Conspiracy Entertainment (CPYE) 10-Q/A 2008 Q2 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

(Mark One)

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

ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 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 ¨ No ¨

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 August 15, 2008, there were 51,189,065 outstanding shares of the Registrant's Common Stock, $0.001 par value.

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

JUNE 30, 2008 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Item 3. Quantitative and Qualitative Disclosure About Market Risk	8
Item 4T. Controls and Procedures	8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	10
Item 1A. Risk Factors	10
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	10
Item 3. Defaults Upon Senior Securities	10
Item 4. Submission of Matters to a Vote of Security Holders	10
Item 5. Other Information	10
Item 6. Exhibits	10
SIGNATURES	11

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-5
Consolidated Statements of Cash Flows	F-7
Notes to the Condensed Consolidated Financial Statements	F-9

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Balance Sheets

ASSETS

	June 30,		December 31,
	2008		2007
	(as restated)		(as restated)
	(unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	523,501	$	539,990
Accounts receivable, net of allowance for doubtful accounts of $-0- and $62,500 in 2008 and 2007, respectively		1,441,790		110,195
Prepaid manufacturing		150,000		277,200
Total Current Assets		2,115,291		927,385
PROPERTY AND EQUIPMENT, NET		8,174		4,449
OTHER ASSETS
Capitalized development costs and licenses, net		2,544,043		1,621,930
Deposits		6,906		6,906
Other receivable		132,500		132,500
Total Other Assets		2,683,449		1,761,336
TOTAL ASSETS	$	4,806,914	$	2,693,170

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

F-3

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Balance Sheets (Continued)

LIABILITIES AND STOCKHOLDERS' DEFICIT

	June 30,			December 31,
	2008			2007
	(as restated)			(as restated)
	(unaudited)
CURRENT LIABILITIES
Accounts payable	$	621,002		$	707,437
Accrued expenses		2,309,018			2,153,669
Payroll taxes payable		737,624			782,554
Deferred compensation		409,253			533,010
Deferred revenue		3,217,049			1,326,653
Notes payable, net of discount of $14,650 in 2008		407,221			344,221
Derivative liability		8,265,897			3,582,501
Convertible notes payable, net of discount of $16,368 and $109,463 in 2008 and 2007, respectively		2,201,032			2,107,937
Total Current Liabilities		18,168,096			11,537,982
Total Liabilities		18,168,096			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		(16,202,766	)		(11,686,396	)
Total Stockholders' Deficit		(13,361,182	)		(8,844,812	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	4,806,914		$	2,693,170

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

F-4

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statements of Operations

(Unaudited)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2008			2007			2008			2007
	(as restated)			(as restated)			(as restated)			(as restated)
NET SALES	$	1,518,992		$	819,330		$	4,759,858		$	819,330
COST OF SALES		817,039			376,830			3,267,051			376,830
GROSS PROFIT		701,953			442,500			1,492,807			442,500
OPERATING EXPENSES
Professional fees		97,961			68,750			275,373			81,250
Wages and salaries		154,870			86,130			306,722			172,480
Selling, general and administrative		309,663			200,141			663,215			274,231
Total Operating Expenses		562,494			355,021			1,245,310			527,961
NET INCOME (LOSS) FROM OPERATIONS		139,459			87,479			247,497			(85,461	)
OTHER INCOME (EXPENSE)
Interest expense		(52,281	)		(35,138	)		(97,505	)		(65,596	)
Net financing expense		(46,547	)		(58,710	)		(93,094	)		(104,780	)
Gain (loss) on valuation of derivative liability		7,720,019			2,179,854			(4,683,396	)		2,807,590
Gain on debt forgiveness		110,128			-			110,128			-
Total Other Income (Expense)		7,731,319			2,086,006			(4,763,867	)		2,637,214
NET INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST		7,870,778			2,173,485			(4,516,370	)		2,551,753
PROVISION FOR INCOME TAXES		-			-			-			-
NET INCOME (LOSS) BEFORE MINORITY INTEREST		7,870,778			2,173,485			(4,516,370	)		2,551,753
MINORITY INTEREST		-			-			-			-
NET INCOME (LOSS)	$	7,870,778		$	2,173,485		$	(4,516,370	)	$	2,551,753

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

F-5

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statements of Operations (Continued)

(Unaudited)

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2008		2007		2008			2007
	(as restated)		(as restated)		(as restated)			(as restated)
BASIC INCOME (LOSS) PER SHARE	$	0.15	$	0.04	$	(0.09	)	$	0.05
DILUTED INCOME (LOSS) PER SHARE	$	0.00	$	0.00	$	0.00		$	(0.00	)
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		197,059,065		188,427,160		197,059,065			51,189,065

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

F-6

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statements of Cash Flows

(Unaudited)

	For the Six Months
	Ended June 30,
	2008			2007
	(as restated)			(as restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(4,516,370	)	$	2,551,753
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		967			3,041
Amortization of discount on convertible notes payable		93,095			104,780
Amortization of capitalized development costs and licenses		634,741			-
Amortization of discount on on notes payable		8,128			-
Gain on debt forgiveness		(110,128	)		-
Net change in derivative liability		4,683,396			(2,807,590	)
Change in operating assets and liabilities:
Accounts receivable and other receivable		(1,331,595	)		55,232
Prepaid expenses		127,200			4,411
Accounts payable and accrued expenses		23,984			169,351
Deferred compensation		(123,757	)		(300	)
Deferred revenue		1,890,396			-
Net Cash Provided by Operating Activities		1,380,057			80,678
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for development costs and licenses		(1,556,854	)		(746,217	)
Purchase of property and equipment		(4,692	)		-
Net Cash Used in Investing Activities		(1,561,546	)		(746,217	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from advances		-			831,250
Proceeds from convertible notes payable		-			80,000
Proceeds from notes payable		205,000			-
Payments on notes payable		(40,000	)		(2,500	)
Net Cash Provided by Financing Activities	$	165,000		$	908,750

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

F-7

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statements of Cash Flows (Continued)

(Unaudited)

	For the Six Months
	Ended June 30,
	2008			2007
	(as restated)			(as restated)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	(16,489	)	$	243,211
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		539,990			24,976
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	523,501		$	268,187
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.

F-8

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

June 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 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.

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.

F-9

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

June 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						For the Six Months
	Ended June 30,						Ended June 30,
	2008			2007			2008			2007
Earnings (loss) per share:
Income (loss) (numerator) - basic	$	7,870,778		$	2,173,485		$	(4,516,370	)	$	2,551,753
Effect of dilutive securities, convertible  notes payable		(7,673,472	)		(2,121,144	)		4,776,490			(2,702,810	)
Income (loss) (numerator) - diluted	$	197,306		$	52,341		$	260,120		$	(151,057	)
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			137,238,095			110,870,000			-
Warrants		35,000,000			-			35,000,000			-
Shares (denominator) - diluted		197,059,065			188,427,160			197,059,065			51,189,065
Per share amount - basic	$	0.15		$	0.04		$	(0.09	)	$	0.05
Per share amount - diluted	$	0.00		$	0.00		$	0.00		$	(0.00	)

For the periods ended June 30, 2008, the Company had warrants to purchase 35,000,000 common shares exercisable at $0.20 per share. Since the exercise price was higher than the trading price at June 30, 2008 (the trading price was $0.07 per share), they are not included in the diluted earnings calculation.

For the period ended June 30, 2007, the Company had warrants to purchase 70,000,000 common shares exercisable at $0.20 and $0.05 per share. Since the exercise prices were higher than the trading price at June 30, 2007 (the trading price was $0.035 per share), they are not included in the diluted earnings calculation.

For the period ended June 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 137,238,098 common shares that were not included in the computation of diluted earnings per share as their effect was anti-dilutive.

F-10

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

  June 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 June 30, 2008, the Company had an accumulated deficit of approximately $16,200,000 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 six months ended June 30, 2008, the Company amortized the debt discount and charged to interest expense $93,094.

F-11

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

  June 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 six months ended June 30, 2008 and 2007, the Company amortized the debt discount and charged to interest expense $-0- and $59,355, 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 six months ended June 30, 2008 and 2007, the Company amortized the debt discount and charged to interest expense $-0- and $45,425, respectively.

F-12

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

 June 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.

F-13

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

June 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.

F-14

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

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

NOTE 4 - CONVERTIBLE NOTES PAYABLE (Continued)

Convertible notes payable are detailed as follows:

	June 30,			December 31,
	2008			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; net of discount of $-0- at June 30, 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 June 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 June 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, 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 $8,184 and $54,731 at June 30, 2008 and December 31, 2007, respectively.		91,816			45,269
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 $8,184 and $54,732 at June 30, 2008 and December 31, 2007, respectively.		91,816			45,268
Total convertible notes payable, net of discount of $16,368 and $109,463 at June 30, 2008 and December 31, 2007, respectively.		2,201,032			2,107,937
Less: current portion		(2,201,032	)		(2,107,937	)
Long-term convertible notes payable	$	-		$	-

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

2009	$	2,201,032
Thereafter		-
Total	$	2,201,032

F-15

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

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

NOTE 5 - NOTES PAYABLE

Notes payable are detailed as follows:

	June 30,			December 31,
	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.		106,564			-
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.		106,564			-
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		407,221			344,221
Less: current portion		(407,221	)		(344,221	)
Long-term notes payable	$	-		$	-

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

2009	$	407,221
Thereafter		-
Total	$	407,221

F-16

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

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

NOTE 6 - CAPITALIZED DEVELOPMENT COSTS AND LICENSES

Capitalized development costs and licenses at March 31, 2008 consisted of the following (only including non-fully amortized costs):

	Development			License			Combined
	Costs			Costs			Totals
Capitalized development costs and licenses	$	982,635		$	2,651,579		$	3,634,214
Less: impairment		(129,930	)		(156,500	)		(286,430	)
Less: accumulated amortization		-			(803,741	)		(803,741	)
Net balance	$	852,705		$	1,691,338		$	2,544,043

Amortization expense was $634,741 and $-0- for the six months ended June 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 7 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

The accompanying consolidated balance sheets as of June 30, 2008 and December 31, 2007 and the consolidated statements of operations and cash flows for the periods ended June 30, 2008 and 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.

F-17

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

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

NOTE 7 - 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 as follows: (1) increase reported net income by $4,858,461 from net income of $3,012,317 to net income of $7,870,778 for the three months ended June 30, 2008, (2) increase reported net loss by $43,732 from a net loss of $4,472,638 to a net loss of $4,516,370 for the six months ended June 30, 2008, (3) decrease reported net loss by $2,591,508 from a net loss of $418,023 to net income of $2,173,485 for the three months ended June 30, 2007, and (4) increase reported net income by $2,445,569 from net income of $106,184 to net income of $2,551,753. There was no effect on the total cash flows.

The following are reconciliations of the Company’s Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007 and Consolidated Statements of Operations and Consolidated Statement of Cash Flows for the three and six months ended June 30, 2008 and 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 June 30, 2008 and 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.

F-18

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

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

NOTE 7 - 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 June 30, 2008

	As Reported			Ref		Adjustments			As Restated
CURRENT ASSETS
Cash and cash equivalents	$	523,501				$	-		$	523,501
Accounts receivable, net		1,441,790					-			1,441,790
Prepaid manufacturing		150,000					-			150,000
Total Current Assets		2,115,291					-			2,115,291
PROPERTY AND EQUIPMENT, NET		8,174					-			8,174
OTHER ASSETS
Capitalized development costs and licenses, net		2,823,443			7		(279,400	)		2,544,043
Deposits		6,906					-			6,906
Other receivable		132,500					-			132,500
Total Other Assets		2,962,849					(279,400	)		2,683,449
TOTAL ASSETS		5,086,314					(279,400	)		4,806,914
CURRENT LIABILITIES
Accounts payable		621,004					-			621,004
Accrued expenses		487,398			1		1,821,620			2,309,018
Payroll taxes payable		737,624					-			737,624
Deferred compensation		409,253					-			409,253
Advance from customer		-					-			-
Deferred revenue		3,217,049					-			3,217,049
Notes payable, net of discount		407,221					-			407,221
Derivative liability		8,066,064			2		199,833			8,265,897
Convertible notes payable, net of discount		2,206,782			3		(5,750	)		2,201,032
Total Current Liabilities		16,152,395					2,015,703			18,168,098
Total Liabilities		16,152,395					2,015,703			18,168,098
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		(16,370,121	)				167,353			(16,202,768	)
Total Stockholders' Deficit		(11,345,481	)				(2,015,703	)		(13,361,184	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	5,086,314				$	(279,400	)	$	4,806,914

F-19

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

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

NOTE 7 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

F-20

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

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

NOTE 7 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statement of Operations

For the Three Months Ended June 30, 2008

	As Reported			Ref		Adjustments			As Restated
NET SALES	$	1,518,992				$	-		$	1,518,992
COST OF SALES		817,039					-			817,039
GROSS PROFIT		701,953					-			701,953
OPERATING EXPENSES
Professional fees		97,961					-			97,961
Wages and salaries		154,870					-			154,870
Selling, general and administrative		309,663					-			309,663
Total Operating Expenses		562,494					-			562,494
NET INCOME (LOSS) FROM OPERATIONS		139,459					-			139,459
OTHER INCOME (EXPENSE)
Interest expense		(52,281	)				-			(52,281	)
Net financing income (expense)		(31,853	)		5		(14,694	)		(46,547	)
Gain (loss) on valuation of derivative liability		2,846,864			6		4,873,155			7,720,019
Gain on forgiveness of debt		110,128								110,128
Total Other Income (Expense)		2,872,858					4,858,461			7,731,319
NET INCOME (LOSS) BEFORE INCOME TAXES		3,012,317					4,858,461			7,870,778
PROVISION FOR INCOME TAXES		-					-			-
NET INCOME (LOSS)	$	3,012,317				$	4,858,461		$	7,870,778
BASIC INCOME (LOSS) PER SHARE	$	0.06				$	0.09		$	0.15
DILUTED INCOME (LOSS) PER SHARE	$	0.01				$	(0.01	)	$	0.00

F-21

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

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

NOTE 7 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statement of Operations

For the Three Months Ended June 30, 2007

	As Reported			Ref		Adjustments			As Restated
NET SALES	$	819,330				$	-		$	819,330
COST OF SALES		376,830					-			376,830
GROSS PROFIT		442,500					-			442,500
OPERATING EXPENSES
Professional fees		68,750					-			68,750
Wages and salaries		86,130					-			86,130
Selling, general and administrative		200,141					-			200,141
Total Operating Expenses		355,021					-			355,021
NET INCOME (LOSS) FROM OPERATIONS		87,479					-			87,479
OTHER INCOME (EXPENSE)
Interest expense		(35,138	)				-			(35,138	)
Net financing income (expense)		(44,399	)		5		(14,311	)		(58,710	)
Gain (loss) on valuation of derivative liability		(425,965	)		6		2,605,819			2,179,854
Total Other Income (Expense)		(505,502	)				2,591,508			2,086,006
NET INCOME (LOSS) BEFORE INCOME TAXES		(418,023	)				2,591,508			2,173,485
PROVISION FOR INCOME TAXES		-					-			-
NET INCOME (LOSS)	$	(418,023	)			$	2,591,508		$	2,173,485
BASIC INCOME (LOSS) PER SHARE	$	(0.01	)			$	0.05		$	0.04
DILUTED INCOME (LOSS) PER SHARE	$	(0.01	)			$	0.01		$	0.00

F-22

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

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

NOTE 7 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statement of Operations

For the Six Months Ended June 30, 2008

	As Reported			Ref		Adjustments			As Restated
NET SALES	$	4,759,858				$	-		$	4,759,858
COST OF SALES		3,267,051					-			3,267,051
GROSS PROFIT		1,492,807					-			1,492,807
OPERATING EXPENSES
Professional fees		275,373					-			275,373
Wages and salaries		306,722					-			306,722
Selling, general and administrative		663,215					-			663,215
Total Operating Expenses		1,245,310					-			1,245,310
NET INCOME (LOSS) FROM OPERATIONS		247,497					-			247,497
OTHER INCOME (EXPENSE)
Interest expense		(97,505	)				-			(97,505	)
Net financing income (expense)		(63,706	)		5		(29,388	)		(93,094	)
Gain (loss) on valuation of derivative liability		(4,669,052	)		6		(14,344	)		(4,683,396	)
Gain on forgiveness of debt		110,128								110,128
Total Other Income (Expense)		(4,720,135	)				(43,732	)		(4,763,867	)
NET INCOME (LOSS) BEFORE INCOME TAXES		(4,472,638	)				(43,732	)		(4,516,370	)
PROVISION FOR INCOME TAXES		-					-			-
NET INCOME (LOSS)	$	(4,472,638	)			$	(43,732	)	$	(4,516,370	)
BASIC INCOME (LOSS) PER SHARE	$	(0.09	)			$	0.00		$	(0.09	)
DILUTED INCOME (LOSS) PER SHARE	$	(0.09	)			$	0.09		$	0.00

F-23

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

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

NOTE 7 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statement of Operations

For the Six Months Ended June 30, 2007

	As Reported			Ref		Adjustments			As Restated
NET SALES	$	819,330				$	-		$	819,330
COST OF SALES		376,830					-			376,830
GROSS PROFIT		442,500					-			442,500
OPERATING EXPENSES
Professional fees		81,250					-			81,250
Wages and salaries		172,480					-			172,480
Selling, general and administrative		274,231					-			274,231
Total Operating Expenses		527,961					-			527,961
NET INCOME (LOSS) FROM OPERATIONS		(85,461	)				-			(85,461	)
OTHER INCOME (EXPENSE)
Interest expense		(65,596	)				-			(65,596	)
Net financing income (expense)		(113,625	)		5		8,845			(104,780	)
Gain (loss) on valuation of derivative liability		370,866			6		2,436,724			2,807,590
Total Other Income (Expense)		191,645					2,445,569			2,637,214
NET INCOME (LOSS) BEFORE INCOME TAXES		106,184					2,445,569			2,551,753
PROVISION FOR INCOME TAXES		-					-			-
NET INCOME (LOSS)	$	106,184				$	2,445,569		$	2,551,753
BASIC INCOME (LOSS) PER SHARE	$	0.00				$	0.05		$	0.05
DILUTED INCOME (LOSS) PER SHARE	$	0.00				$	(0.00	)	$	(0.00	)

F-24

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

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

NOTE 7 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statement of Cash Flows

For the Six Months Ended June 30, 2008

	As Reported			Ref		Adjustments			As Restated
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(4,472,638	)			$	(43,732	)	$	(4,516,370	)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization		967					-			967
Amortization of discount on convertible notes		63,705			5		29,388			93,093
Amortization of capitalized development costs		634,741					-			634,741
Amortization of discount on on notes payable		8,128					-			8,128
Gain on debt forgiveness		(110,128	)				-			(110,128	)
Net change in derivative liability		4,669,052			6		14,344			4,683,396
Change in operating assets and liabilities:
Accounts receivable and other receivable		(1,331,595	)				-			(1,331,595	)
Prepaids		127,200					-			127,200
Accounts payable and accrued expenses		23,986					-			23,986
Deferred compensation		(123,757	)				-			(123,757	)
Deferred revenue		1,890,396					-			1,890,396
Net Cash Provided by Operating Activities		1,380,057					-			1,380,057
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for development costs and licenses		(1,556,854	)				-			(1,556,854	)
Purchase of property and equipment		(4,692	)				-			(4,692	)
Net Cash Used in Investing Activities		(1,561,546	)				-			(1,561,546	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable		205,000					-			205,000
Payments on notes payable		(40,000	)				-			(40,000	)
Net Cash Provided by Financing Activities		165,000					-			165,000
DECREASE IN CASH		(16,489	)				-			(16,489	)
CASH, BEGINNING OF YEAR		539,990					-			539,990
CASH, END OF YEAR	$	523,501				$	-		$	523,501

F-25

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

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

NOTE 7 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

Consolidated Statement of Cash Flows

For the Six Months Ended June 30, 2007

	As Reported			Ref		Adjustments			As Restated
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	106,184				$	2,445,569		$	2,551,753
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest		29,400			7		(29,400	)		-
Depreciation and amortization		3,041					-			3,041
Amortization of discount on convertible notes		113,625			5		(8,845	)		104,780
Net change in derivative liability		(370,866	)		6		(2,436,724	)		(2,807,590	)
Change in operating assets and liabilities:
Accounts receivable and other receivable		55,232					-			55,232
Prepaids		4,411					-			4,411
Accounts payable and accrued expenses		169,351					-			169,351
Deferred compensation		(300	)				-			(300	)
Net Cash Provided by Operating Activities		110,078					(29,400	)		80,678
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for development costs and licenses		(775,617	)		7		29,400			(746,217	)
Net Cash Used in Investing Activities		(775,617	)				29,400			(746,217	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from advances		831,250					-			831,250
Proceeds from convertible notes payable		80,000					-			80,000
Payments on notes payable		(2,500	)				-			(2,500	)
Net Cash Provided by Financing Activities		908,750					-			908,750
INCREASE IN CASH		243,211					-			243,211
CASH, BEGINNING OF YEAR		24,976					-			24,976
CASH, END OF YEAR	$	268,187				$	-		$	268,187

F-26

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.

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

Revenues for the three months ended June 30, 2008 were $1,518,992, compared to $819,330 for the three months ended June 30, 2007. This represents an increase of $699,662 or 85.4% from the previous year. The company had one flat fee release plus one new release in addition to large reorders of its Winter Sports (Wii) title for the quarter.

There was a 58.6%  or $ 259,452 increase in Gross profit for the three months ended June 30, 2008 which was $701,953, compared to $442,500 for the three months ended June 30, 2007. This is primarily the result of large reorders of Winter Sports (Wii).

For the three months ended June 30, 2008, operating expenses totaled $562,494 as compared to $355,021 for the three months ended June 30, 2007. This was an increase of $207,473 or 58.4%. The increase in operating expenses resulted from an increase in marketing expenses of $66,795 or 76.9% from $86,897 for the three months ended June 30, 2007 to $153,692 for the three months ended June 30, 2008, a result of the company increasing its Investor Relations efforts by $42,033 as well as attending an industry trade show, and brining on additional external help to help prepare for the upcoming 3rd quarter releases. In addition, wages and salries increased $68,740 or 79.8% from $86,130 for the three months ended June 30, 2007 to $154,870 for the three months ended June 30, 2008 due to the additon of 3 employees. However, outside service decreased from $29,350 for the three months ended June 30, 2007 to $0 for the three months ended June 30, 2008 due to the increase in employees which reduced the need for temporary staff. Professional fees increased from $68,750 for the three months ended June 30, 2007 to $97,961 for the three months ended June 30, 2008, an increase of 42.5% or $29,211 due to an increase in attorney fees incurred during the quarter. Penalty increased $33,000 for the three months ended June 30, 2008 from $0 for the three months ended June 30, 2007 due to penalties incurred involving the company’s debt to the Internal Revenue Service. Other than the decrease in outside service there were no significant decreases in expenses for the quarter despite our continued effort to reduce expenses.

Interest expense was $52,281 and $35,138 for the three months ended June 30, 2008 and 2007, respectively. This was an increase of $17,143, or 48.8%.

We received $110,128 in Other Income for the three months ended June 30, 2008 compared to $0 in Other Income for the three months ended June 30, 2007. The difference of $110,128 or 100% was a result of forgiven debt of a loan received from an individual.

We had $46,547 in Financing Expense for the three months ended June 30, 2008 compared to $58,710 of Financing Income for the three months ended June 30, 2007.

We had $7,720,019 Gain on Derivative Liability for the three months ended June 30, 2008 as compared to a Gain of $2,179,854 for the three months ended June 30, 2007.

Our net profit was $7,870,778 for the three months ended June 30, 2008 compared to a net gain of $2,173,485 for the three months ended June 30, 2007. The increase in profitability for the three months ended June 30, 2008 was due to Gain on Derivative Liability although Net Operating Income  of $139,459 for the three months ended June 30, 2008 exceeded that of $87,479 for the three months ended June 30, 2007.

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Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

Revenues for the six months ended June 30, 2008 were $4,759,858, compared to $819,330 for the six months ended June 30, 2007. This represents an increase of $3,940,528 from the previous year. This year the we have released one flat fee title, 5 new titles and had substantial reorders of Winter Sports (Wii).

There was a 237.4% change in Gross profit for the six months ended June 30, 2008 which was $1,492,806, compared to $442,500 for the six months ended June 30, 2007. This is the result of the significant sales for the period as compared to 2007.

For the six months ended June 30, 2008, operating expenses totaled $1,245,308 as compared to $527,961 for the six months ended June 30, 2007. This was an increase of $717,347 or 135.9%. The increase in operating expenses resulted from an increase in marketing expenses of $251,298 or 246.8% from $101,820 for the six months ended June 30, 2007 to $353,119 for the six months ended June 30, 2008, a result of the company receiving manufacturing approval for 5 titles during the six months ended June 30, 2008 and preparing 6 more titles which should receive approval in the upcoming quarter. In addition, wages and salaries increased $134,243 or 77.8% from $172,480 for the six months ended June 30, 2007 to $306,723 for the six months ended June 30, 2008 which was the result in the company adding 3 emplpoyees. However, Outside service decreased from $40,550 for the six months ended June 30, 2007 to $4,980 for the six months ended June 30, 2008 due to an increase in employees which reduced the need for temporary staff.  Professional fees increased from $81,250 for the six months ended June 30, 2007 to $275,372 for the six months ended June 30, 2008, an increase of 238.9% or $194,122 due to consultants paid to assist with securing the 2008 title lineup as well as representing the company in negotiations for our 2009 lineup.  In addition, Attorney and Accountant fees increased over the same period. Penalty also increased $65,972 from $0 for the six months ended June 30, 2007 to $65,972 for the six months ended June 30, 2008 a results of our negoatiations with the Internal Revenue Service to reduce our liability with them.  Finally, Travel increased $33,659 or 178.6% from $18,851 for the six months ended June 2007 to $52,510 for the six months ended June 30, 2008 a result of the increased travel activity necessary to sign, secure and obtain manufacturing approval for titles during the period as well as upcoming titles. These increases were offset by significant decreases only in Outside Service as explained above.

Interest expense was $97,506 and $65,596 for the six months ended June 30, 2008 and 2007, respectively. This was an increase of $31,910, or 48.7%.

We received $110,128 in Other Income for the six months ended June 30, 2008 compared to $0 in Other Income for the six months ended June 30, 2007. The difference of $110,128 or 100% was a result of forgiven debt of a loan received from an individual.

We had $93,094 in Financing Expense for the six months ended June 30, 2008 compared to $104,780 for the six months ended June 30, 2007.

We had $4,683,396 Loss on Derivative Liability for the six months ended June 30, 2008 as compared to a Gain of $2,807,590 for the six months ended June 30, 2007.

Our net loss was $4,516,370 for the six months ended June 30, 2008 compared to a net income of $2,551,753 for the six months ended June 30, 2007. The decrease in profitability for the six months ended June 30, 2008 was due to Loss on Derivative Liability although Net Operating Income of 247,497 for the six months ended June 30, 2008 exceeded the $85,461 Net Operating Loss for the six months ended June 30, 2007.

Liquidity and Capital Resources

As of June 30, 2008 our cash balance was $523,501 compared to $539,990 at December 31, 2007. Total current assets at June 30, 2008 were $2,115,291 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 fiscal 2008. The Company reached this conclusion by recognizing that a major portion ($2,201,032) of our debt is attributed to convertible notes payable, which we expect to be converted into shares, Deferred Revenue ($3,217,049) will be reclassified as revenue upon the completion of the current projects in development, and Derivative Liability ($8,265,897) would be the amount of cash required should our investors call in our outstanding loans. We do not believe will happen anytime in the near future. 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 ($409,253). 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.

4

For the six months ended June 30, 2008, net cash provided by operating activities was $1,380,057 as compared to $80,678 for the six months ended June 30, 2007.  The increase in cash provided by operating activities can be attributed to the net change in derivative liability of $4,683,396, increase in accounts receivable  of 1,386,827 and deferred revenue of $1,890,396.

F or the six months ended June 30, 2008, net cash used in investing activities was $1,561,546, compared to net cash used in investing activities of $746,217 for the six months ended June 30, 2007. The increase in cash used in investing activities of $815,329 for the six months ending June 30, 2008, was due to payments made for development costs and licenses, and purchase of equipment.

For the six months ended June 30, 2008, net cash provided by Financing Activities was $165,000 compared to $908,750 for the six months ended June 30, 2007. The primary reason for this was $831,250 in advances received for the six months ended June 30, 2007 as compared to $0 for the six months ended June 30, 2008.

Our accounts receivable at June 30, 2008 was $1,441,790, compared to $110,195 at December 31, 2007. The change in accounts receivable is primarily due orders received in the amount of $1,105,290 on June 30, 2008.

As of June 30, 2008 we had a working capital deficiency of $16,052,805. A major portion of our debt is attributed to derivative liability, 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 June 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 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.

5

CONTRACTUAL OBLIGATIONS

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

	Payments due by period
			Less than					More
Contractual Obligations	Total		One Year		Years 1-2			than 2 years
Notes Payable	$	2,608,253	$	2,608,253
Operating Lease Obligations	$	147,845	$	116,611		$	31,234
License Fee Obligations	$	60,000	$	60,000
Total	$	2,816,898	$	2,784,864		$	31,234

In February 2008, we obtained an unsecured loan from two accredited investors in the amount of $227,889.  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.  As of June 30, 2008 the balance owed net of discount is $213,128.

In July 2007, we entered into a convertible debenture in the amount of $200,000, as of June 30, 2008 net of discount, the balance owed is $183,632.

In March 2007, we entered into a convertible debenture in the amount of $80,000.

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.  As of June 30, 2008 the balance due is $194,093.

On February 9, 2005, we entered into three convertible notes payable agreements totaling $650,000, and  

in September and October 2004, we entered into two convertible notes payable agreements totaling $1.1 million. The balance due as of June 30, 2008 is $1,690,400. To date, these notes are past due and have not been called.

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.

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.

6

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.

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.

7

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 $2,544,043 at June 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

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.

8

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 June 30, 2008.  Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s internal controls over 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 internal controls over financial reporting and our disclosure controls and procedures are related to the limited financial background 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 personnnel 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 June 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 June 30, 2008 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

9

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.

There were no material changes to the procedures by which security holders may recommend nominees to the registrant’s board of directors.

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: January 9, 2009

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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