Left Behind Games (LFBG) 10-Q 2009 Q1 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

S

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 PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from _____to_____

COMMISSION FILE NUMBER 000-50603

LEFT BEHIND GAMES INC.

(Exact name of registrant as specified in its charter)

WASHINGTON	91-0745418
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

25060 HANCOCK AVENUE,SUITE 103 BOX 110, MURRIETA, CA 92562

(Address of principal executive offices) (Zip Code)

(951) 894-6597

(Registrant's telephone number, including area code)

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  S    NO  £

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting Company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  £	Accelerated filer  £
Non accelerated filer  £ (Do not check if a smaller reporting company)	Smaller reporting company  S

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

YES  £     NO  S  

As of August 15, 2008, the registrant had outstanding 148,859,681 shares of common stock, $.001 par value.

PART I. FINANCIAL INFORMATION
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	3
	CONDENSED CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2008 (UNAUDITED)
	AND MARCH 31, 2008	3
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
	THREE MONTHS ENDED JUNE 30, 2008 AND 2007	4
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
	MONTHS ENDED JUNE 30, 2008 AND 2007	5
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	7
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION	26
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	32
ITEM 4.	CONTROLS AND PROCEDURES	32
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	33
ITEM 1A.	RISK FACTORS	33
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	33
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	33
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	33
ITEM 5.	OTHER INFORMATION	33
ITEM 6.	EXHIBITS	34

2

PART I.  FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

LEFT BEHIND GAMES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

		June 30,		March 31,
		2008		2008
		(Unaudited)
ASSETS
Current assets
Cash	$	1,117	$	2,695
Accounts receivable, net		844,649		830,374
Inventories, net		83,056		69,199
Debt issuance costs		--		14,872
Prepaid royalties		14,750		17,225
Prepaid expenses and other current assets		3,392		75,576
Total current assets		947,964		1,009,941
Property and equipment, net		181,373		216,872
Intangible assets, net		17,969		18,375
Other assets		51,162		52,372
Total assets	$	1,197,468	$	1,297,560
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses	$	2,950,327	$	2,608,438
Royalty payable		250,000		250,000
Advances from related parties		41,213		56,023
Notes payable, net of discounts		695,115		604,240
Deferred income – product sales		544,974		480,090
Deferred revenue		100,323		100,323
Total current liabilities		4,581,952		4,099,114
Convertible zero coupon notes, net of discount		29,241		8,641
Deferred rent		1,427		1,427
Total liabilities		4,612,620		4,109,182
Commitments and Contingencies
Stockholders' Deficit
Series A preferred stock, $0.001 par value; 10,000,000
shares authorized; 3,586,245 shares issued and outstanding;
liquidation preference of $188,500		3,586		3,586
Series B preferred stock, $0.001 par value; 3,413,755 shares
authorized; 2,392,966 shares and 0 issued and outstanding
as of June 30, 2008 and March 31, 2008, respectively		2,393		--
Common stock, par value $0.001 per share; 100,000,000 shares
authorized;144,607,181 and 138,433,090 shares issued and
outstanding as of June 30, 2008 and March 31, 2008, respectively		144,549		138,374
Additional paid-in capital		39,516,682		39,156,427
Stockholder note receivable		(70,000)		(70,000)
Accumulated deficit		(43,012,362)		(42,040,009
		(3,415,152)		(2,811,622)
Total liabilities and stockholders' deficit	$	1,197,468	$	1,297,560

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

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LEFT BEHIND GAMES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended

June 30, 2008 and 2007

(Unaudited)

		Three Months		Three Months
		Ended		Ended
		June 30,		June 30,
		2008		2007
				(Restated)
Net revenues	$	60,552	$	114,702
Costs and expenses:
Cost of sales – product costs		60,415		74,445
Cost of sales – intellectual property costs		2,475		--
General and administrative		800,867		1,108,678
Product development		51,127		103,002
Total costs and expenses		884,884		1,286,125
Operating loss		(824,332)		(1,171,423)
Other expense:
Interest and other debt expenses		143,334		140,239
Other expense		4,820		1,387
Total other expense		148,164		141,626
Loss before provision for income taxes		(972,496)		(1,313,049)
Provision for income taxes		--		2,400
Net loss	$	(972,496)	$	(1,315,449)
Basic and diluted loss per common share	$	(0.01)	$	(0.03)
Weighted average number of common shares outstanding		143,687,458		41,593,313

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

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LEFT BEHIND GAMES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007

(Unaudited)

		Three Months		Three Months
		Ended		Ended
		June 30,		June 30,
		2008		2007
				(Restated)
Cash flows from operating activities:
Net loss	$	(972,496)	$	(1,315,449)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization		22,186		30,405
Interest paid in common stock		5,500		--
Loss on disposal of assets		4,820		1,387
Estimated fair value of common stock issued to
consultants for services		90,567		249,357
Estimated fair value of common stock issued to
employees and directors for services		1,500		93,325
Amortization of debt discount and
debt issuance costs		67,128		118,739
Provision for inventory reserve		16,220
Changes in operating assets and liabilities:
Accounts receivable		(14,275)		313,879
Inventory		(30,077)		24,747
Prepaid expenses		3,685		(14,896)
Other assets and prepaid royalties		68,916		--
Accounts payable and accrued expenses		367,414		(55,100)
Deferred income – product sales		64,884		(350,252)
Deferred rent		--		1,433
Net cash used in operating activities		(304,028)		(902,425)
Cash flows from investing activities:
Payments for trademarks and prepaid royalties		--		(6,090)
Net cash used in investing activities		--		(6,090)
Cash flows from financing activities:
Debt issuance costs		--		(16,900)
Proceeds from the issuance of notes payable		346,500		130,000
Principal repayments of notes payable		(29,240)		(69,723)
Payments on advances from related party		(14,810)		(23,000)
Proceeds from the issuance of common stock		--		883,800
Net cash provided by financing activities		302,450		904,177
Net increase in cash		(1,578)		(4,338)
Cash at beginning of period		2,695		14,965
Cash at end of period	$	1,117	$	10,627

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

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LEFT BEHIND GAMES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007

(Unaudited)

		Three Months		Three Months
		Ended		Ended
		June 30,		June 30,
		2008		2007
				(Restated)
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	--	$	503
Income taxes	$	--	$	2,400
Supplemental disclosures of non-cash and investing and financing information:
Issuance of common stock in exchange for note receivable	$	--	$	25,000
Issuance of common stock as debt issuance costs	$	--	$	76,750
Exchange of equipment for settlement of accounts payable	$	8,899	$	1,440
Cancellation of insurance policy	$	3,412	$	--
Discount on convertible notes payable	$	281,470	$	--
Conversion of accrued expenses to notes payable	$	13,212	$	--

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LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Month Periods Ended June 30, 2008 and 2007

NOTE 1

ORGANIZATION AND BASIS OF PRESENTATION

ORGANIZATION

In January 2006, Left Behind Games Inc. (collectively, “we”, “our,” the “Company” or “LBG”) entered into an Agreement and Plan of Merger (the “Agreement”) with Bonanza Gold, Inc., a Washington corporation (“Bonanza”), wherein Bonanza acquired LBG through the purchase of our outstanding common stock on a “1 for 1” exchange basis. Prior to the execution of the Agreement, on January 25, 2006, we effected a 2.988538 for 5 reverse stock split of both our common stock and preferred stock outstanding, resulting in 12,456,538 and 3,586,246 shares of common and preferred stock, respectively. Also prior to the execution of the Agreement, Bonanza effected a 1 for 4 reverse stock split, resulting in 1,882,204 shares of common stock outstanding.

Effective February 1, 2006, Bonanza exchanged 12,456,538 and 3,586,246 shares of its common and preferred stock, respectively, for an equal number of our common and preferred shares. The acquisition was accounted for as a reverse acquisition whereby the assets and liabilities of LBG were reported at their historical cost. Bonanza had nominal amounts of assets and no significant operations at the date of the acquisition.

We were incorporated on August 27, 2002 under the laws of the State of Delaware for the purpose of engaging in the business of producing, distributing and selling video games and associated products. We completed the development of our first video game based upon the popularLEFT BEHIND series of novels published by Tyndale House Publishers (“Tyndale”) and as of November 2006 began commercially selling the video game to retail outlets nationwide.

We hold an exclusive worldwide license (the “License”) from Tyndale to develop, manufacture and distribute video games and related products based on theLEFT BEHIND series of novels published by Tyndale. Our common stock is quoted on the Over-the-Counter Bulletin Board administered by the Financial Industry Regulatory Authority ("OTCBB") under the symbol "LFBG.OB".

BASIS OF PRESENTATION

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Such rules and regulations allow us to condense and omit certain information and footnote disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States of America. We believe these unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal, recurring adjustments) that are necessary for a fair presentation of our consolidated financial position and consolidated results of operations for the periods presented.  The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-KSB for the year ended March 31, 2008. The interim unaudited consolidated financial information contained in this filing is not necessarily indicative of the results to be expected for any other interim period or for the full year ending March 31, 2009.   

NOTE 2 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

As previously disclosed in our Current Report on Form 8-K dated November 19, 2007 and filed on November 19, 2007 our Board of Directors, upon the recommendations of management, and with the concurrence of our independent registered public accounting firm, concluded on November 19, 2007 that we needed to restate our historical financial statements for the fiscal year ended March 31, 2007 and for the quarters ended December 31, 2006 and June 30, 2007.  

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LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Month Periods Ended June 30, 2008 and 2007

NOTE 2 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS - CONTINUED

In connection with a regulatory review by the SEC of our Form 10-KSB for the fiscal year ended March 31, 2007, our management determined that our revenue recognition policies for sales of our product were not appropriate given the limited sales history of our product.  Historically, our revenue recognition policy was to record revenue upon shipment of product to our channel partners and direct customers then adjusted for a reserve to cover anticipated product returns and/or future price concessions.  After considering (i) the limited sales history of our product, (ii) the limited business history with our primary channel partner and largest retail customer and (iii) the competitive conditions in the software industry, our management determined that return privileges and price protection rights granted to our customers impacted our ability to reasonably estimate returns and future price concessions, and therefore, we were unable to conclude that our sales arra ngements had a fixed and determinable price at the time our inventory was shipped to customers.  For sales to our primary channel partner and most significant retail customer, revenues should have been deferred until the resale of the products to the end customers, or the “sell-through method.”  For sales to our on-line store customers, revenues should have been deferred until such time as the right of return privilege granted to the customers lapsed, which is 30 days from the date of sale.  For sales to our Christian bookstore customers and all other customers, revenues should have been recognized on a cash receipts basis since these customers do not provide us with sell-through information and we may allow product returns from these customers from time to time. The impact on the consolidated financial statements for correcting these matters primarily resulted in recognizing deferred income on shipments until later periods and in certain cases permanent reductions in revenue when re venue was previously recognized upon shipment.

Furthermore, as part of the restatement process, we also determined that our largest retail customer had billed us for a $25,000 co-operative advertising campaign that we had not previously recorded as a reduction to our revenue.  In connection with the restatement, we deducted the $25,000 amount from our revenue in the fiscal year ended March 31, 2007. However, that customer subsequently agreed to cancel their invoice for this co-operative advertising campaign and paid us that $25,000 in July 2008

The following table presents the effects of the restatement adjustments on the accompanying consolidated financial statements for the three months ended June 30, 2007:

		As Previously
		Reported		Restated		Net Adjustment
Condensed Consolidated Statement of Operations
Net sales	$	56,815	$	114,702	$	57,887
Cost of sales – product costs		20,652		74,445		53,793
Total costs and expenses		1,232,332		1,286,125		53,793
Operating loss		(1,175,517)		(1,171,423)		4,094
Loss before provision for income taxes		(1,317,143)		(1,313,049)		4,094
Net loss	$	(1,319,543)	$	(1,315,449)	$	4,094
Net loss per common share — basic and diluted	$	(0.03)	$	(0.03)	$	--

	As Previously
	Reported	Restated	Net Adjustment
Condensed Consolidated Statement of Cash Flows
Net cash used in operating activities	(902,425)	(902,425)	--
Net cash used in investing activities	(6,090)	(6,090)	--
Increase in cash and cash equivalents	904,177	904,177	--

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LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Month Periods Ended June 30, 2008 and 2007

NOTE 3 -

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of LBG and, effective July 2005, include the accounts of LB Games Ukraine LLC (“LB Games Ukraine”), a variable interest entity in which LBG is the primary beneficiary. LB Games Ukraine is a related party created to improve control over software development with independent contractors internationally. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.

Risks and Uncertainties

We maintain our cash accounts with a single financial institution.  Accounts at this financial institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000. At June 30, 2008 and 2007, we did not have balances in excess of the FDIC insurance limit.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Our significant estimates include recoverability of prepaid royalties and long-lived assets, and the realizability of accounts receivable, inventories and deferred tax assets.

Software Development Costs

Research and development costs, which consist of software development costs, are expensed as incurred.  Software development costs primarily include payments made to independent software developers under development agreements.  Statement of Financial Accounting Standards ("SFAS") No. 86,Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed, provides for the capitalization of certain software development costs incurred after technological feasibility of the software is established or for the development costs that have alternative future uses.  We believe that the technological feasibility of the underlying software is not established until substantially all product development is complete, which generally includes the development of a working model.  No software development costs have been capitalized to date.

Cost of Sales

Cost of sales consists of product costs, royalty expenses, license costs and inventory-related operational expenses.

Inventories

Raw materials, work in process and finished goods are stated at the lower of average cost (which approximated FIFO) or market.

Property and Equipment

Property and equipment is stated at cost.  Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from 3 to 5 years. Repairs and maintenance are charged to expense as incurred while improvements are capitalized.  Upon the sale or retirement of property and equipment, the accounts are relieved of the cost and the related accumulated depreciation, with any resulting gain or loss included in the consolidated statement of operations.

Intangible Assets

License Agreement

The cost of the License Agreement is amortized on a straight-line basis over its terms (see Notes 7 and 8).

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LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Month Periods Ended June 30, 2008 and 2007

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Trademarks

The cost of trademarks includes funds expended for trademark applications that are in various stages of the filing approval process. The trademark costs are being amortized on a straight-line basis over their estimated useful lives. During the three months ended June 30, 2008, the Company recorded $406 of amortization expense related to its capitalized trademark costs. During the three months ended June 30, 2007, the Company recorded $1,129 of amortization expense related to its capitalized trademark costs.

Royalties

Royalty-based obligations with content licensors are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations are generally expensed to cost of goods sold at the greater of the contractual rate or an effective royalty rate based on expected net product sales.

Our contracts with some licensors include minimum guaranteed royalty payments which are recorded to expense and as a liability at the contractual amount when no significant performance remains with the licensor. Minimum royalty payment obligations are classified as current liabilities to the extent such royalty payments are contractually due within the next twelve months.

Significant judgment is required to estimate the effective royalty rate for a particular contract. Because the computation of effective royalty rates requires us to project future revenue, it is inherently subjective as our future revenue projections must anticipate, for example, (1) the total number of titles subject to the contract, (2) the timing of the release of these titles, (3) the number of software units we expect to sell, and (4) future pricing.

Our license agreement requires payments of royalties to the licensor.  The license agreement provides for royalties to be calculated as a specified percentage of sales and provides for guaranteed minimum royalty payments. Royalties payable calculated using the agreement percentage rates are being recognized as cost of sales as the related sales are recognized.  Guarantees advanced under the license agreement are recorded as a component of cost of sales during the period in which the Company is contractually obligated to make minimum guaranteed royalty payments.

During the three months ended June 30, 2008, we recorded expense of $2,400 related to the Charlie Church Mouse license.  During the three months ended June 30, 2007, we did not record any expense related to royalties.

Long-Lived Assets

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows expected to be generated by the assets.  If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the present value of estimated future cash flows.  As of June 30, 2008, we believe there is no impairment of our long-lived assets.  There can be no assurance, however, that market conditions will not change or that there will be demand for our products, which could result in impairment of long-lived assets in the future.

Income Taxes

We account for income taxes under the provisions of SFAS No. 109,Accounting for Income Taxes.  Under SFAS No. 109, deferred tax assets and liabilities are recognized for future tax benefits or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be realized through future operations.

As of March 31, 2008, we had net operating loss carryforwards of approximately $25,300,000 available to offset future taxable Federal and state income.  The Federal and state net operating moss carryforwards expire at various dates through 2026 and 2016, respectively.  Section 382 of the Internal Revenue Code may limit utilization of our Federal and state net operating loss carryforwards upon any change in control of the Company.

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LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Month Periods Ended June 30, 2008 and 2007

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Stock-Based Compensation

Effective April 1, 2006, the first day of our fiscal year 2007, we adopted the fair value recognition provisions of SFAS No. 123(R),Share-Based Payment, using the modified-prospective transition method. Under this transition method, compensation cost recognized in the year ended March 31, 2007 includes: (a) compensation cost for all share-based payments granted and not yet vested prior to April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123,Accounting for Stock-Based Compensation, and (b) compensation cost for all share-based payments granted subsequent to March 31, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. No stock options have been grante d to employees. Therefore, we believe the adoption of SFAS No. 123(R) had an immaterial effect on the accompanying consolidated financial statements.

We calculate stock-based compensation by estimating the fair value of each option using the Binomial Lattice option pricing model. Our determination of the fair value of share-based payment awards is made as of the respective dates of grant using the option pricing model and that determination is affected by our stock price as well as assumptions regarding the number of subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behavior. The Binomial Lattice option pricing model was developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because employee stock options have certain characteristics that are significantly different from traded options, the existing valuation models may not provide an accurate measure of the fair value of our employee stock options. A lthough the fair value of employee stock options is determined in accordance with SFAS No. 123(R) using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. The calculated compensation cost, net of estimated forfeitures, is recognized on a straight-line basis over the vesting period of the option.

Stock-based awards to non-employees are accounted for using the fair value method in accordance with SFAS No. 123R, and Emerging Issues Task Force (“EITF”) Issue No. 96-18,Accounting for Equity Instruments that are issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the third-party performance is complete or the date on which it is probable that performance will occur.

In accordance with EITF Issue No. 00-18,Accounting Recognition for Certain Accounting Transactions Involving Equity Instruments Granted to Other Than Employees, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor's balance sheet once the equity instrument is granted for accounting purposes. Accordingly, we record the fair value of the common stock issued for certain future consulting services as prepaid expenses in our consolidated balance sheet.

Basic and Diluted Loss per share

Loss per common share is based on the weighted average number of shares of common stock and common stock equivalents outstanding during the year in accordance with SFAS No. 128, "EARNINGS PER SHARE."

Securities that could potentially dilute basic loss per share (prior to their conversion, exercise or redemption) were not included in the diluted-loss-per-share computation because their effect is anti-dilutive. There were 82,261,090 and 3,760,983 potentially dilutive common shares outstanding for the three months ended June 30, 2008 and 2007, respectively, have not been included in loss per share calculations.

Foreign Currency and Comprehensive Income

We have determined that the functional currency of LB Games Ukraine is the local currency of that company. Assets and liabilities of the Ukrainian subsidiary are translated into U.S. dollars at the period end exchange rates. Income and expenses, including payroll expenses, are translated at an average exchange rate for the period and the translation gain or loss is accumulated as a separate component of stockholders’ equity (deficit). We determined that the translation gain or loss did not have a material impact on our stockholders’ equity (deficit) as of June 30, 2008 and March 31, 2008. As a result, we have not presented a separate accumulated other comprehensive income (loss) on our consolidated balance sheets.

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LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Month Periods Ended June 30, 2008 and 2007

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Foreign currency gains and losses from transactions denominated in other than the respective local currencies are included in income. There were no foreign currency transactions included in income during the three month period ended June 30, 2008 and 2007.

Comprehensive income includes all changes in equity (net assets) during a period from non-owner sources. The components of comprehensive income were not materially impacted by foreign currency gains or losses during the three month periods ended June 30, 2008 and 2007.

Fair Value of Financial Instruments

Our financial instruments consist of cash, accounts receivable, accounts payable, related party advances, notes payable and accrued expenses. The carrying amounts of these financial instruments, except for the notes payable, approximate their fair value due to their short maturities or based on rates currently available to the Company for notes payable.  The fair values for our notes payable are not readily determinable and it would be cost prohibitive to provide a fair value estimate.

Revenue Recognition

We evaluate the recognition of revenue based on the criteria set forth in Statement of Position ("SOP") 97-2,Software Revenue Recognition, as amended by SOP 98-9,Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactionsand Staff Accounting Bulletin (“SAB”) No. 101,Revenue Recognition in Financial Statements, as revised by SAB No. 104,Revenue Recognition. We evaluate revenue recognition using the following basic criteria and recognize revenue when all four of the following criteria are met:

•  Persuasive evidence of an arrangement exists: Evidence of an agreement with the customer that reflects the terms and conditions to deliver products must be present in order to recognize revenue.

•  Delivery has occurred: Delivery is considered to occur when the products are shipped and risk of loss and reward have been transferred to the customer.

•  The seller’s price to the buyer is fixed and determinable: If an arrangement includes rights of return or rights to refunds without return, revenue is recognized at the time the amount of future returns or refunds can be reasonably estimated or at the time when the return privilege has substantially expired in accordance with SFAS No. 48,Revenue Recognition When Right of Return Exists.  If an arrangement requires us to rebate or credit a portion of our sales price if the customer subsequently reduces its sales price for our product to its customers, revenue is recognized at the time the amount of future price concessions can be reasonably estimated, or at the time of customer sell-through.  

•  Collectibility is reasonably assured: At the time of the transaction, we conduct a credit review of each customer involved in a significant transaction to determine the creditworthiness of the customer. Collection is deemed probable if we expect the customer to be able to pay amounts under the arrangement as those amounts become due. If we determine that collection is not probable, we recognize revenue when collection becomes probable (generally upon cash collection).

Historically, we recorded revenue upon shipment of product to our channel partners and direct customers then adjusted for a reserve to cover anticipated product returns and/or future price concessions, or the “ship-to method.”  After considering (i) the limited sales history of our product, (ii) the limited business history with our primary channel partner and largest retail customer and (iii) the competitive conditions in the software industry, we determined that return privileges and price protection rights granted to our customers impacted our ability to reasonably estimate sales returns and future price concessions, and therefore, we were unable to conclude that our sales arrangements had a fixed and determinable price at the time our inventory was shipped to customers.  As a result, we have revised our revenue recognition policies.

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LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Month Periods Ended June 30, 2008 and 2007

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

For sales to our on-line store customers, revenues are deferred until such time as the right of return privilege granted to the customers lapses, which is 30 days from the date of sale for unopened games.

For sales to our Christian bookstore customers and all other customers that cannot provide us with sell-through information and for which we may accept product returns from time to time, revenues are recognized on a cash receipts basis.

In the future, we intend to continue using the sell-through methodology with our primary channel partner and largest retail customer.  We also plan to continue recognizing sales on our on-line store after a one month lag to allow for the right that we have given our on-line customers to return unopened games for 30 days.

We continue to accumulate historical product return and price concession information related to our Christian bookstore customers and all other customers.  In future periods, we may elect to return to the accrual methodology of recording revenue for those customers upon shipment with estimated reserves at which time we believe we can reasonably estimate returns and price concessions to these customers based upon our historical results.

Revenue from Sales of Consignment Inventory. We have placed consignment inventory with certain customers. We receive payment from those customers only when they sell our product to the end consumers. We recognize revenue from the sale of consignment inventory only when we receive payment from those customers.

Shipping and Handling: In accordance with EITF Issue No. 00-10,Accounting for Shipping and Handling Fees and Costs, we recognize amounts billed to customers for shipping and handling as revenue. Additionally, shipping and handling costs incurred by us are included in cost of goods sold.

We promote our products with advertising, consumer incentive and trade promotions. Such programs include, but are not limited to, cooperative advertising, promotional discounts, coupons, rebates, in-store display incentives, volume based incentives and product introductory payments (i.e. slotting fees). In accordance with EITF No. 01-09,Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendors Products, certain payments made to customers by the Company, including promotional sales allowances, cooperative advertising and product introductory expenditures have been deducted from revenue. During the three month periods ended June 30, 2008 and 2007, we did not record any such types of arrangements.

EQUITY INSTRUMENTS FOR SERVICES PROVIDED BY OTHER THAN EMPLOYEES

We follow SFAS No. 123-R (as interpreted by Emerging Issues Task Force ("EITF") Issue No. 96-18, "ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR SERVICES") ("EITF No. 96-18") to account for transactions involving goods and services provided by third parties where we issue equity instruments as part of the total consideration. Pursuant to paragraph 7 of SFAS No. 123-R, we account for such transactions using the fair value of the consideration received (i.e. the value of the goods or services) or the fair value of the equity instruments issued, whichever is more reliably measurable.

We apply EITF No. 96-18, in transactions, when the value of the goods and/or services are not readily determinable and (1) the fair value of the equity instruments is more reliably measurable and (2) the counterparty receives equity instruments in full or partial settlement of the transactions, using the following methodology:

(a)  For transactions where goods have already been delivered or services rendered, the equity instruments are issued on or about the date the performance is complete (and valued on the date of issuance).

(b)  For transactions where the instruments are issued on a fully vested, non-forfeitable basis, the equity instruments are valued on or about the date of the contract.

(c)  For any transactions not meeting the criteria in (a) or (b) above, we re-measure the consideration at each reporting date based on its then current stock value.

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LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Month Periods Ended June 30, 2008 and 2007

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE

The convertible feature of certain notes payable provides for a rate of conversion that is below the market value of our common stock. Such feature is normally characterized as a "Beneficial Conversion Feature" ("BCF"). Pursuant to EITF Issue No. 98-5, "ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE CONVERSION RATIO" and EITF No. 00-27, "APPLICATION OF EITF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS," the estimated fair value of the BCF is recorded, when applicable, in the consolidated financial statements as a discount from the face amount of the notes. Such discounts are accreted to interest expense over the term of the notes using the effective yield basis.

SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS

In December 2006, the FASB issued SFAS No. 157, "FAIR VALUE MEASUREMENTS," which defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. SFAS No. 157 simplifies and codifies related guidance within GAAP, but does not require any new fair value measurements. The guidance in SFAS No. 157 applies to derivatives and other financial instruments measured at estimated fair value under SFAS No. 133 and related pronouncements. SFAS 157 was originally effective for fiscal years and interim periods within those fiscal years, beginning after November 15, 2007, but was partially delayed by one year for non-financial assets and liabilities as detailed within FASB Staff Position 157-2. SFAS No. 157 applies to certain assets and liabilities that are being measured and reported on a fair value basis. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosure about fair value measurements. This Statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The Statement requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The fair value of our warrant liabilities is determined based on observable market based inputs or unobservable inputs that are not corroborated by market data, which is a Level 3 classification.

The following outlines the significant weighted average assumptions used to estimate the fair value information presented, with respect to warrants utilizing the Binomial Lattice option pricing model (no warrants were valued in the three months ended June 30, 2007):

	Three Months Ended June 30, 2008
Risk free interest rate	4.68%
Average expected life	3 years
Expected volatility	181.7%
Expected dividends	None

We did not make any changes to our valuation techniques in the quarter ended June 30, 2008.

We are currently evaluating the impact of adoption as it relates to non-financial assets, but do not believe there will be a material impact on the consolidated financial statements.

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LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Month Periods Ended June 30, 2008 and 2007

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS No. 159 expands the scope of specific types of assets and liabilities that an entity may carry at fair value on its statement of financial position, and offers an irrevocable option to record the vast majority of financial assets and liabilities at fair value, with changes in fair value recorded in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We have not yet determined the impact, if any, of SFAS No. 159 on our consolidated financial statements and have not yet elected to use the fair value option.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on our present or future consolidated financial statements.

Customer Concentrations

During the three month periods ended June 30, 2008 and 2007, one customer accounted for 51% and 19% of our net revenues, respectively, and one other customer accounted for 0% and 43% of our net revenues, respectively.  As of June 30, 2008 and March 31, 2008, such customers together represented 53% and 53% of our accounts receivable, respectively.

NOTE 4– GOING CONCERN AND LIQUIDITY CONSIDERATIONS

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the ordinary course of business. We have started generating revenue but have incurred net losses of $972,496 and $1,315,449 during the three month periods ended June 30, 2008 and 2007, respectively, and had an accumulated deficit of $43,012,362 at June 30, 2008. In addition, we used cash in our operations of $304,028 and $902,425 during the three month periods ended June 30, 2008 and 2007, respectively.  Additionally, we are in default on certain notes payable and subject to certain defaults/judgments, which among other matters, raises significant doubt about our ability to continue as a going concern. We have not generated significant revenue or any profit from operations since inception. Our current financial resources are insufficient to fund o ur capital expenditures, working capital and other cash requirements (consisting of accounts payable, accrued liabilities, amounts due to related parties and amounts due under various notes payable) for the fiscal year ending March 31, 2009. Therefore we will be required to seek additional funds through debt and/or equity financing arrangements to finance our current and long-term operations.

Over the past year, we have significantly reduced our cost of operations. The size of our operations was reduced from 75 workers in 3 countries to less than 5 full-time and 3 part-time employees in the USA, and we consolidated our offices into one location in Murrieta, California. A new Board of Directors took office on December 3, 2007 and we hired Douglas Milnor as our Chief Operating Officer. We are currently pursuing a new product strategy of developing intellectual property (new products) aimed at leveraging existing products which are modified to become inspirational for significantly less than our previous product development expenses. This is evidenced by our cost of development for our new PC Game, ‘Keys of the Kingdom’ which was announced at the recent International Christian Retail Show. In the past year, we have successfully built a direct-to-store distribution channel to more than 1,500 stores and this year, plans to increase revenue from the mai nstream, inspirational and direct-to-consumer sales channels. We also have reassigned resources to expand distribution internationally in Australia, UK and South Africa. A new program is underway to provide consumers an opportunity to buy our products in exchange for a donation to be made to their favorite charity, church or ministry. We expect to continue to reduce costs and increase margins as was evidenced by our per unit cost drop in the past year from $3.63 to $1.50. We plan to continue to control and reduce costs where necessary in an effort to reach profitability. Management plans to raise additional capital in the latter half of 2008 to fund ongoing business operations and to then reevaluate capital needs upon a review of sales performance resulting from the upcoming holiday season.

Our ability to continue as a going concern is dependent upon our ability to generate profitable operations in the future and/or to obtain the necessary financing to meet our obligations and to repay the liabilities arising from normal business operations when they come due. We are also seeking to merge with another entity which has achieved higher revenue levels or which has the near-term potential to accomplish significant revenue levels. Meanwhile, we plan to continue to provide for our capital requirements by issuing additional equity securities. No assurance can be given that additional capital will be available when required or on terms acceptable to us. We also cannot give assurance that we will achieve significant revenues in the future. The outcome of these matters cannot be predicted at this time and there are no assurances that if achieved, we will have sufficient funds to execute our business plan or generate positive operating results.  

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LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Month Periods Ended June 30, 2008 and 2007

NOTE 4 – GOING CONCERN AND LIQUIDITY CONSIDERATIONS – CONTINUED

These matters, among others, raise substantial doubt about the ability of LBG to continue as a going concern.  These accompanying consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.

NOTE 5– INVENTORIES

Inventories consisted of the following at June 30, 2008 and March 31, 2008:

		June 30, 2008		March 31, 2008
Raw Materials	$	287,564	$	287,564
Finished Goods		117,772		87,695
		405,336		375,259
Less Reserve		(322,280)		(306,060)
Total Inventories	$	83,056	$	69,199

We established an inventory reserves to cover product obsolesce associated with our initial game.

NOTE 6– PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at June 30, 2008 and March 31, 2008:

		June 30,		March 31,
		2008		2008
Office furniture and equipment	$	53,266	$	66,985
Leasehold improvements		106,010		106,010
Computer equipment		188,268		200,756
		347,544		373,751
Less accumulated depreciation		(166,171)		(156,879)
	$	181,373	$	216,872

Depreciation expense for the three month periods ended June 30, 2008 and 2007 was $21,780 and $28,147, respectively.

NOTE 7 – INTANGIBLE ASSETS

Intangible assets consisted of the following at June 30, 2008 and March 31, 2008:

		June 30, 2008		March 31, 2008
License	$	5,850	$	5,850
Trademarks		65,331		65,331
		71,181		71,181
Less accumulated amortization		(53,212)		(52,806)
	$	17,969	$	18,375

Trademarks are amortized on a straight-line basis over their lives.  The license is fully amortized. Amortization expense for the three month periods ended June 30, 2008 and 2007 was $406 and $2,258, respectively.

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LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Month Periods Ended June 30, 2008 and 2007

NOTE 8 – RELATED PARTY TRANSACTIONS

As LB Games Ukraine is currently providing software development services only to us and due to our history of providing on-going financial support to that entity, through consolidation we absorb all net losses of this variable interest entity in excess of the equity. LB Games Ukraine’s sole asset is cash which has a balance of $163 at June 30, 2008. During the three month periods ended June 30, 2008 and 2007, we paid approximately $11,000 and $57,000 for software development services provided by LB Games Ukraine, which has been recorded as research and development cost during the period.

At various times, several of our executives have advanced us funds to help us with our working capital requirements. These advances were non-interest bearing and have been classified as a current liability in the accompanying condensed consolidated balance sheet as of June 30, 2008 and March 31, 2008. At June 30, 2008, $41,213 was owed to several of our executives.

NOTE 9 – STOCKHOLDERS’ EQUITY

Common Stock

We are authorized to issue 200,000,000 shares of common stock, $0.001 par value per share.  The holders of our common stock are entitled to one vote per share of common stock held and have equal rights to receive dividends when, and if, declared by our Board of Directors, out of funds legally available therefore, subject to the preference of any holders of preferred stock.  In the event of liquidation, holders of common stock are entitled to share ratably in the net assets available for distribution to stockholders, subject to the rights, if any, of holders of any preferred stock then outstanding.  Shares of common stock are not redeemable and have no preemptive or similar rights. The Board of Directors and majority of Shareholders have agreed to increase the amount of authorized shares. See the Note 14 for details.

In January 2006, we entered into an Agreement and Plan of Merger (the “Agreement”) with Bonanza Gold, Inc., a Washington corporation (“Bonanza”), wherein Bonanza acquired the Company through the purchase of the Company’s outstanding common stock on a “1 for 1” exchange basis. Prior to the execution of the Agreement, on January 25, 2006, we effected a 2.988538 for 5 reverse stock split of both its common stock and preferred stock outstanding, resulting in 12,456,538 and 3,586,246 shares of common and preferred stock, respectively. Also prior to the execution of the Agreement, Bonanza effected a 1 for 4 reverse stock split, resulting in 1,882,204 shares of common stock outstanding.

During the three months ended June 30, 2008, we issued to independent third parties 5,649,091 shares of common stock for services provided, valued at $90,567 (based on the closing price on the respective grant date). We also issued 75,000 shares of common stock, valued at $1,500 (based on the closing price on the respective grant date), to certain employees as additional compensation.  We also issued 450,000 shares for interest, valued at $5,500 (based on the closing price on the respective grant date).

During the three months ended June 30, 2008, we issued 562,500 warrants to purchase shares of common stock all with an exercise price of $0.05 (see Note 11). We have estimated the value of these warrants to be approximately $11,000 using the binomial lattice method.

Also during the three month period ended June 30, 2008, we issued convertible debt to accredited investors which is convertible to 61,275,891 shares of our common stock at various conversion prices. Through those convertible debt offerings, we raised $283,500 of cash, refinanced $135,000 of past due debt and $13,213 of past due accrued interest.  The convertible debt offerings carried interest rates ranging from ten percent to twenty percent and certain of the notes also paid out an aggregate amount of 2,392,966 shares of our series B preferred stock (see below).

During the three months ended June 30, 2007, we issued 9,088,000 shares of common stock for net proceeds of $883,800 (excluding a stockholder note receivable for $25,000). There were no offering costs associated with the shares we sold for cash in the three months ended June 30, 2007.

During the three months ended June 30, 2007, we issued 981,949 shares of common stock for services provided by independent third parties, valued at $249,357 (based on the closing price of our common stock on the respective issuance dates).

During the three months ended June 30, 2007, we issued 425,000 shares of common stock, valued at $93,325 (based on the closing price of our common stock on the respective issuance dates), to certain employees as additional compensation.

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LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Month Periods Ended June 30, 2008 and 2007

NOTE 9 – STOCKHOLDERS’ EQUITY - CONTINUED

Common Stock (Continued)

During the three months ended June 30, 2007, we issued 325,000 shares of common stock valued at $76,750 to investors and investment bankers in connection with the receipt of $130,000 in gross proceeds under a bridge financing. We recorded this amount to debt issuance costs and amortized that amount over the one year term of the financing. We previously had recorded $412,000 to debt issuance costs related to earlier fundings under the bridge financing. We amortized $118,739 of debt issuance costs as interest expense during the three month period ended June 30, 2007.

Preferred Stock

We are authorized to issue 10,000,000 shares of preferred stock, $0.001 par value per share. Of this preferred stock, 3,586,245 shares have been designated and issued as series A preferred stock. The holders of the series A preferred stock are entitled to one vote per share on all matters subject to stockholder vote. The series A preferred stock is convertible on a one for one basis into our common stock at the sole discretion of the holder.  The holders of the series A preferred stock have equal rights to receive dividends when, and if, declared by our Board of Directors, out of funds legally available therefore. In the event of liquidation, holders of preferred stock are entitled to share ratably in the net assets available for distribution to stockholders. In November 2005, we issued 1,434,498 shares of series A preferred stock valued at $1.67 per share under a consulting agreement for total deferred consulting expense of $2,400,000 to be amortized over the ter m of the consulting agreement, of which $1,600,000 and $800,000 were recorded as consulting expense during the fiscal years ended March 31, 2007 and 2006, respectively. The amounts under the consulting agreements were fully amortized as of March 31, 2007.

The holders of series A preferred stock have a liquidation preference equal to the sum of the converted principal, accrued interest and value of converted common stock, aggregating $188,500 at March 31, 2008.

On May 12, 2008, we designated 3,413,755 shares of our 10,000,000 authorized preferred stock as series B preferred. Such stock was designated to be used in future private offerings. Each share of series B preferred stock has voting power equal to 200 shares of common stock for a twelve month period.  Subsequently, each series B preferred share has voting power equal to one vote of common stock. In the event of liquidation, holders of preferred stock are entitled to share ratably in the net assets available for distribution to stockholders.

In May and June 2008, we borrowed $166,500 from four accredited investors in four separate one year convertible notes bearing interest at ten percent per annum and having a conversion rate into our common stock of $0.01 per share for loans of up to $100,000 and $0.005 per share on any amounts lent above $100,000.  As one investor lent us $150,000, that investor received a conversion rate of $0.005 on $50,000 and a rate of $0.01 on $100,000.  That investor also agreed to convert a note payable of $120,000 and accrued interest of $11,047 into this convertible instrument as well, which allowed us to extend the term of his loan by another twelve months.

The other $16,500 came from three accredited investors and they received a conversion rate of $0.01 per share.  As an additional inducement, these investors each received five shares of series B Preferred Stock for every dollar that they lent to us up to $100,000 and ten shares for every dollar lent over $100,000.  We have valued the shares of series B Preferred Stock issued to those investors based on the value of our common stock on the date of their respective investments, recording it as a debt discount and will amortize that value as interest expense over the terms of the loans.

On July 16, 2008, the Board of Directors and majority of Shareholders have agreed to increase the amount of authorized shares of our preferred stock (see note 14).

Stock Incentive Plan

In January 2007, we instituted the Left Behind Games Inc. 2006 Stock Incentive Plan (the “Plan”). The purpose of the Plan is to encourage and enable officers, directors, and employees of Left Behind Games Inc. and its Subsidiaries and other persons to acquire a proprietary interest in the Company. It is anticipated that providing such persons with a direct stake in the Company's welfare will assure a closer identification of their interests with those of the Company and its shareholders, thereby stimulating their efforts on the Company's behalf and strengthening their desire to remain with the Company. The Plan is for 2,500,000 shares, which was issued in a number of forms including direct stock issuances and stock options. We registered the Plan under an S-8 registration statement in January 2007 and there are currently no shares remaining to be issued from this plan.

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LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Month Periods Ended June 30, 2008 and 2007

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Guarantees and Indemnities

We have made certain indemnities and guarantees, under which we may be required to make payments to a guaranteed or indemnified party in relation to certain actions or transactions.  We indemnify our directors, officers, employees and agents, as permitted under the laws of the State of Delaware.  We have also indemnified our consultants, investment bankers, sublicensor and distributors against any liability arising from the performance of their services or license commitment, pursuant to their agreements.  In connection with our facility leases, we have indemnified our lessors for certain claims arising from the use of the facility.  The duration of the guarantees and indemnities varies, and is generally tied to the life of the agreement. These guarantees and indemnities do not provide for any limitation of the maximum potential future payments we could be obligated to make.  Historically, we have not been obligated nor incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities and guarantees in the accompanying consolidated balance sheets.

Employment Agreements

We have entered into employment agreements with certain of our key employees.  Such contracts provide for minimum annual salaries and are renewable annually.  In the event of termination of certain employment agreements by LBG without cause, we would be required to pay continuing salary payments for specified periods in accordance with the employment contracts.   

Leases

In June 2006, we entered into a non-cancelable operating lease for its corporate facility in Murrieta, California which expires on May 31, 2010. The terms of the lease require initial monthly rents of $7,545 and escalate at 4% annually through lease expiration.  In March 2008, we abandoned this space.

In October 2006, we entered into a three year lease to rent 3,500 square feet of additional space in Murrieta, California at $3,920 per month. This additional space is being used for both administrative, sales and warehouse purposes. For the three months ended June 30, 2008 and 2007, we recorded approximately $38,629 and $36,915, respectively, of rent expense.  

Independent Sales Representatives

In order to help us secure retail distribution of our initial product, we entered into consulting arrangements with several independent representatives. The payment arrangements to these independent representatives are based upon the ultimate amount paid to us by the retail customers. The commission rates for these independent representatives typically vary from three percent to five percent of the net amount we collect from the retail customer. We have accrued commissions payable of approximately $2,300 based on funds collected.

Music Licenses

In April 2006, we entered into a license agreement with a record company for the use of certain music recordings to be used in connection with our game production. The license agreement requires us to pay royalties to the record company at a rate of $0.10 per unit ($0.05 per unit for the master license and an additional $.05 per unit for the performance license) and also requires the payment of other fees. The agreement remains in effect for two years.  We have calculated and accrued the amount due to this licensor as of March 31, 2007 and recorded that provision for licensing fees to cost of goods sold. In May 2007, this arrangement was subsequently modified to $0.025 for the master license and $0.025 for the performance license (see Note 14 - Subsequent Events). We have accrued license fees relating to this arrangement of approximately $47,000, of which $25,000 has been paid, and charged that expense to our cost of sales during the year ended March 31, 2007 .  We subsequently removed the licensed music from our game and therefore, did not record any such expense in the three month period ended June 30, 2008 nor for the year ended March 31, 2008.

In November 2006, we also entered into an agreement with a second record company for the use of certain music recordings to be used in connection with our game production. That license agreement also requires us to pay royalties to the record company at a rate of $0.10 per unit ($0.05 per unit for the master license and an additional $.05 per unit for the performance license) and remains in effect for three years. We have accrued license fees relating to this arrangement of approximately $10,000, of which $5,000 has been paid, and charged that expense to our cost of sales during the year ended March 31, 2007. We subsequently removed the licensed music from our game and therefore, did not record any such expense in the three month period ended June 30, 2008 not for the year ended June 30, 2008.

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LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Month Periods Ended June 30, 2008 and 2007

NOTE 10 – COMMITMENTS AND CONTINGENCIES – CONTINUED

Left Behind License

On October 11, 2002, Tyndale granted us an exclusive worldwide license, as amended, to use the copyrights and trademarks relating to the storyline and content of the books in theLEFT BEHIND series of novels for the manufacture and distribution of video game products for personal computers, CD-ROM, DVD, game consoles, and the Internet. The License was initially set to expire on December 31, 2006, subject to automatic renewal for three additional three-year terms so long as Tyndale was paid royalties in an aggregate amount equal to or in excess of $1,000,000 during the initial term and $250,000 during each renewal term.

The License requires us to pay the following royalties: (i) 4% of the gross receipts on console game platform systems and (ii) 10% of the gross receipts on all non-electronic products and for electronic products produced for use on personal computer systems. We were required to guarantee a minimum royalty of $250,000 during the initial four-year term of the License. We also were required to pay $100,000 to Tyndale as an advance against future royalties payable to Tyndale under the License agreement, all of which we paid by in fiscal 2003 (see below).

During the year ended March 31, 2003, we paid $100,000 to Tyndale as a non-refundable advance against the guaranteed minimum royalty of $250,000 payable to Tyndale during the initial four-year term. We accrued the remaining guaranteed minimum royalty of $150,000 which was included in current liabilities in the accompanying consolidated balance sheet at March 31, 2006 and was paid in October 2006.

In September 2006, the License was amended and extended to December 31, 2009 after which it is subject to automatic renewals for additional three year terms if we have paid and/or prepaid royalties of $250,000 during each renewal period. As part of this amendment, we were required to pay Tyndale the remaining $750,000 of the agreed original minimum royalty payment on or before March 31, 2007.

The license was further amended on May 14, 2007. Under this amendment the remaining amount of the minimum royalty payment was reduced from $750,000 to $250,000 and the date of that payment was extended from March 31, 2007 to December 31, 2007. We have recorded the financial impact of this amendment on the March 31, 2007 financial statements. While Tyndale subsequently agreed to extend the license for an additional three years, we have not paid additional advance royalties due to Tyndale since January 1, 2008. We can not make any assurances that Tyndale will continue to provide such royalty advance extension, which may result in a demand for us to pay such fees or forfeit future licensing rights.

Content License

In July 2007, we entered into a Software Publishing Agreement to publish three pc video games under the Charlie Church Mouse (“CCM”) brand.  That license agreement requires us to pay royalties to the licensor at a rate of twenty percent of the gross margin on the cash receipts from sales of CCM branded games net of any amounts received as or for any sales, use, customs or other taxes, or postage, shipping, handling, freight, delivery, insurance, maintenance service, sales programs and commissions, interest or finance charges.  We have expensed license fees relating to this arrangement of $10,175 as of June 30, 2008. Since we paid a prepaid license fee of $25,000 in connection with the signing of the Software Publishing Agreement, we have a prepaid license fee amount of $14,825 under prepaid expenses and other current assets on our June 30, 2008 balance sheet.

Litigation

We are subject to litigation from time to time in the ordinary course of our business. More than 6 months ago, we received a letter from our former President, and current director, Jeffrey Frichner, demanding payment of $37,500 pursuant to our Separation Agreement with him that is allegedly owed to him by us.  We have accrued this amount as an accrued expense in the accompanying consolidated balance sheet.

On March 13, 2008, we entered into a payment schedule with a stipulation of judgment with Leonard Linsker in the amount of $60,000. We failed to make those payments.  We have accrued this amount as an accrued expense in the accompanying consolidated balance sheet. In July 2008, Mr. Linsker exported his judgment to California and has been successful in placing a lien on our bank accounts. To date, he has not extracted any funds from us. We continue to attempt to settle this litigation.

We are currently not involved in any other litigation or any pending legal proceedings that we believe could have a material adverse effect on our financial position or results of operations.

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LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Month Periods Ended June 30, 2008 and 2007

NOTE 11 – NOTES PAYABLE

During the three months ended June 30, 2008, we entered into several borrowing arrangements. The amounts borrowed under those arrangements are included in notes payable in the accompanying consolidated balance sheet.

The following table is a recap of our notes payable outstanding as of June 30, 2008:

		Face Amount of				Notes Payable,
		Notes Payable		Note Discounts		Net of Discounts
Loans from investors	$	185,000	$	--	$	185,000
Bridge loan (see note 13)		300,000		--		300,000
Convertible loans from investors		431,713		(221,598)		210,115
Convertible zero coupon notes		247,188		(217,947)		29,241
Total Notes Payable	$	1,163,901	$	(439,545)	$	724,356

During the three months ended June 30, 2008, we borrowed an aggregate amount of $328,500 of additional cash from certain accredited investors under several different arrangements.  We borrowed $45,000 from one investor on a short-term basis with no conversion privileges.

In May and June 2008, we borrowed $166,500 from four investors in four separate one year convertible notes bearing interest at ten percent per annum and they received a conversion rate of $0.01 per share for loans of up to $100,000 and $0.005 per share on any amounts lent above $100,000.  As one investor lent us $150,000, that investor received a conversion rate of $0.005 on $50,000 and a rate of $0.01 on $100,000.  That investor also agreed to convert a note payable of $120,000 and accrued interest of $11,047 into this convertible instrument as well, which allowed us to extend the term of his loan by another twelve months.

The other $16,500 came from three investors and they received a conversion rate of $0.01 per share.  As an additional inducement, these investors each received five shares of series B Preferred Stock for every dollar that they lent to us up to $100,000 and ten shares for every dollar lent over $100,000.  We have valued the shares of series B Preferred Stock issued to those investors based on the value of our common stock on the date of their respective investments and recorded that value as interest expense.

On June 30, 2008, an investor who had participated in the bridge loan converted his principal balance of $15,000 and accrued interest of $2,166 into the one year convertible note instrument with an interest of ten percent in the first year and 15% thereafter.

NOTE 12 – DEFERRED REVENUES

  In July 2006, we entered into a revenue share agreement with Double Fusion, an in-game advertising technology and service provider, under which Double Fusion will provide in-game advertising and product placement to go into our first video game product. Under this agreement, Double Fusion advanced $100,000 to us as an upfront deposit, which we received during the fiscal year ended March 31, 2007. Under the agreement, Double Fusion will pay us 65% of net advertising revenues as our part of the revenue share related to in-game advertising placements that they sell. Once they have recouped $100,000 from our 65% revenue share, we will recognize this $100,000 upfront deposit as revenue. Until that time, we have classified this amount as deferred revenue in the current liabilities section of the accompanying balance sheet as of June 30, 2008.

NOTE 13 – BRIDGE LOAN

In January 2007, we entered into a Bridge Loan arrangement with Meyers Associates L.P. (“Meyers”), a broker-dealer. Under this unsecured Bridge Loan arrangement we agreed to issue two shares of our common stock for every $1 lent to us by accredited investors (the “Bridge Units”). We also agreed to pay to the investors 10% simple interest on the funds lent to us and to pay Meyers a commission of 10% of proceeds received under the arrangement and a non-accountable expense allowance that is equal to 3% of the gross funds that we received. Meyers also received 25% shares coverage. We agreed to repay the Bridge Loan at the earlier of (i): twelve months after the date of issuance; (ii) the consummation of any $1.5 million financing; and (iii) the date on which the outstanding principal amount is prepaid in full. The initial completion date of the Bridge Loan was March 31, 2007, which was subsequently extended to May 31, 2007 at which time i t terminated.

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LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Month Periods Ended June 30, 2008 and 2007

NOTE 13 – BRIDGE LOAN – CONTINUED

We agreed to provide the investors in this Bridge Offering the same registration rights provided to investors in our next private placement. In the event that a private placement is not completed at our election within 90 days from the completion of this Bridge Offering, we agreed to file with the SEC within 120 days from the final completion of this Bridge Offering a registration statement under the Securities Act of 1933, as amended, concerning the resale of the shares of our Common Stock included in the Bridge Units.   We have not filed such registration statement.

Through March 31, 2008, we received an aggregate $386,600 in net proceeds (net of commissions and legal fees) under the Bridge Loan and the gross amount at that date that we would need to repay to the investors was $450,000. Subsequently, that amount was later reduced to $340,000 due to partial conversions to equity and by a partial repayment (see below). During the year ended March 31, 2008, we recorded $31,848 of interest expense related to the agreed ten percent interest rate under the Bridge Loan. Overall, we paid Meyers cash commissions of $57,900 on the amount funded, of which $16,900 was paid during the year ended March 31, 2008. These commissions were recorded to debt issuance costs and are being amortized over the one year term of the Bridge Loan.

 We issued an aggregate 900,000 shares to the investors as part of the Bridge Units and 225,000 shares to Meyers as part of their compensation. Overall, we valued the 900,000 shares issued to the investors at $358,200, of which $61,400 was related to the issuance of 260,000 shares during the year ended March 31, 2008, based on the closing market price of our stock on the days in which the funding events occurred and capitalized that amount to debt issuance costs on our March 31, 2008 consolidated balance sheet. Overall, the shares issued to Meyers were valued at $221,650, of which $15,350 was related to the issuance of 65,000 shares during the year ended March 31, 2008, based on the closing market price of our stock and were also capitalized to debt issuance costs on our condensed consolidated balance sheet. As of June 30, 2008, those costs have been fully amortized to interest expense over the term of the loan.

Three of the investors in the Bridge Loan subsequently agreed to convert their aggregate note balances of $125,000 to common stock. We issued an additional 880,000 shares to convert the principal balance of their notes and recorded the $110,000 to common stock and additional paid-in capital. We also accelerated the unamortized value of the debt issuance costs attributable to their notes. This resulted in additional interest expense of $40,617 that was recorded in the year ended March 31, 2008. Since the effective conversion price of the 880,000 shares issued to convert that $110,000 of debt was $0.125 per share and that conversion price was $0.095 less than the closing price of $0.22 on the date of conversion, we also recorded an additional interest charge of $83,600 relating to that beneficial conversion in the year ended March 31, 2008.

In the year ended March 31, 2008, we made a partial repayment of $25,000 to one of the investors in the Bridge Loan.  As a result of this repayment, we accelerated the remaining amount of debt financing costs of $5,042 attributable to that investor and charged that amount to interest expense.

The combination of the $125,000 in conversions and the $25,000 partial repayment reduced the amount outstanding under the Bridge Loan as of June 30, 2008 to $300,000.

Due to our failure to repay the Bridge Loans at the end of their one year terms, the loans defaulted and we are now accruing a penalty interest rate of 15% per annum.

NOTE 14 – SUBSEQUENT EVENTS

In July 2008, we raised $65,000 in additional one year convertible notes from accredited investors.

Also in July 2008, one of the Bridge Loan investors agreed to convert his principal balance of $150,000 and accrued interest of $22,644 to the one year convertible note instrument and an investor who had a non-convertible note payable of $20,000 that was in default agreed to convert his loan into the one year convertible note instrument.  

In July 2008, we issued 150,000 shares to an accredited investor in exchange for an investment of $1,500.

In July and August 2008, we issued an aggregate 1,600,000 to certain employees as additional compensation.

In July 2008, we issued 2,502,500 shares of our common stock to two investors for consulting services.

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LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Three Month Periods Ended June 30, 2008 and 2007

NOTE 14 – SUBSEQUENT EVENTS – CONTINUED

On July 16, 2008, our Board of Directors approved an increase in our authorized shares to 400 million Common Shares and 20 million Preferred Shares, subject to shareholder approval, the majority of which has been attained. We have ordered a current shareholder list and anticipate mailing an information statement to all shareholders regarding this important change in corporate structure.

In July 2008, one of our largest retail customers paid $45,000 from invoices more than 18 months old, which included the $25,000 charge previously written-off.

In August 2008, we reached a settlement agreement with our former distributor, which will extinguish our largest single account payable and largest account receivable.  We expect to record a gain from this settlement in the September 2008 quarter but have not yet finalized the accounting.

As of August 19, 2008, the maturity dates of three loans that were in default have been extended.

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

The following discussion of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by the condensed consolidated financial statements and notes thereto, included in Item 1 in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements.

FORWARD LOOKING STATEMENTS

This document contains statements that are considered forward-looking statements. Forward-looking statements give our current expectations, plans, objectives, assumptions or forecasts of future events. All statements other than statements of current or historical fact contained in this annual report, including statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward -looking statements by terminology such as “anticipate,” “estimate,” “plans,” “potential,” “projects,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” and similar expressions. These statements are based on our current plans and are subject to risks and uncertainties, and as such our actual future activities and resu lts of operations may be materially different from those set forth in the forward looking statements. Any or all of the forward-looking statements in this quarterly report may turn out to be inaccurate and as such, you should not place undue reliance on these forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. The forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and assumptions due to a number of factors, including:

— continued development of our technology;

— consumer acceptance of our current and future products

— dependence on key personnel;

— competitive factors;

— the operation of our business; and

— general economic conditions.

These forward-looking statements speak only as of the date on which they are made, and except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this quarterly report.

THE COMPANY

Left Behind Games Inc., a Washington corporation, formerly known as Bonanza Gold, Inc., doing business through its subsidiary Left Behind Games Inc., a Delaware corporation is in the business of developing and publishing video game products based upon the popular Left Behind series of novels. Pursuant to a share exchange agreement closed on February 7, 2006, we became a subsidiary of Left Behind Games Inc. Washington. As a result of the share exchange agreement, our shareholders took majority control of Left Behind Games Inc. Washington and our management became the management of Left Behind Games Inc. Washington (collectively, “we”, “our” or “LBG”).

We are an early stage company founded to develop and publish video game products based upon the popularLeft Behind series of novels. We have the exclusive world-wide rights to theLeft Behind book series and brand, for the purpose of making any form of electronic games, which includes video games.Left Behind novels and products are based upon fictional storylines focused on events at the end of the world, including the ultimate battles of good against evil, which are very action oriented and supremely suitable for an engaging series of electronic games. According to the book publisher, Tyndale House Publishers,Left Behind’s series of books has sold more than 63 million copies. Accordingly,Left Behind branded products have generated more than $500 million at retail for theLeft Behind book series. According to a Barna Research study,Left Behind has also become a recognized brand name by more than 1/3 of Amer icans. Our management believes thatLeft Behind products have experienced financial success, including the novels, children's books, graphic novels (comic books), movies, and music. Our interest in theLeft Behind brand is limited to our license to make video games. We have no interest in, nor do we profit from any otherLeft Behind branded products.

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Our rights to use theLeft Behind brand to make electronic games is based solely on our license to develop, manufacture, market and distribute video game products based on theLeft Behind series with the publisher of theLeft Behind book series.

We have assembled a team of individuals experienced in the video game industry to develop and market video games based upon theLeft Behind series. Our game(s) feature spiritual weapons such as “prayer” and “worship” which can overcome the fighting power of “guns”.

We have developed our two high quality video games based upon theLeft Behind trademark. We released our first game in November 2006.

To date, we have financed our operations primarily through the sale of shares of our common stock. During the three months ended June 30, 2008, we borrowed an aggregate amount of $328,500 from certain accredited investors under several different formats. We continue to generate operating losses and have only just begun to generate revenues.

Furthermore, the report by our Independent Registered Public Accounting Firm on our financial statements includes a paragraph describing substantial doubt about our ability to continue as a “going concern” as of and for the year ended March 31, 2008.

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the informational requirements of the Securities Exchange Act and must file reports, proxy statements and other information with the SEC. The reports, information statements and other information we file with the Commission can be inspected and copied at the Commission Public Reference Room, 450 Fifth Street, N.W. Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The Commission also maintains a Web site  http://www.sec.gov) that contains reports, proxy, and information statements and other information regarding registrants, like us, which file electronically with the Commission. Our headquarters are located at25060 Hancock Avenue, Suite 103 Box 110, Murrieta, CA 92562. Our phone number is (951) 894-6597. Our Web site ishttp://www.leftbehindgames.com.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2008 and 2007

Revenues

We recorded net revenues of $60,552 for the three months ended June 30, 2008 compared to $114,702 in the three months ended June 30, 2007.  This represented a decline in our revenues of $54,150, or 47%.  The revenues in the three months ended June 30, 2008 were from a mix ofLeft Behind: Eternal Forces, Left Behind:Tribulation Forcesand three Charlie Church Mouse (“CCM”) games.  All of the revenues in the three months ended June 30, 2007 were from the sale ofLeft Behind: Eternal Forces.

Approximately 51% of our revenues in the three months ended June 30, 2008 came from our largest retail customer.  We do expect to report revenue from that customer in the September 2008 period as well but not thereafter as they have reported to us that they are deemphasizing their PC games business.

Our revenue declined primarily because (a) we record our revenues based primarily on sell through at major retailers and cash receipts from our Christian bookstore and other customers and (b) we had a significantly larger presence in a number of major retailers with reported sellthrough in the 2007 period compared to the 2008 period where almost all of our shipments were to the Christian bookstore marketplace.  We expect to report the revenue related from those shipments to the Christian bookstore marketplace as we collect those accounts receivable in later periods.

Cost of Sales - Product Costs

We recorded cost of sales - product costs of $30,415 for the three months ended June 30, 2008 compared to $74,445 in the three months ended June 30, 2007.  This represented a decline in our cost of sales – predict costs of $44,030, or 59%.  The decrease in cost of sales – product costs was due to the decrease in recognized revenue noted above. Cost of sales - product costs consists of product costs and inventory-related operational expenses.

Cost of Sales – Intellectual Property Licenses

We recorded cost of sales – intellectual property licenses of $2,475 for the three months ended June 30, 2008.  Those expenses represented our royalties from the collection of cash originating from the sale of the three Charlie Church Mouse games. We did not record any such expenses in the three months ended June 30, 2007.  

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General and Administrative Expenses

General and administrative expenses were $800,867 for the three months ended June 30, 2008, compared to $1,108,678 for the three months ended June 30, 2007, a decrease of $307,811 or 28%.

Many of these general and administrative expenses were non-cash charges since we paid many of our consultants in shares of our common stock rather than in cash. During the three months ended June 30, 2008 and 2007, we recorded expenses relating to these non-cash payments to consultants of $90,567 and $249,357, respectively. This represented a $158,790 decrease.

During the three months ended June 30, 2008, we issued 75,000 shares of common stock, valued at approximately $1,500 to an employee as additional compensation while in the three months ended June 30, 2007, we issued 425,000 shares of common stock, valued at approximately $93,325, to certain employees as additional compensation. This represented a decrease of $91,825. The overall decrease in non-cash charges attributable to consultants and employees was $250,615.

The remainder of the decrease was due to a variety of factors, including a $203,318 reduction in employee salaries and directors’ fees, a $21,935 reduction in travel and entertainment expense, a $44,660 reduction in professional fees, a $19,205 reduction in communications expenses and a $10,894 decrease in health insurance.

Product Development Expenses

Product development expenses were $51,127 for the three months ended June 30, 2008, compared to $103,002 for the three months ended June 30, 2007, a decrease of $51,875 or 50%. These decreases are directly attributable to the reduction in the number of employees working on our development team and a reduction in consulting fees from outside contractors involved in game development and testing.

Interest Expense

We recorded interest expense of $143,344 for the three months ended June 30, 2008, compared to $140,239 in the three months ended June 30, 2007.  Our interest expense arose from the accretion of debt discounts as well as interest expense associated with various notes payable.  

Net Loss

As a result of the above factors, we reported a net loss of $972,496 for the three months ended June 30, 2008, compared to a net loss of $1,315,449 for the three months ended June 30, 2007, resulting in a reduced loss of $342,953. In addition, our accumulated deficit at June 30, 2008 totaled $43,012,362.

CASH REQUIREMENTS, LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2008 we had $1,117 of cash compared to $2,695 of cash at March 31, 2007, a decrease of $1,578. At June 30, 2008, we had a working capital deficit of $3,634,988 compared to a working capital deficit of $3,089,173 at March 31, 2008.

Operating Activities

For the three month periods ended June 30, 2008 and 2007, net cash used in operating activities was $304,028 and $902,425, respectively. The $304,028 decrease in cash used in our operating activities was primarily due to the decrease in our general and administrative expenses and research and development expenses as we reduced our expenditures over the three month period ended June 30, 2008 to conserve cash. The net losses for the three month periods ended June 30, 2008 and 2007 were $972,496 and $1,315,449, respectively, a decrease of $342,953.

Investing Activities

For the three month period ended June 30, 2007, net cash used in investing activities was $6,090, which represented payments for trademarks. We did not have any investing activities in the three month period ended June 30, 2008 in order to conserve cash.

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Financing Activities

For the three month periods ended June 30, 2008 and 2007, net cash provided by financing activities was $302,450 and $904,177, respectively. The primary element of cash provided by financing activities in the three month period ended June 30, 2008 was borrowings under notes payable and in the three month period ended June 30, 2007 was cash raised through the sale of common stock.

Future Financing Needs

Since our inception in August 2002 through June 30, 2008, we have raised approximately $9.6 million through funds provided by private placement offerings. This was sufficient to enable us to develop our first product and expand our product line to include 6 ggames. Although we expect this trend of financing our business through private placement offerings to continue, we can make no guarantee that we will be adequately financed going forward. However, it is also anticipated that in the event we are able to continue raising funds at a pace that exceeds our minimum capital requirements, we may elect to spend cash to expand operations or take advantage of business and marketing opportunities for our long-term benefit. Additionally, we intend to continue to use equity whenever possible to finance marketing, public relations and development services that we may not otherwise be able to obtain without cash.

We have reduced our staff in order to preserve cash. This personnel reduction does not negatively impact our game development because of our use of outsourcing. This structure allows us to expand the size of our development team on a product-by-product basis without substantially increasing our long-term monthly burn-rate of cash.

To date, we have financed our operations primarily through the sale of shares of our common stock and through the issuance of debt instruments.  During the three months ended June 30, 2008, we borrowed $328,500 from certain accredited investors under several different formats.   We continue to generate operating losses.

Furthermore, the report by our Independent Registered Public Accounting Firm on our financial statements includes a paragraph describing substantial doubt about our ability to continue as a “going concern” as of and for the year ended March 31, 2008.

Going Concern

The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. We have suffered continuing losses from operations, are in default on certain debt, have received a judgment against us, have negative working capital of approximately $3,634,988, which, among other matters, raises substantial doubt about our ability to continue as a going concern. A significant amount of additional capital will be necessary to advance the development and distribution of our products to the point at which they may generate sufficient gross profits to cover our operating expenses. We intend to fund operations through debt and/or equity financing arrangements, which management believes may be insufficient to fund our capital expenditures, working capital and other cash requirements (consisting of accounts payable, accrued liabilities, amounts due to related parties and amounts due under various notes payable) for the fiscal year ending March 31, 2009. Therefore, we will be required to seek additional funds to finance our long-term operations.

We are currently addressing our liquidity issue by continually seeking investment capital through the public markets, specifically, through private placements of common stock and debt. However, no assurance can be given that we will receive any funds in addition to the funds we have received to date.

The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business plan or generate positive operating results.

The consolidated financial statements do not include any adjustments related to recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.

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Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, however, in the past the estimates and assumptions have been materially accurate and have not required any significant changes. Specific sensitivity of each of the estimates and assumptions to change based on other outcomes t hat are reasonably likely to occur and would have a material effect is identified individually in each of the discussions of the critical accounting policies described below. Should we experience significant changes in the estimates or assumptions which would cause a material change to the amounts used in the preparation of our financial statements, material quantitative information will be made available to investors as soon as it is reasonably available.

We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Software Development Costs.Research and development costs, which consist of software development costs, are expensed as incurred. Software development costs primarily include payments made to independent software developers under development agreements. SFAS No. 86,Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed, provides for the capitalization of certain software development costs incurred after technological feasibility of the software is established or for the development costs that have alternative future uses. We believe that the technological feasibility of the underlying software is not established until substantially all product development is complete, which generally includes the development of a working model. No software development costs have been capitalized to date.

Impairment of Long-Lived Assets. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows expected to be generated by the assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the present value of estimated future cash flows. At June 30, 2008, our management believes there is no impairment of our long-lived assets other than the lease-hold improvements of its abandoned office space and certain trademark costs both of which have been written off in the fiscal year ended March 31, 2008. There can be no assurance however; that market conditions will not change or that there will be demand for our products, which could result in impa irment of long-lived assets in the future.

Stock-Based Compensation. Effective April 1, 2006, on the first day of our fiscal year 2006, we adopted the fair value recognition provisions of SFAS No. 123(R),Share-Based Payments, using the modified-prospective transition method. Under this transition method, compensation cost recognized in the fiscal year ended March 31, 2007 includes: (a) compensation cost for all share-based payments granted and not yet vested prior to April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123,Accounting for Stock-Based Compensation, and (b) compensation cost for all share-based payments granted subsequent to March 31, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estim ates. As of March 31, 2008, we had no options outstanding and therefore believe the adoption of SFAS No. 123(R) had an immaterial effect on the accompanying consolidated financial statements.

We calculate stock-based compensation by estimating the fair value of each option using the Binomial Lattice option pricing model. Our determination of the fair value of share-based payment awards are made as of their respective dates of grant using the option pricing model and that determination is affected by our stock price as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behavior. The Binomial Lattice option pricing model was developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, the existing valuation models may not provide an accurate measure of the fair value of our employee stock opti ons. Although the fair value of employee stock options is determined in accordance with SFAS No. 123(R) using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. The calculated compensation cost, net of estimated forfeitures, is recognized on a straight-line basis over the vesting period of the option.

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Stock-based awards to non-employees are accounted for using the fair value method in accordance with SFAS No. 123(R),Accounting for Stock-Based Compensation, and Emerging Issues Task Force (“EITF”) Issue No. 96-18,Accounting for Equity Instruments that are issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the third-party performance is complete or the date on which it is probable that performance will occur. We account for stock-based awards to non-employees by using the fair value method.

In accordance with EITF Issue No. 00-18,Accounting Recognition for Certain Accounting Transactions Involving Equity Instruments Granted to Other Than Employees, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor's balance sheet once the equity instrument is granted for accounting purposes. Accordingly, we have recorded the fair value of the common stock issued for certain future consulting services as prepaid expenses in its consolidated balance sheet.

Revenue Recognition.We evaluate the recognition of revenue based on the criteria set forth in Statement of Position ("SOP") 97-2,Software Revenue Recognition, as amended by SOP 98-9,Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactionsand Staff Accounting Bulletin (“SAB”) No. 101,Revenue Recognition in Financial Statements, as revised by SAB No. 104,Revenue Recognition. We evaluate revenue recognition using the following basic criteria and recognize revenue when all four of the following criteria are met:

•  Persuasive evidence of an arrangement exists: Evidence of an agreement with the customer that reflects the terms and conditions to deliver products must be present in order to recognize revenue.

•  Delivery has occurred: Delivery is considered to occur when the products are shipped and risk of loss and reward have been transferred to the customer.

•  The seller’s price to the buyer is fixed and determinable: If an arrangement includes rights of return or rights to refunds without return, revenue is recognized at the time the amount of future returns or refunds can be reasonably estimated or at the time when the return privilege has substantially expired in accordance with SFAS No. 48,Revenue Recognition When Right of Return Exists.  If an arrangement requires us to rebate or credit a portion of our sales price if the customer subsequently reduces its sales price for our product to its customers, revenue is recognized at the time the amount of future price concessions can be reasonably estimated, or at the time of customer sell-through.  

•  Collectibility is reasonably assured: At the time of the transaction, we conduct a credit review of each customer involved in a significant transaction to determine the creditworthiness of the customer. Collection is deemed probable if we expect the customer to be able to pay amounts under the arrangement as those amounts become due. If we determine that collection is not probable, we recognize revenue when collection becomes probable (generally upon cash collection).

Historically, we recorded revenue upon shipment of product to our channel partners and direct customers then adjusted for a reserve to cover anticipated product returns and/or future price concessions, or the “ship-to method.”  After considering (i) the limited sales history of our product, (ii) the limited business history with our primary channel partner and largest retail customer and (iii) the competitive conditions in the software industry, we determined that return privileges and price protection rights granted to our customers impacted our ability to reasonably estimate sales returns and future price concessions, and therefore, we were unable to conclude that our sales arrangements had a fixed and determinable price at the time our inventory was shipped to customers.  As a result, we have revised our revenue recognition policies.

For sales to our primary channel partner and largest retail customer, we defer revenue recognition until the resale of the products to the end customers, or the “sell-through method.”  Under sell-through revenue accounting, accounts receivable are recognized and inventory is relieved upon shipment to the channel partner or retail customer as title to the inventory is transferred upon shipment, at which point we have a legally enforceable right to collection under normal terms. The associated sales and cost of sales are deferred by recording “deferred income – product sales” (gross profit margin on these sales) as shown on the face of the consolidated balance sheet. When the related product is sold by our primary channel partner or our largest retail customer to their end customers, we recognize previously deferred income as sales and cost of sales.  Our primary channel partner and largest retail customer each provide us with sell-thro ugh information on a frequent basis regarding sales to end customers and in-channel inventories.  

For sales to our on-line store customers, revenues are deferred until such time as the right of return privilege granted to the customers lapses, which is thirty (30) days from the date of sale for unopened games.

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For sales to our Christian bookstore customers and all other customers that cannot provide us with sell-through information and for which we may accept product returns from time to time, revenues are recognized on a cash receipts basis.

In the future, we intend to continue using the sell-through methodology from customers that supply us with sell through reports.  We also plan to continue recognizing sales on our on-line store after a one month lag to allow for the right that we have given our on-line customers to return unopened games for thirty (30) days.

We continue to accumulate historical product return and price concession information related to our Christian bookstore customers and all other customers.  In future periods, we may elect to return to the accrual methodology of recording revenue for those customers upon shipment with estimated reserves at which time we believe we can reasonably estimate returns and price concessions to these customers based upon our historical results.

Revenue from Sales of Consignment Inventory. We have placed consignment inventory with certain customers. We receive payment from those customers only when they sell our product to the end consumers. We recognize revenue from the sale of consignment inventory only when we receive payment from those customers.

Shipping and Handling: In accordance with EITF Issue No. 00-10,Accounting for Shipping and Handling Fees and Costs, we recognize amounts billed to customers for shipping and handling as revenue. Additionally, shipping and handling costs incurred by us are included in cost of goods sold.

We promote our products with advertising, consumer incentive and trade promotions. Such programs include, but are not limited to, cooperative advertising, promotional discounts, coupons, rebates, in-store display incentives, volume based incentives and product introductory payments (i.e. slotting fees). In accordance with EITF No. 01-09,Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendors Products, certain payments made to customers by us, including promotional sales allowances, cooperative advertising and product introductory expenditures have been deducted from revenue. During the three month periods ended June 30, 2008 and 2007, we had no such types of arrangements.

Off-Balance Sheet Arrangements

We presently do not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this report, our management evaluated our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as to whether such disclosure controls and procedures were effective in providing reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the chief executive officer, as appropriate to allow timely decisions regarding required disclosure. Based on our evaluation and subject to the foregoing, our Chief Executive Officer concluded that since our evaluation as of March 31, 2008 we have had n o significant changes in our internal controls.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Since our evaluation as of March 31, 2008 we have had no significant changes in our internal controls.

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PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We are subject to litigation from time to time in the ordinary course of our business. More than 6 months ago, we received a letter from our former President, and current director, Jeffrey Frichner, demanding payment of $37,500 pursuant to our Separation Agreement with him that is allegedly owed to him by us.  We have accrued this amount as an accrued expense in our consolidated balance sheet.

On March 13, 2008, we entered into a payment schedule with a stipulation of judgment with Leonard Linsker in the amount of $60,000. We failed to make those payments.  We have accrued this amount as an accrued expense in the accompanying consolidated balance sheet. In July 2008, Mr. Linsker exported his judgment to California and has placed a lien on our bank accounts.  To date, he has not extracted any funds from us. We continue to attempt to settle this litigation.

We are currently not involved in any other litigation or any pending legal proceedings that we believe could have a material adverse effect on our financial position or results of operations.

ITEM 1A. RISK FACTORS.

Not applicable.

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

During the three months ended June 30, 2008, we issued to independent third parties 5,649,091 shares of common stock for services provided, valued at $90,567 (based on the closing price on the respective grant date). We also issued 75,000 shares of common stock, valued at $1,500 (based on the closing price on the respective grant date), to certain employees as additional compensation.  We also issued 450,000 shares for interest, valued at $5,500 (based on the closing price on the respective grant date).

During the three months ended June 30, 2008, we issued 562,500 warrants to purchase shares of common stock all with an exercise price of $0.05 (see Note 11). We have estimated the value of these warrants to be approximately $11,000 using the binomial lattice method.

Also during the three month period ended June 30, 2008, we issued convertible debt to accredited investors which is convertible to 61,275,891 shares of our common stock at various conversion prices. As an additional inducement, these investors each received five shares of series B Preferred Stock for every dollar that they lent to us up to $100,000 and ten shares for every dollar lent over $100,000.  We have valued the shares of series B Preferred Stock issued to those investors based on the value of our common stock on the date of their respective investments, recoding it as a debt discount, and will amortize that value as interest expense over the term of the loans.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Due to our failure to repay the Bridge Loans at the end of their one year terms, the loans have been declared in default and we are now accruing a penalty interest rate of 15% per annum.  We are also in default on several of our notes payable.

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

None.

ITEM 5. OTHER INFORMATION.

None

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ITEM 6.      EXHIBITS.

(a) Exhibits. The following documents are filed as part of this report:

Exhibit 3.1	Articles of Incorporation dated March 29, 1961***
Exhibit 3.2	Amendment to Articles of Incorporation dated August 20, 1962***
Exhibit 3.3	Amendment to Articles of Incorporation dated October 17, 1977***
Exhibit 3.4	Amendment to Articles of Incorporation dated June 15, 1999***
Exhibit 3.5	Amended and Restated Articles of Incorporation dated January 30, 2004***
Exhibit 3.6	Bylaws***
Exhibit 10.1	Share Exchange Agreement**
Exhibit 10.2	Employment Agreement with Troy A. Lyndon**
Exhibit 10.3	Addendum dated June 2, 2004 to Employment Agreement with Troy A. Lyndon**
Exhibit 10.4	Addendum dated February 1, 2005 to Employment Agreement with Troy A. Lyndon**
Exhibit 10.5	Employment Agreement with Jeffrey S. Frichner**
Exhibit 10.6	Addendum dated June 2, 2004 to Employment Agreement with Jeffrey S. Frichner**
Exhibit 10.7	Addendum dated February 1, 2005 to Employment Agreement with Jeffrey S. Frichner**
Exhibit 10.8	Employment Agreement with Thomas H. Axelson**
Exhibit 10.9	Addendum dated June 2, 2004 to Employment Agreement with Thomas H. Axelson**
Exhibit 10.10	Addendum dated February 1, 2005 to Employment Agreement with Thomas H. Axelson**
Exhibit 10.11	Sub-License Agreement with White Beacon****
Exhibit 10.12	Distribution Agreement with COKeM International****
Exhibit 10.13	Separation Agreement with Jeffrey S. Frichner*
Exhibit 14.1	Code of Ethics for Chief Executive Officer and Senior Financial Officers***
Exhibit 31.1	Certification of principal executive officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1	Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*       Incorporated by reference from Form 8-K filed on June 13, 2007

**     Incorporated by reference from Form 8-K filed on February 10, 2006

***   Incorporated by reference from Form 10-SB filed on February 23, 2004

**** Incorporated by reference from Form 10-KSB filed on July 16, 2007

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SIGNATURES

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

LEFT BEHIND GAMES, INC.

Date: AUGUST 19, 2008                   

BY:/S/ TROY A. LYNDON                          

TROY A. LYNDON

PRINCIPAL EXECUTIVE OFFICER,

PRINCIPAL ACCOUNTING OFFICER

AND PRINCIPAL FINANCIAL OFFICER

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