequacy of our accounts receivable allowance after considering the size of the accounts receivable balance, each customer's expected ability to pay and our collection history with each customer. We review significant invoices that are past due to determine if an allowance is appropriate based on the risk category using the factors described above. In addition, we maintain a general reserve for certain invoices by applying a percentage based on the age category. We also monitor our accounts receivable for concentration to any one customer, industry or geographic region. The allowance for doubtful accounts represents our best estimate, but changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. As of March 31, 2007, the allowance for doubtful accounts holds $0 balance as none of our accounts receivable are deemed uncollectible. 

Valuation of Long-Lived Intangible Assets Including Capitalized Development Costs and Licenses. Capitalized development costs include payments made to independent software developers under development agreements, as well as direct costs incurred for internally developed products.

We account for software development costs in accordance with SFAS No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a product encompasses both technical design documentation and game design documentation. The accumulation of appropriate costs as a capitalized, long-term asset involves significant judgment and estimates of employee time spent on individual software projects. The accumulation and timing of costs recorded and amortized may differ from actual results.

Our long-lived assets consist primarily of capitalized development costs and licenses. We review such long-lived assets, including certain identifiable intangibles, for impairment whenever events or changes in circumstances indicate that we will not be able to recover the asset's carrying amount in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business or asset, a significant decrease in the benefits realized from the software products, difficulty and delays in sales or a significant change in the operations of the use of an asset.

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Recoverability of long-lived assets by comparison of the carrying amount of an asset to estimated undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds its fair value.

Capitalized development costs and licenses, net of accumulated amortization, totaled approximately $1,901,330 at March 31, 2008. Factors we consider important which could trigger an impairment review include, but are not limited to, significant under-performance relative to expected historical or projected future operating results, significant changes in the manner of our use of our assets or the strategy for our overall business or significant negative economic trends. If this evaluation indicates that the value of an intangible asset may be impaired, an assessment of the recoverability of the net carrying value of the asset over its remaining useful life is made. If this assessment indicates that an intangible asset is not recoverable, based on the estimated undiscounted future cash flows or other comparable market valuations, of the entity or technology acquired over the remaining amortization period, the net carrying value of the related intangible asset will be reduced to fair value and the remaining amortization period may be adjusted. Any such impairment charge could be significant and could have a material adverse effect on our reported financial statements.

Income Taxes. We account for income taxes under SFAS No. 109, "Accounting for Income Taxes," which involves the evaluation of a number of factors concerning the realizability of our deferred tax assets. In concluding that a valuation allowance is required to be applied to certain deferred tax assets, we considered such factors as our history of operating losses, our uncertainty as to the projected long-term operating results, and the nature of our deferred tax assets. Although our operating plans assume taxable and operating income in future periods, our evaluation of all of the available evidence in assessing the realizability of the deferred tax assets indicated that such plans were not considered sufficient to overcome the available negative evidence. The possible future reversal of the valuation allowance will result in future income statement benefit to the extent the valuation allowance was applied to deferred tax assets generated through ongoing operations. To the extent the valuation allowance relates to deferred tax assets generated through stock compensation deductions, the possible future reversal of such valuation allowance will result in a credit to additional paid-in capital and will not result in future income statement benefit.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

N/A.

ITEM 4T. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

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Pursuant to Rule 13a-15(b) under the Exchange Act the Company carried out an evaluation with the participation of the Company’s management, including Sirus Ahmadi, the Company’s Chief Executive Officer (“CEO”) and Keith Tanaka, the Company’s Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the three months ended March 31, 2008. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal controls

Our management, with the participation our Chief Executive Officer and Chief Financial Officer, performed an evaluation as to whether any change in our internal controls over financial reporting  occurred during the Quarter ended March 31, 2008.  Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that no change occurred in the Company's internal controls over financial reporting during the 2008 Quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

.

PART II

OTHER INFORMATION COMPANY CONFIRM OR UPDATE AS NEEDED

ITEM 1 - LEGAL PROCEEDINGS

We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.  

ITEM 1A. RISK FACTORS

There have been no material changes from the Risk Factors described in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007.

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

None.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None.

ITEM 5 - OTHER INFORMATION

None.

Item 6. Exhibits

31.1	Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
31.2	Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
32.1	Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code
32.2	Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATE: May 20, 2008

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

By:	/s/ Sirus Ahmadi
	SIRUS AHMADI
	CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER), SECRETARY AND DIRECTOR

By:	/s/ Keith Tanaka
	KEITH TANAKA
	CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING OFFICER) AND DIRECTOR

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