Conspiracy Entertainment (CPYE) 10-Q 2008 Q3 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 SEPTEMBER 30, 2008.

OR

¨ 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 T

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 December 19, 2008, there were 51,189,065 outstanding shares of the Registrant's Common Stock, $0.001 par value.

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

SEPTEMBER 30, 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 or Plan of Operation	25
Item 3. Quantitative and Qualitative Disclosure About Market Risk	30
Item 4T. Controls and Procedures	30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	31
Item 1A. Risk Factors	31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3. Defaults Upon Senior Securities	31
Item 4. Submission of Matters to a Vote of Security Holders	31
Item 5. Other Information	31
Item 6. Exhibits	32
SIGNATURES	33

2

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONTENTS

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

3

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Balance Sheets

ASSETS

	September 30, 2008		December 31, 2007
	(Unaudited)		(as restated)
CURRENT ASSETS
Cash and cash equivalents	$	211,277	$	539,990
Accounts receivable, net of allowance for doubtful accounts of $-0- and $62,500 in 2008 and 2007, respectively		159,000		110,195
Prepaid manufacturing		-		277,200
Total Current Assets		370,277		927,385
PROPERTY AND EQUIPMENT, NET		11,938		4,449
OTHER ASSETS
Capitalized development costs and licenses, net		3,525,221		1,621,930
Deposits		6,906		6,906
Other receivable		132,500		132,500
Total Other Assets		3,664,627		1,761,336
TOTAL ASSETS	$	4,046,842	$	2,693,170

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

4

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Balance Sheets (Continued)

LIABILITIES AND STOCKHOLDERS' DEFICIT

	September 30, 2008			December 31, 2007
	(Unaudited)			(as restated)
CURRENT LIABILITIES
Accounts payable	$	497,913		$	707,437
Accrued expenses		2,388,605			2,153,669
Accrued interest on related party loans		10,000			-
Payroll taxes payable		715,675			782,554
Deferred compensation		397,544			533,010
Related party loans		80,000			-
Deferred revenue		2,373,441			1,326,653
Notes payable, net of discount of $8,924 in 2008 and $-0- in 2007		412,947			344,221
Derivative liability		3,444,428			3,582,501
Convertible notes payable, net of discount of $-0- and $109,463 in 2008 and 2007, respectively		2,217,400			2,107,937
Total Current Liabilities		12,537,953			11,537,982
Total Liabilities		12,537,953			11,537,982
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		2,790,394			2,790,394
Accumulated deficit		(11,332,695	)		(11,686,396	)
Total Stockholders' Deficit		(8,491,111	)		(8,844,812	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	4,046,842		$	2,693,170

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 September 30,						For the Nine Months Ended September 30,
	2008			2007			2008			2007
				(as restated)						(as restated)
NET SALES	$	3,024,146		$	1,700,000		$	7,784,004		$	2,519,330
COST OF SALES		2,420,106			907,643			5,687,157			1,284,473
GROSS PROFIT		604,040			792,357			2,096,847			1,234,857
OPERATING EXPENSES
Professional fees		78,740			173,115			354,113			254,365
Wages and salaries		155,417			114,630			462,139			287,110
Selling, general and administrative		242,599			282,652			905,814			556,882
Total Operating Expenses		476,756			570,397			1,722,066			1,098,357
NET INCOME FROM OPERATIONS		127,284			221,960			374,781			136,500
OTHER INCOME (EXPENSE)
Interest expense		(62,313	)		(40,893	)		(159,818	)		(106,489	)
Net financing expense		(10,618	)		(64,123	)		(109,463	)		(168,903	)
Gain (loss) on valuation of derivative liability		4,821,469			(6,490,311	)		138,073			(3,682,722	)
Gain on debt forgiveness		-			-			110,128			-
Total Other Income (Expense)		4,748,538			(6,595,327	)		(21,080	)		(3,958,114	)
NET INCOME (LOSS) BEFORE INCOME TAXES		4,875,822			(6,373,367	)		353,701			(3,821,614	)
PROVISION FOR INCOME TAXES		-			-			-			-
NET INCOME (LOSS)	$	4,875,822		$	(6,373,367	)	$	353,701		$	(3,821,614	)

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 September 30,					For the Nine Months Ended September 30,
	2008		2007			2008		2007
			(as restated)					(as restated)
BASIC INCOME (LOSS) PER SHARE	$	0.10	$	(0.12	)	$	0.01	$	(0.07	)
DILUTED INCOME (LOSS) PER SHARE	$	0.00	$	(0.12	)	$	0.00	$	(0.07	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC		51,189,065		51,189,065			51,189,065		51,189,065
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED		162,059,065		51,189,065			162,059,065		51,189,065

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 Nine Months Ended September 30,
	2008			2007
				(as restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	353,701		$	(3,821,614	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization		1,747			4,349
Amortization of discount on convertible notes payable		109,463			168,903
Amortization of capitalized development costs and licenses		686,142			-
Amortization of discount on notes payable		13,854			-
Gain on debt forgiveness		(110,128	)		-
Net change in derivative liability		(138,073	)		3,682,722
Change in operating assets and liabilities:
Accounts receivable and other receivable		(48,805	)		(402,993	)
Prepaids		277,200			(2,808,608	)
Accounts payable and accrued expenses		(41,467	)		118,007
Accrued interest, related party loans		10,000			-
Deferred compensation		(135,466	)		(12,317	)
Deferred revenue		1,046,788			-
Net Cash Provided (Used) by Operating Activities		2,024,956			(3,071,551	)
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for development costs and licenses		(2,589,433	)		(944,922	)
Purchase of property and equipment		(9,236	)		-
Net Cash Used in Investing Activities		(2,598,669	)		(944,922	)
cash flows from financing activities
Proceeds from advances		80,000			4,081,492
Proceeds from convertible notes payable		-			280,000
Proceeds from notes payable		205,000			-
Payments on notes payable		(40,000	)		(2,500	)
Net Cash Provided by Financing Activities	$	245,000		$	4,358,992

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 Nine Months Ended September 30,
	2008			2007
				(as restated)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	(328,713	)	$	342,519
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		539,990			24,976
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	211,277		$	367,495
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	-		$	-
Cash paid for income taxes	$	-		$	-
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Beneficial conversion feature of convertible notes payable	$	-		$	280,000

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

9

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

September 30, 2008 (Unaudited) and December 31, 2007

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 it’s 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.

NOTE 2 - BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim condensed financial statements includes normal recurring adjustments and reflects all adjustments, which in the opinion of management, are necessary for a fair presentation of such financial statements. The results of operations for any interim period are not necessarily indicative of results for the full year.

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

September 30, 2008 (Unaudited) and December 31, 2007

NOTE 3 - EARNINGS (LOSS) PER SHARE

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 September 30,						For the Nine Months Ended September 30,
	2008			2007			2008			2007
Earnings (loss) per share:
Income (loss) (numerator) - basic	$	4,875,822		$	(6,373,367	)	$	353,701		$	(3,821,614	)
Effect of dilutive securities, convertible notes payable		(4,810,851	)		-			(28,610	)		-
Income (loss) (numerator) - diluted	$	64,971		$	(6,373,367	)	$	325,091		$	(3,821,614	)
Shares (denominator) - basic		51,189,065			51,189,065			51,189,065			51,189,065
Effect of dilutive securities, convertible notes payable		110,870,000			-			110,870,000			-
Warrants		-			-			-			-
Shares (denominator) - diluted		162,059,065			51,189,065			162,059,065			51,189,065
Per share amount - basic	$	0.10		$	(0.12	)	$	0.01		$	(0.07	)
Per share amount - diluted	$	0.00		$	(0.12	)	$	0.00		$	(0.07	)

For the periods ended September 30, 2007, the Company had warrants to purchase 70,000,000 common shares at a weighted average price of $0.125 and notes payable convertible into 154,817,539 common shares that were not included in the computation of diluted earnings per share as their effect was anti-dilutive.

For the periods ended September 30, 2008, the Company had warrants to purchase 70,000,000 common shares exercisable at both $0.05 and $0.20 per share. Since both exercise prices were higher than the trading price at September 30, 2008 (the trading price was $0.04 per share), they are not included in the diluted earnings calculation.

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

September 30, 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.  However, at September 30, 2008, the Company had an accumulated deficit of approximately $11,000,000 and negative working capital. 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 and 2009. 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

The Company entered into a Securities Purchase Agreement on July 7, 2007 for the issuance of $200,000 of convertible notes (“Convertible Notes”) The Convertible Note accrues interest at 15% per annum. The note holder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.02 or b) 70% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 30 trading days before, but not including, conversion date. The notes matured on August 1, 2008 and are currently in default.

During the year ended December 31 2007, the Company issued to investors of the Convertible Notes a total amount of $200,000 in exchange for total proceeds of $200,000.

The Company's identified embedded derivatives related to the Securities Purchase Agreement entered into on July 7, 2007. These embedded derivatives included certain conversion features, variable interest features, call options and default provisions. The accounting treatment of derivative financial instruments requires that the Company allocate the relative fair values of the derivatives as of the inception date of the Securities Purchase Agreement up to the proceeds amount and to fair value as of each subsequent balance sheet date. At the inception of the Securities Purchase Agreement, the Company allocated $200,000 to the embedded derivatives.

For the nine months ended September 30, 2008, the Company amortized the debt discount and charged to interest expense $109,463.

12

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

September 30, 2008 (Unaudited) and December 31, 2007

NOTE 4 - CONVERTIBLE NOTES PAYABLE (Continued)

The Company entered into a Securities Purchase Agreement on March 30, 2007 for the issuance of $80,000 of convertible note (“Convertible Note”) The Convertible Note accrues interest at 15% per annum.. The note holder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.02 or b) 70% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 30 trading days before, but not including, conversion date. The note was due on August 1, 2007 and currently in default.

During the year ended December 31 2007, the Company issued to investors of the Convertible Note a total amount of $80,000 in exchange for total proceeds of $80,000.

The Company's identified embedded derivatives related to the Securities Purchase Agreement entered into on March 30, 2007. These embedded derivatives included certain conversion features, variable interest features, call options and default provisions. The accounting treatment of derivative financial instruments requires that the Company allocate the relative fair values of the derivatives as of the inception date of the Securities Purchase Agreement up to the proceeds amount and to fair value as of each subsequent balance sheet date. At the inception of the Securities Purchase Agreement, the Company allocated $80,000 to the embedded derivatives.

For the nine months ended September 30, 2008 and 2007, the Company amortized the debt discount and charged to interest expense $-0- and $80,000, respectively.

The Company entered into a Securities Purchase Agreement on August 11, 2006 for the issuance of $247,000 of convertible note (“Convertible Note”) The Convertible Note accrues interest at 15% per annum.. The note holder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.02 or b) 70% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 30 trading days before, but not including, conversion date. The note was due on August 1, 2007 and currently in default.

During the year ended December 31 2006, the Company issued to investors of the Convertible Note a total amount of $247,000 in exchange for total proceeds of $247,000.

The Company's identified embedded derivatives related to the Securities Purchase Agreement entered into on August 11, 2006. These embedded derivatives included certain conversion features, variable interest features, call options and default provisions. The accounting treatment of derivative financial instruments requires that the Company allocate the relative fair values of the derivatives as of the inception date of the Securities Purchase Agreement up to the proceeds amount and to fair value as of each subsequent balance sheet date. At the inception of the Securities Purchase Agreement, the Company allocated $247,000 to the embedded derivatives.

For the nine months ended September 30, 2008 and 2007, the Company amortized the debt discount and charged to interest expense $-0- and $45,425, respectively.

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

September 30, 2008 (Unaudited) and December 31, 2007

NOTE 4 - CONVERTIBLE NOTES PAYABLE (Continued)

The Company entered into a Securities Purchase Agreement with investors on February 9, 2005 for the issuance of $650,000 of convertible notes (“Convertible Notes”) and attached to the Convertible Notes was warrants to purchase 13,000,000 shares of the Company’s common stock at $0.05 per share and warrants to purchase 13,000,000 shares of the Company’s common stock at $0.20 per share. The Convertible Note accrues interest at 5% per annum. The note holder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.02 or b) 70% 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 amended).  The note was due on February 9, 2007 and currently in default.

During the year ended December 31, 2005, the Company issued to investors of the Convertible Notes a total amount of $650,000 in exchange for total proceeds of $650,000.

The Company's identified embedded derivatives related to the Securities Purchase Agreement entered into on February 9, 2005. These embedded derivatives included certain conversion features, variable interest features, call options and default provisions. The accounting treatment of derivative financial instruments requires that the Company allocate the relative fair values of the derivatives and related warrants as of the inception date of the Securities Purchase Agreement up to the proceeds amount and to fair value as of each subsequent balance sheet date.

The Company entered into a Securities Purchase Agreement with investors on August 31, 2004 for the issuance of $1,050,000 of convertible notes (“Convertible Notes”) and attached to the Convertible Notes was warrants to purchase 21,000,000 shares of the Company’s common stock at $0.05 per share and warrants to purchase 21,000,000 shares of the Company’s common stock at $0.20 per share. The Convertible Note accrues interest at 5% per annum. The note holder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.02 or b) 70% 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 amended).  The note was due on August 30, 2006 and is currently in default.

During the year ended December 31, 2004, the Company issued to investors of the Convertible Notes a total amount of $1,050,000 in exchange for total proceeds of $1,050,000.

The Company's identified embedded derivatives related to the Securities Purchase Agreement entered into on August 31, 2004. These embedded derivatives included certain conversion features, variable interest features, call options and default provisions. The accounting treatment of derivative financial instruments requires that the Company allocate the relative fair values of the derivatives and related warrants as of the inception date of the Securities Purchase Agreement up to the proceeds amount and to fair value as of each subsequent balance sheet date.

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CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

September 30, 2008 (Unaudited) and December 31, 2007

NOTE 4 - CONVERTIBLE NOTES PAYABLE (Continued)

The Company entered into a Securities Purchase Agreement with investors on September 28, 2004 for the issuance of $50,000 of convertible notes (“Convertible Notes”) and attached to the Convertible Notes was warrants to purchase 1,000,000 shares of the Company’s common stock at $0.05 per share and warrants to purchase 1,000,000 shares of the Company’s common stock at $0.20 per share. The Convertible Note accrues interest at 5% per annum. The note holder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.02 or b) 70% 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 amended).  The note currently is in default.

During the year ended December 31, 2004, the Company issued to investors of the Convertible Notes a total amount of $50,000 in exchange for total proceeds of $50,000.

The Company's identified embedded derivatives related to the Securities Purchase Agreement entered into on September 28, 2004. These embedded derivatives included certain conversion features, variable interest features, call options and default provisions. The accounting treatment of derivative financial instruments requires that the Company allocate the relative fair values of the derivatives and related warrants as of the inception date of the Securities Purchase Agreement up to the proceeds amount and to fair value as of each subsequent balance sheet date.

15

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

September 30, 2008 (Unaudited) and December 31, 2007

NOTE 4 - CONVERTIBLE NOTES PAYABLE (Continued)

Convertible notes payable are detailed as follows:

	September 30, 2008			December 31, 2007
	(Unaudited)
Convertible debentures to partnerships and funds; 5% interest payable annually; secured by the Company’s assets, matured August 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.	$	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 September 30, 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 September 30, 2008 and December 31, 2007.		80,000			80,000
Convertible debentures to an entity; 15% interest payable annually; secured by the Company’s assets, matured 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 $-0- and $54,731 at September 30, 2008 and December 31, 2007, respectively.		100,000			45,269
Convertible debentures to an entity; 15% interest payable annually; secured by the Company’s assets, matured 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 $-0- and $54,732 at September 30, 2008 and December 31, 2007, respectively.		100,000			45,268
Total convertible notes payable, net of discount of $-0- and $109,463 at September 30, 2008 and December 31, 2007, respectively.		2,217,400			2,107,937
Less: current portion		(2,217,400	)		(2,107,937	)
Long-term convertible notes payable	$	-		$	-

Future minimum principal payments on the convertible notes payable are as follows:

For the Years Ending September 30,
2009	$	2,217,400
Thereafter		-
Total	$	2,217,400

16

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

September 30, 2008 (Unaudited) and December 31, 2007

NOTE 5 - NOTES PAYABLE

Notes payable are detailed as follows:

	September			September
	2008			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.		109,427			-
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.		109,427			-
Note payable to an individual; total interest of $88,000 (50,000 pounds) due; principal and interest due upon receipt of first $355,000 of product sales from British publisher, unsecured. Remaining balance due of $110,128 was forgiven during 2nd quarter 2008.		-			150,128
Total notes payable		412,947			344,221
Less: current portion		(412,947	)		(344,221	)
Long-term notes payable	$	-		$	-

Future minimum principal payments on the convertible notes payable are as follows:

2009	$	412,947
Thereafter		-
Total	$	412,947

17

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

September 30, 2008 (Unaudited) and December 31, 2007

NOTE 6 - RELATED PARTY LOANS

The Company received two loans during the quarter ended September 30, 2008 from officers of the Company. One loan is for $50,000 and the other is for $30,000. Each loan is payable on demand and requires repayment of $5,000 interest for each loan in addition to the principal balance.

NOTE 7 - CAPITALIZED DEVELOPMENT COSTS AND LICENSES

Capitalized development costs and licenses at September 30, 2008 consisted of the following (only including non-fully amortized costs):

	Development			License			Combined
	Costs			Costs			Totals
Capitalized development costs and licenses	$	1,112,635		$	3,554,158		$	4,666,793
Less: impairment		(129,930	)		(156,500	)		(286,430	)
Less: accumulated amortization		-			(855,142	)		(855,142	)
Net balance	$	982,705		$	2,542,516		$	3,525,221

Amortization expense was $1,445,490 and $1,284,473 for the nine months ended September 30, 2008 and 2007, respectively.

The Company’s total impairment losses of $286,430 on the capitalized costs were determined as a result of the projects either being cancelled or terminated.

NOTE 8 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

The accompanying consolidated balance sheet as of December 31, 2007 and the consolidated statements of operations and cash flows for the periods ended September 30, 2007 have been restated to correct the following errors in its previously issued financial statements:

·      The Company had issued convertible debt with embedded derivatives including certain conversion features, variable interest rate features, call and default provisions.  The accounting treatment of these derivative financial instruments requires that the Company record the derivatives and related warrants at their fair values as of inception date of the Note and at fair value as of each subsequent balance sheet date.  In addition, under the provisions of EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," as a result of entering into the Notes, the Company are required to classify all other non-employee stock options and warrants as derivative liabilities and mark them to market at each reporting date.  In our initial financial statements we erred in following the guidance of SFAS 133.

18

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

September 30, 2008 (Unaudited) and December 31, 2007

NOTE 8 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (Continued)

·      In conjunction with raising capital through the issuance of Convertible Notes, the Company has issued registration rights for the underlying shares under certain debentures and related warrants. This agreement   includes a liquidated damages provision that if the Company did not met the “Required Filing Date” or the “Initial Required Effectiveness Date” as defined therein.   The Company has not met the “Required Filing Date” nor is the “Initial Required Effectiveness Date” as of December 31, 2007 and as such, under the guidance of FSB ETIF 00-19-2, “Accounting for Registration Payment Agreements”, required to accrue an estimate of liquidated damages.

·      The Company had previously recorded monies received from a joint venture as minority interest. Upon re-review of the agreement, it was noted that the amounts received as part of the joint venture were to reimburse the Company for costs incurred on developing the related video games. As such, the Company is restating the amounts received as a reduction of the capitalized costs related to the joint venture and not as minority interest (reclassification). This has no effect to the statements of operations.

The impact on these restatement adjustments is to increase reported net loss by $3,691,022 from a net loss of $130,592 to a net loss of $3,821,614 for the nine months ended September 30, 2007 and decrease reported net income by $6,507,456 from net income of $134,089 to a net loss of $6,373,367 for the three months ended September 30, 2007.  There was no effect on the total cash flows.

The following are reconciliations of the Company’s Consolidated Balance Sheet as of December 31, 2007 and Consolidated Statements of Operations and Consolidated Statement of Cash Flows for the periods ended September 30, 2007.

1.      Estimated accrual for liquidated damages under a registration rights agreement issued in connection with Convertible debt.

2.      Correction in the recording of the fair value of embedded derivatives and warrant liability as of December 31, 2007.

3.      Correction to the carrying value of the convertible debt created by errors in the amortization of the debt discount.

4.      The Company initially recorded the debt discount of the convertible debt at the date of issuance with an offset to equity (additional paid in capital) as a beneficial conversion feature and warrants as an equity instrument.  Under SFAS 133, the appropriate offset should have been to derivative and warrant liability accounts.  This entry re-classes previous year’s errors and charges to Accumulated Deficit.

5.      Income statement. Corrects the amortization of the debt discounts associated with the convertible debt

6.      Income statement. Corrects the mark to market change in the fair value of the embedded derivatives and warrant liability.

7.      Reclassification. Correction in recording proceeds from a joint venture agreement as a reimbursement for capitalized development costs (reduction of costs) rather than as originally recorded as minority interest.

19

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

September 30, 2008 (Unaudited) and December 31, 2007

NOTE 8 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The comparisons between the initial and restated financial statements are as follows:

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Balance Sheet

As of December 31, 2007

	As Reported			Ref		Adjustments			As Restated
CURRENT ASSETS
Cash and cash equivalents	$	539,990				$	-		$	539,990
Accounts receivable, net		110,195					-			110,195
Prepaid manufacturing		277,200					-			277,200
Other prepaid expenses		-					-			-
Total Current Assets		927,385					-			927,385
PROPERTY AND EQUIPMENT, NET		4,449					-			4,449
OTHER ASSETS
Capitalized development costs and licenses, net		1,901,330			7		(279,400	)		1,621,930
Deposits		6,906					-			6,906
Other receivable		132,500					-			132,500
Total Other Assets		2,040,736					(279,400	)		1,761,336
TOTAL ASSETS		2,972,570					(279,400	)		2,693,170
CURRENT LIABILITIES
Accounts payable		707,437					-			707,437
Accrued expenses		332,049			1		1,821,620			2,153,669
Payroll taxes payable		782,554					-			782,554
Deferred compensation		533,010					-			533,010
Advance from customer		-					-			-
Deferred revenue		1,326,653					-			1,326,653
Notes payable, current portion		344,221					-			344,221
Derivative liability		3,397,012			2		185,489			3,582,501
Convertible notes payable, net of discounts		2,143,077			3		(35,140	)		2,107,937
Total Current Liabilities		9,566,013					1,971,969			11,537,982
Total Liabilities		9,566,013					1,971,969			11,537,982
MINORITY INTEREST		279,400			7		(279,400	)		-
STOCKHOLDERS’ DEFICIT
Common stock		51,190					-			51,190
Additional paid in capital		4,973,450			4		(2,183,056	)		2,790,394
Accumulated deficit		(11,897,483	)				211,087			(11,686,396	)
Total Stockholders’ Deficit		(6,872,843	)				(1,971,969	)		(8,844,812	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	2,972,570				$	(279,400	)	$	2,693,170

20

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

September 30, 2008 (Unaudited) and December 31, 2007

NOTE 8 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statement of Operations

For the Nine Months Ended September 30, 2007

	As Reported			Ref		Adjustments			As Restated
NET SALES	$	2,519,330				$	-		$	2,519,330
COST OF SALES		1,284,473					-			1,284,473
GROSS PROFIT		1,234,857					-			1,234,857
OPERATING EXPENSES
Professional fees		254,365					-			254,365
Wages and salaries		287,110					-			287,110
Selling, general and administrative		556,882					-			556,882
Total Operating Expenses		1,098,357					-			1,098,357
NET INCOME (LOSS) FROM OPERATIONS		136,500					-			136,500
OTHER INCOME (EXPENSE)
Interest expense		(106,489	)				-			(106,489	)
Net financing income (expense)		(160,603	)		5		(8,300	)		(168,903	)
Gain (loss) on valuation of derivative liability		-			6		(3,682,722	)		(3,682,722	)
Total Other Income (Expense)		(267,092	)				(3,691,022	)		(3,958,114	)
NET INCOME (LOSS) BEFORE INCOME TAXES		(130,592	)				(3,691,022	)		(3,821,614	)
PROVISION FOR INCOME TAXES		-					-			-
NET INCOME (LOSS)	$	(130,592	)			$	(3,691,022	)	$	(3,821,614	)
BASIC INCOME (LOSS) PER SHARE	$	(0.00	)			$	(0.07	)	$	(0.07	)
DILUTED INCOME (LOSS) PER SHARE	$	(0.00	)			$	(0.07	)	$	(0.07	)

21

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

September 30, 2008 (Unaudited) and December 31, 2007

NOTE 8 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statement of Operations

For the Three Months Ended September 30, 2007

	As Reported			Ref		Adjustments			As Restated
NET SALES	$	1,700,000				$	-		$	1,700,000
COST OF SALES		907,643					-			907,643
GROSS PROFIT		792,357					-			792,357
OPERATING EXPENSES
Professional fees		173,115					-			173,115
Wages and salaries		114,630					-			114,630
Selling, general and administrative		282,652					-			282,652
Total Operating Expenses		570,397					-			570,397
NET INCOME (LOSS) FROM OPERATIONS		221,960					-			221,960
OTHER INCOME (EXPENSE)
Interest expense		(40,893	)				-			(40,893	)
Net financing income (expense)		(46,978	)		5		(17,145	)		(64,123	)
Gain (loss) on valuation of derivative liability		-			6		(6,490,311	)		(6,490,311	)
Total Other Income (Expense)		(87,871	)				(6,507,456	)		(6,595,327	)
NET INCOME (LOSS) BEFORE INCOME TAXES		134,089					(6,507,456	)		(6,373,367	)
PROVISION FOR INCOME TAXES		-					-			-
NET INCOME (LOSS)	$	134,089				$	(6,507,456	)	$	(6,373,367	)
BASIC INCOME (LOSS) PER SHARE	$	0.00				$	(0.12	)	$	(0.12	)
DILUTED INCOME (LOSS) PER SHARE	$	0.00				$	(0.12	)	$	(0.12	)

22

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

September 30, 2008 (Unaudited) and December 31, 2007

NOTE 8 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statement of Cash Flows

For the Nine Months Ended September 30, 2007

	As Reported			Ref		Adjustments			As Restated
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(130,592	)			$	(3,691,022	)	$	(3,821,614	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Minority interest		29,400			7		(29,400	)		-
Depreciation and amortization		4,349					-			4,349
Amortization of discount on convertible notes		160,603			5		8,300			168,903
Net change in derivative liability		-			6		3,682,722			3,682,722
Change in operating assets and liabilities:
Accounts receivable and other receivable		(402,993	)				-			(402,993	)
Prepaids		(2,808,608	)				-			(2,808,608	)
Accounts payable and accrued expenses		118,007					-			118,007
Deferred compensation		(12,317	)				-			(12,317	)
Net Cash Provided by (Used in) Operating Activities		(3,042,151	)				(29,400	)		(3,071,551	)
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for development costs and licenses		(974,322	)		7		29,400			(944,922	)
Purchase of property and equipment		-					-			-
Net Cash Used in Investing Activities		(974,322	)				29,400			(944,922	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from advances		4,081,492					-			4,081,492
Proceeds from convertible notes payable		280,000					-			280,000
Payments on notes payable		(2,500	)				-			(2,500	)
Net Cash Provided by Financing Activities		4,358,992					-			4,358,992
INCREASE IN CASH		342,519					-			342,519
CASH, BEGINNING OF YEAR		24,976					-			24,976
CASH, END OF YEAR	$	367,495				$	-		$	367,495

23

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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.

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 September 30, 2008 Compared to Three Months Ended September 30, 2007

Revenues for the three months ended September 30, 2008 were $3,024,146, compared to $1,700,000 for the three months ended September 30, 2007. This represents an increase of $1,324,146. This increase was primarily attributable to the releases of Summer Athletics and Crashtime over flat fee releases for the same period in 2007.

There was a -23.8% change in gross profit for the three months ended September 30, 2008 which was $604,040, compared to $792,357 for the three months ended September 30, 2007. This decrease in gross profit was primarily the result of our releases of Summer Athletics and Crashtime being conventional type releases where production is part of the cost of goods, whereas our flat fee releases over the same period in 2007 had no productions costs associated with revenue.

For the three months ended September 30, 2008, operating expenses totaled $476,756 as compared to $570,397 for the three months ended September 30, 2007. This was a decrease of $93,641 or 16.4%. The decrease in operating expenses resulted from an decrease in marketing expenses of $106,937 or 59.0% from $181,166 for the three months ended September 30, 2007 to $74,229 for the three months ended September 30, 2008, a releasing two titles in the quarter as compared to 5 over the same period one year ago. In addition outside service decreased $31,117 or 100% from $31,117 for the three months ended September 30, 2007 to $0 for the three months ended September 30, 2008 which was a result of the additional employees hired earlier in the year being able to limit the need for temporary assistance during the quarter. Professional fees decreased from $173,115 for the three months ended September 30, 2007 to $78,740 for the three months ended September 30, 2008, a decrease of 54.5% or $94,375 due to our agreement with consultants to reduce their fees during the year from a percentage base to a fixed fee. However, Auto Expense increased $18,368 or 616.0% from $2,982 for the three months ended September 30, 2007 to $21,350 for the three months ended September 30, 2008 a result of the increased travel activity, and our agreement with consultants to reimburse auto expenses. Entertainment also increased during the quarter from $9,329 for the three months ended September 30, 2007 to $27,096 for the three months ended September 30, 2008 which was an 190.5% increase or $17,768 increase over the same period last year due to our efforts to secure alternate distribution for upcoming titles as well as entertaining several new developers and publishers.  Payroll increased 35.6% or $40,787 from $114,630 for the three months ended September 30, 2007 to $155,417 due to additional employees being added to payroll.  Office Rent also increased $21,735 or 159.4% from $13,632 for the three months ended September 30, 2007 to $35,367 for the three months ended September 30, 2008 to to our expansion of office space to accommodate additional employees and consultants necessary to assist the company in its growth.  Finally, Penalty increased $33,000 or 100% from $0 over the three months ended September 30, 2007 due to fees associated with our tax debt to the Internal Revenue Service.

Interest expense was $62,313 and $40,893 for the three months ended September 30, 2008 and 2007, respectively. This was an increase of $21,420, or 52.4%^%.

We received $4,748,538 in other income for the three months ended September 30, 2008 compared to Other Expense of $6,595,327 for the three months ended September 30, 2007. The difference of $11,343,865 which was a result of adjustments on the valuation of our derivative liablities.

Our net income was $4,875,822 for the three months ended September 30, 2008 compared to a net loss of $6,373,367 for the three months ended September, 2007. The increase in net income for the three months ended September 30, 2008 was due to the adjustments made to the valuation of derivative liability over the three months ended September 30, 2008.

24

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Revenues for the nine months ended September 30, 2008 were $7,784,004 compared to $2,519,330 for the nine months ended September 30, 2007. This represents an increase of $5,264,674.

There was a 69.8]% change in gross profit for the nine months ended September 30, 2008 which was $2,096,847, compared to $1,234,857 for the nine months ended September 30, 2007. This increase resulted primarily from the release of conventional titles over flat fee titles and the continued success of Winter Sports: The Ultimate Challenge.

For the nine months ended September 30, 2008, operating expenses totaled $1,722,066 as compared to $1,098,357 for the nine months ended September 30, 2007. This was an increase of $623,709 or 56.8%. The increase in operating expenses resulted from an increase in marketing expenses of $144,361 or 51.0% from $282,986 for the nine months ended September 30, 2007 to $427,348 for the nine months ended September 30, 2008, a result of our IR campaign and efforts to bring more information to current and potential shareholders. In addition, entertainment expenses increased $44,057 or 140.9% from $31,278 for the nine months ended September 30, 2007 to $75,335 for the nine months ended September 30, 2008. Automobile Expense increased from $9,085 for the nine months ended September 30, 2007 to $42,638 for the nine months ended September 30, 2008 due to our agreement to reimburse consultant auto expenses and an increased amount of travel. Payroll Expenses increased from $287,110 for the nine months ended September 30, 2007 to $462,139 for the nine months ended September 30, 2008, an increase of 61.0% or $175,029 due to additional employees hired to help offset the need for temporary services. Penalty increased $98,972 or 100% from $0 for the nine months ended September 30, 2007 a result of the increased fees incurred in relation our to our tax debts. Professional fees increased $99,747 or 39.2% from $254,365 for the nine months ended September 30, 2007 to $354,112 for the nine month due to the fees paid to Consultants and attorneys.  Finally Travel increased $41,146 or 129.8% from 31,704 for the nine months ended September 30, 2007 to $72,850 for the nine months ended September 30, 2008 due to Travel fees incurred by consultants as well as our efforts to expand or distribution network and our attempt to acquire future titles from developers and publishers.  These increases were offset by decreases in Outside Service of $66,687 or 93.1% from $71,667 for the nine months ended September 30, 2007 to $4,980 for the nine months ended September30, 2008 due to the hiring of additional employees to reduce the need for temporary assistance.

Interest expense was $159,818 and $106,489 for the nine months ended September 30, 2008 and 2007, respectively. This was an increase of $53,329 or 50.1%.

We had  $138,073 net gain on the valuation of derivative liabilities for the nine months ended September 30, 2008 compared to a net loss of $3,682,722 for the nine months ended September 30, 2007.

Our net income was $353,701 for the nine months ended September 30, 2008 compared to a net loss of $3,821,614 for the nine months ended September 30, 2007. The increase in net income for the nine months ended September 30, 2008 was due to the gain on valuation of our derivative liabilities of $138,073 as compared to a loss on valuation of our derivative liabilities of $3,682,722 for the nine months ended September 30, 20076.

Liquidity and Capital Resources

As of September 30, 2008 our cash balance was $211,277 compared to $539,990 at December 31, 2007. Total current assets at September 30, 2008 were $370,277 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 2008 will be sufficient to cover our working capital requirements for the remainder of fiscal 2008. The Company reached this conclusion by recognizing that a major portion ($2,217,400) of our debt is attributed to convertible notes payable, which we expect to be converted into shares, Deferred Revenue ($2,373,441) will be reclassified as revenue upon the completion of the current projects in development, and Derivative Liability ($3,444,428) would be the amount of cash required should our investors call in our outstanding loans. Although we do not believe that our investors will call in our outstanding loans anytime in the near future. We can provide no assurance that this will not occur. We have informally negotiated with the IRS to pay down our Payroll Taxes liability in the amount of $10,000 per month. The Company is negotiating with several other parties to waive portions of our debt, or to pay the debt with the issuance of company stock including Deferred Compensation ($394,544). In addition, based on our schedule of development for the remainder of the year, we anticipate an increase in sales, profitability and cash receipts in 2008 which will allow the Company to continue to pay down our working capital requirements and help avoid additional need for working capital.

25

For the nine months ended September 30, 2008, net cash provided in operating activities was $2,024,956 as compared to $3,071,551 used by operating activities for the nine months ended September 30, 2007.  The increase in cash provided in operating activities can be attributed to an increase in net profit of $4,175,315 from a loss of $3,821,614 for the nine months ended September 30, 2007 to net income of $353,701 for the nine months ended September 30, 2008.  In addition, we had a net gain in the valuation of our derivative liability of $138,073 as compared to a net loss in the valuation of our derivative liability of $3,682,722.  Finally we a change in Prepaids of $ 3,085,808 from $2,808,608 reduction for the nine months ended September 30, 2007 as compared to an increase of $277,200 for the nine months ended September 30, 2008.

For the nine months ended September 30, 2008, net cash used in investing activities was $2,598,669, compared to net cash used in investing activities of $944,922 for the nine months ended September 30, 2007. The increase in cash used in investing activities of $1,653,747 for the nine months ending September 30, 2008, was due to the increase in payments for development costs and licenses.

For the nine months ended September 30, 2008, net cash provided by Financing Activities was $245,000 compared to $4,358,992 for the nine months ended September 30, 2007.  This decrease in cash provided by financing activities resulted primarily from less proceeds from advances.

Our accounts receivable at September 30, 2008 was $159,000, compared to $110,195 at December 31, 2007. The increase in accounts receivable is primarily attributable to receiving larger orders at the end of the quarter prior as compared to December 31, 2007.

As of September 30, 2008 we had a working capital deficiency of $12,167,676. A major portion 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.

At September 30, 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.

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 with exercise prices of $0.05 and 35,000,000 Class B Warrants with exercise prices of $0.20. 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.

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Contractual Obligations

 The following table summarizes our contractual obligations as of September 30, 2008:

	Payments due by period
			Less than			More
Contractual Obligations	Total		One Year		Years 1-2	than 2 years
Notes Payable	$	2,630,347	$	2,630,347
Operating Lease Obligations	$	99,929	$	99,929	$
License Fee Obligations	$	60,000	$	60,000
Total	$	2,790,276	$	2,790,276	$

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.

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

2007	$	28,331
2008	$	69,598

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.

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.

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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.

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.

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Allowance For Doubtful Accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments where applicable. The majority of the Company’s sales are done through exclusive distribution which requires advance payments from the distributor.  If payments are not received, product will not be published. This eliminates the need for allowance for doubtful accounts for the majority of the Company’s receivables. However the Company regularly reviews the adequacy of its accounts receivable allowance for all sales not made under the explained scenario, and after considering the size of the accounts receivable balance, each customer's expected ability to pay and our collection history with each customer an allowance is established if deemed necessary by the Company’s findings. The Company reviews 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, the Company maintains a general reserve for certain invoices by applying a percentage based on the age category. The Company also monitors its accounts receivable for concentration to any one customer, industry or geographic region. The allowance for doubtful accounts represents the Company’s best estimate, but changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. The balance of the allowance for doubtful accounts as of September 30, 2008 and December 31, 2007 was $0 and $62,500, respectively.

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.

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 $3,525,221 at September 30, 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

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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.

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 period ended September 30, 2008.  Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s internal controls of financial reporting and its disclosure controls and procedures are not 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. The deficiencies in our disclosure controls and procedures are related to the limited financial backgrounds of our management and a lack of segregation of duties due to the size of our accounting department. When our financial position improves, we intend to hire additional personnel to remedy such deficiencies.

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 September 30, 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 September 30, 2008 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

. PART II

OTHER INFORMATION

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

None.

ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None.

ITEM 5 - OTHER INFORMATION

None.

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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: December 22, 2008

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
	BY:	/S/ SIRUS AHMADI
		SIRUS AHMADI
		CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER), SECRETARY AND DIRECTOR

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