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FREEZE TAG, INC.
0001485074
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false
--12-31
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<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><i>Nature of Business</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">We are a casual online games publisher that develops and markets
games across the major digital distribution platforms including PC/Mac downloadable (Web), mobile, and emerging platforms like
social networking sites (including Facebook).  We focus on casual games because of our belief that they appeal to a significant
portion of the population.  Although the primary consumers of downloadable casual games are women over the age of 35,
downloadable casual games are enjoyed by people of all ages – ex-gamer dads, pre-teen kids, teenagers, college students and
grandparents.  Thus, we believe the potential market for our games is very large.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Revenue
Recognition</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">The
Company’s revenues are derived primarily by licensing software products in the form of online and downloadable games for
PC, Mac and smartphone platforms.  The Company distributes its products primarily through online games portals and smartphone
device manufacturers (“distribution partners”), which market the games to end users.  The nature of our
business is such that we sell games basically through four distribution outlets – WEB portals, brick and mortar retail distributors,
mobile distributors and publishers, and our own web portal, <u>www.freezetag.com</u>.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b><i>Product
Sales (web and mobile revenues)</i></b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">We
recognize revenue from the sale of our products upon the transfer of title and risk of loss to our customers, and once any performance
obligations have been completed.  Revenue from product sales is recognized after deducting the estimated allowance for
returns and price protection.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b><i>Licensing
Revenues (retail revenues- royalties)</i></b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Third-party
licensees distribute games under license agreements with the Company.  We receive royalties from the licensees as a
result.  We recognize these royalties as revenues upon receipt of the monthly or quarterly (varies per distribution
partner) revenue reports provided by the partner.  Revenue from licensing/royalties is recognized after deducting the
estimated allowance for returns and price protection.  Some license agreements require a royalty advance from the licensee/distributor
in which case the original advance is recognized as a liability and royalty revenue is deducted from the advance as earned.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">  </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Other
revenues primarily include Ad game revenue and work-for-hire game related revenue. We derive our advertising game revenue from
certain of our partners that offer our games free of charge to consumers in exchange for the consumers being exposed to advertising
embedded in our games. In this way, we do not receive revenue for the sale of our games, but rather a percentage of the “advertising”
revenue generated by these player views.  This method of generating revenue is essentially the same as traditional radio
or television advertising where consumers are allowed to enjoy content for “free” but are forced to watch (or listen)
to advertising before, in between and at the end of the programming content.  Additionally, we derive some revenue from
“work-for-hire” projects.  Some of our partners occasionally ask us to render “work-for-hire”
services for them such as preparing packaging materials.  For example, a retail game and DVD publisher hired us to create
several designs for printed packages that were used for games published by the publisher but not developed by us.  For
this work, we charge a one-time, fixed fee for each package design.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">We
recognize this revenue once all performance obligations have been completed.  In addition, persuasive evidence of an
arrangement must exist and collection of the related receivable must be probable.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">We
recognize revenue in accordance with current accounting standards when an arrangement exists, delivery has occurred, the price
is fixed and determinable, and collectability is probable.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Cash
and Cash Equivalents</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">For
purposes of the Statement of Cash Flows, the Company considers liquid investments with an original maturity of three months or
less to be cash equivalents.  The Company places its cash and cash equivalents with large commercial banks.  The
Federal Deposit Insurance Corporation (“FDIC”) insures these balances, up to $250,000.  All of the Company’s
cash balances at September 30, 2011 and December 31, 2010 were insured.  At September 30, 2011 and December 31, 2010
there were no cash equivalents.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b><i>Restricted
Cash</i></b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">In
February of 2010, as a condition of the private equity offering of common shares of the Company, we entered into an escrow agreement,
which governed the receipt and distribution of the funds.  At the time of closing, $171,125 (50%) of the funds were
placed in to an escrow account, and these funds are being used to pay accounting, legal, and consulting fees associated with the
public offering of common shares of the Company and the first 12 months of accounting and legal expenses following the successful
listing on the OTCBB.  As of September  30, 2011, the remaining balance was $0 compared to $28,839 as of December
31, 2010.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Releasing
the funds required the signatures of both the Company, and a representative from Monarch Bay Management Company.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Because
of these restrictions on the use of funds, we have placed them on the balance sheet in a “Restricted Cash” category.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Allowances
for Returns, Price Protection, and Doubtful Accounts</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">   </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Because
the majority of our business is derived through online portals (such as Big Fish Games) and wireless online app stores (such as
Apple), there is no physical product, other than the downloadable bits of our games that is involved in the customer purchase.  In
the digital environment, the customer cannot ‘return’ a digital download product.  Therefore, there are
no returns.  The customer can ask for a refund of a digital product, and if there are any, then they are reconciled
or netted out by our distribution partners before we receive the corresponding payments and royalty statements.  As
such, we do not allow for returns, bad debts or price protection of digital download products.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b> </b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">However,
we derive a small portion of our revenues from sales of physical packaged software for personal computers through distribution
partners who sell through traditional retail channels.  Product revenue is recognized net of allowances for price protection
and returns and various customer discounts.  Our distribution partners who sell to retailers may allow returns for our
packaged personal computer products; these partners may decide to provide price protection or allow returns for personal computer
products after they analyze: (1) inventory remaining in the retail channel, (2) the rate of inventory sell-through in the retail
channel, and (3) the remaining inventory on hand of our games.  To allow for these returns, price protection and various
customer discounts, some of our distribution partners who sell to retailers will hold back a percentage of our revenue.  These
“hold-back” amounts, typically a percentage of revenue, are then reconciled on a quarterly basis and detailed on the
statements we receive from our distribution partners.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">  </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Property
and Equipment</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Property
and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the related
assets.  All assets are currently depreciated over 3 years.  Maintenance and repairs are charged to expense
as incurred.  Renewals and improvements of a major nature are capitalized.  At the time of retirement or other
disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts, and any resulting
gains or losses are reflected in the statement of operations.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Concentrations
of Credit Risk, Major Customers and Major Vendors</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">The
Company’s customers are the end-consumers that purchase its games from the websites where the Company has its games listed
for sale.  Therefore, the Company does not have any individual customers that represent any more than a fraction of
its revenue.  However, the Company does have primary distribution partners, which are the owners of the websites where
it sells its games.  Under the Company’s distribution agreements it is not obligated to make, distribute or sell
any games.  However, for any games the Company does make and wishes to distribute it can list them on one or more of
these websites under a revenue sharing arrangement where it shares the revenue from any of its games that sell.  The
sharing arrangement varies greatly depending on the distributor with the Company generally keeping between 35% and 70% of the
revenue and the distributor keeping the remainder of the revenue generated by each sale.  At times the Company enters
into “exclusivity options” whereby if a distributor wishes to have an exclusive period carrying the Company’s
games (normally 30-90 days) it will agree to that in exchange for the distributor marketing the game in their newsletter and other
marketing programs.  Due to the fact the Company has a number of distribution partners and a variety of different websites
where it can sell its games, the Company is not substantially dependent on any of its distribution partners or agreements.  In
addition to the distribution agreements, the Company currently has licensing agreements with Ohio Art Company and CMG Worldwide,
which allow it to develop and distribute games around third party intellectual property in exchange for paying royalty payments.  The
Company is not substantially dependent on either of those licensing agreements.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">   </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">At
September 30, 2011, the Company’s primary distributors that represented 10% or more of its revenues were: Big Fish Games
– 61.31%.  At December 31, 2010, the Company’s primary distributors that represented 10% or more of its
revenues were: Big Fish Games – 48% and Real Networks – 12%.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">At
September 30, 2011, the Company’s primary distributors and partners that represented 10% or more of its accounts receivable
were: Big Fish Games – 56.14%, and Exent –13.96%.  At December 31, 2010, the Company’s primary distributors
and partners that represented 10% or more of its accounts receivable were: Big Fish Games - 39%, Square Enix Ltd – 22%,
and Exent Technologies – 17%.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Income
Taxes</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">We
account for income taxes using ASC Topic 740, Income Taxes.  Under ASC Topic 740, income taxes are accounted for under
the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry forwards.  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.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">ASC
Topic 740 includes accounting guidance which clarifies the accounting for the uncertainty in recognizing income taxes in an organization
by providing detailed guidance for financial statement recognition, measurement and disclosure involving uncertain tax positions.  This
guidance requires an uncertain tax position to meet a more-likely-than-not recognition threshold at the effective date to be recognized
both upon the adoption of the related guidance and in subsequent periods.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> The
Company has no uncertain tax positions at any of the dates presented.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Foreign
Currency Translation</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">We
derive a portion of our revenue from foreign countries, which report to us in foreign currency, but pay in U.S. Dollars.  Because
of the fluctuations between the reporting time and the payment period (up to 60 days), it is necessary to make adjustments to
our accounting records.  These adjustments are recorded under a Foreign Currency Translation expense account, and shown
in the Statement of Operations as a General and Administrative expense.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Accounting
for Stock-Based Compensation</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">We
account for stock-based compensation in accordance with ASC Topic 718-10, Compensation-Stock Compensation and ASC Subtopic 505-50,
Equity-Based Payments to Non-Employees (“ASC stock-based compensation guidance”).  Stock-based compensation
expense recognized during the requisite services period is based on the value of share-based payment awards after reduction for
estimated forfeitures.  Forfeitures are estimated at the time of grant and are revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Stock-based
compensation expense recognized in our statement of operations for the nine month period ended September 30, 2011 was $16,003,
and $21,992 for the nine month period ended September 30, 2010.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">  </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Impairment
of Long-Lived Assets</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">The
Company has adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”).  ASC
360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  The
Company evaluates its long-lived assets for impairment annually or more often if events and circumstances warrant.  Events
relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted
inability to achieve break-even operating results over an extended period.  The Company evaluates the recoverability
of long-lived assets based upon forecasted undiscounted cash flows.  Should impairment in value be indicated, the carrying
value of long-lived assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate
disposition of the asset.  ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying
amount or the fair value less costs to sell.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Fair
Value of Financial Instruments</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Effective
January 1, 2009, the Company adopted Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures
(“ASC 820- 10”) and Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”),
which permits entities to choose to measure many financial instruments and certain other items at fair value.  Neither
of these statements had an impact on the Company’s financial position, results of operations or cash flows.  The
carrying value of cash and cash equivalents, accounts payable, accrued expenses and notes payable, as reflected in the balance
sheets, approximate fair value because of the short-term maturity of these instruments.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Inputs
used in the valuation to derive fair value are classified based on a fair value hierarchy which distinguishes between assumptions
based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs).  The hierarchy
consists of three levels:</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="width: 100%">
<tr style="vertical-align: top">
<td style="width: 48px; font: 10pt/115% Calibri, Halvetica, Sans-Serif; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">·  </font></td>
<td style="font: 10pt/115% Times New Roman, Times, Serif; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Level
one — Quoted market prices in active markets for identical assets or liabilities;</font></td></tr>
<tr style="vertical-align: top">
<td style="font: 10pt/115% Calibri, Halvetica, Sans-Serif; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">·  </font></td>
<td style="font: 10pt/115% Times New Roman, Times, Serif; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Level
two — Inputs other than level one inputs that are either directly or indirectly observable; and</font></td></tr>
</table>
<p style="font: 11pt Calibri, Halvetica, Sans-Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="width: 100%">
<tr style="vertical-align: top">
<td style="width: 48px; font: 10pt/115% Calibri, Halvetica, Sans-Serif; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">·  </font></td>
<td style="font: 10pt/115% Times New Roman, Times, Serif; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Level
three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and
reflect those assumptions that a market participant would use.</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Determining
the category in which an asset or liability falls within the hierarchy requires significant judgment.  The Company evaluates
its hierarchy disclosures each period.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Use
of Estimates</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">The
preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“U.S.
GAAP”) requires the Company’s management to make judgments, assumptions and estimates that affect the amounts reported
in its financial statements and accompanying notes.  Management bases its estimates on historical experience and on
various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities.  Actual results may differ from these estimates and these
differences may be material.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">  </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Research
and Development Costs</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">The
Company charges costs related to research and development of products to general and administrative expense as incurred.  The
types of costs included in research and development expenses include research materials, salaries, contractor fees, and support
materials.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Software
Development Costs</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Software
development costs include direct costs incurred for internally developed products and payments made to independent software developers
and/or contract engineers and artists.  We account for software development costs in accordance with the FASB guidance
for the costs of computer software to be sold, leased, or otherwise marketed (“ASC Subtopic 985-20”).  Software
development costs are capitalized once the technological feasibility of a product is established and such costs are determined
to be recoverable.  Technological feasibility of a product encompasses both technical design documentation and game
design documentation, or the completed and tested product design and working model.  Software development costs are
capitalized once technological feasibility of a product is established and such costs are determined to be recoverable against
future revenues.  For products where proven game engine technology exists (as is the case for most of our products),
this may occur early in the development cycle.  Significant management judgments and estimates are utilized in the assessment
of when technological feasibility is established.  For most of our PC/Mac products, technological feasibility is established
when a detailed game design document containing sufficient technical specifications written for a proven game engine or framework
technology has been created and approved by management.  However, technological feasibility is evaluated on a product-by-product
basis.  Amounts related to software development that are not capitalized are charged immediately to the appropriate
expense account.  Amounts that are considered ‘research and development’ that are not capitalized are immediately
charged to general and administrative expense.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Prior
to a product’s release, we expense, as part of “Cost of Sales—Product Development”, capitalized costs
when we believe such amounts are not recoverable.  Capitalized costs for those products that are cancelled or abandoned
are charged to product development expense in the period of cancellation.  Commencing upon product release, capitalized
software development costs are amortized to “Cost of Sales—Product Development” based on the straight-line method
over a twenty four month period.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">   </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">We
evaluate the future recoverability of capitalized software development costs and intellectual property licenses on a quarterly
basis.  For products that have been released in prior periods, the primary evaluation criterion is actual title performance.  For
products that are scheduled to be released in future periods, recoverability is evaluated based on the expected performance of
the specific products to which the costs relate or in which the licensed trademark or copyright is to be used.  Criteria
used to evaluate expected product performance include: historical performance of comparable products developed with comparable
technology; orders for the product prior to its release; and, for any sequel product, estimated performance based on the performance
of the product on which the sequel is based.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Based
on current trends in our business, management has determined the expected shelf life of the majority of a game’s revenue
will be realized over a two year period.  Therefore, we have determined the appropriate amortization period for expensing
capitalized production costs to be two years or twenty four months from date of the initial release, or first sale of the product
for a specific technology platform.  It is possible that the same game developed on different technology platforms (such
as PC and Mac) will be launched on different release dates because product development cycles may differ and distribution partner
release policies may differ.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">At
September 30, 2011, and December 31, 2010, current and long-term capitalized software development costs on the balance sheet were
$716,729 and $479,245 respectively.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">From
time to time, the Company engages in product development projects for third parties where the company does not retain the intellectual
property rights to the games it develops.  These types of development projects are often referred to as “work-for-hire.”  In
these instances, all costs associated with developing the games are expensed as they are incurred.  We do this because
the Company receives revenue based on project deliverables outlined as milestones in the development agreement executed by the
Company and the third party that has engaged us to perform development work.  These non-capitalized costs are represented
as “Cost of Sales – Development Services” expenses on our financial statements.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">For
the nine month period ended September 30, 2011, “Cost of Sales – Development Services” was $0.  For
the nine month period ended September 30, 2010, the Company recorded “Cost of Sales – Development Services”
charges of $134,405.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Intellectual
Property Licenses (Prepaid Royalties)</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Intellectual
property license costs represent license fees paid to intellectual property rights holders for use of their trademarks or copyrights
in the development of the Company’s products.  Intellectual property license costs represent license fees paid
to intellectual property rights holders for use of their trademarks, copyrights, software, technology, music or other intellectual
property or proprietary rights in the development of our products.  Depending upon the agreement with the rights holder,
we may obtain the rights to use acquired intellectual property in multiple products over multiple years, or alternatively, for
a single product.  Minimum guaranteed royalty payments for intellectual property licenses are initially recorded as
an asset (prepaid royalties or prepaid licensing fees), and a current liability, (accrued royalties payable) at the contractual
amount upon execution of the contract when no significant performance remains with the licensor.  Commencing upon the
related product’s release date, intellectual property licenses costs are amortized to “Cost of Sales – Licensing”
based upon the percentage of revenue outlined in the contract with each specific licensor.  Generally, the Company’s
intellectual property licensing contracts call for licensors to be paid a percentage of revenue actually received by the Company,
with allowances for minimum guarantees. Sometimes, the terms of the specific licensing contracts allow for the Company to re-capture
expenses before licensing out royalties are calculated.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">  </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">Capitalized
intellectual property costs for those products that are cancelled or abandoned are charged to product development expense in the
period of cancellation.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">For
the nine month period ended September 30, 2011 and the year ended December 31, 2010, prepaid royalties (or prepaid licensing fees)
were $13,217, and $21,088 respectively.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b> </b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Recent
Accounting Pronouncements</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">In
January 2010, the FASB issued an update to Fair Value Measurements and Disclosures.  This update provides amendments
to ASC Subtopic 820-10 requiring new disclosures regarding (1) transfers in and out of Levels 1 and 2, in which the Company should
disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe
the reasons for the transfers, and (2) the reconciliation for fair value measurements using significant unobservable inputs (Level
3), in which the Company should present separately information about purchases, sales, issuances, and settlements (on a gross
basis rather than as one net number).  In addition the update provides clarification of existing disclosures regarding
the level of disaggregation and disclosures about inputs and valuation techniques.  The new disclosures and clarifications
of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchase, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements.  Those
disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years.  The
Company does not expect the adoption of this statement to have a material impact on its financial statements.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">In
December 2010, the FASB issued FASB ASU No. 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for
Reporting Units with Zero or Negative Carrying Amounts,” which is now codified under FASB ASC Topic 350, “Intangibles
— Goodwill and Other.”  This ASU provides amendments to Step 1 of the goodwill impairment test for reporting
units with zero or negative carrying amounts.  For those reporting units, an entity is required to perform Step 2 of
the goodwill impairment test if it is more likely than not a goodwill impairment exists.  When determining whether it
is more likely than not an impairment exists, an entity should consider whether there are any adverse qualitative factors, such
as a significant deterioration in market conditions, indicating an impairment may exist. FASB ASU No. 2010-28 is effective
for fiscal years (and interim periods within those years) beginning after December 15, 2010.  Early adoption is
not permitted. Upon adoption of the amendments, an entity with reporting units having carrying amounts which are zero or negative
is required to assess whether is it more likely than not the reporting units’ goodwill is impaired.  If the entity
determines impairment exists, the entity must perform Step 2 of the goodwill impairment test for that reporting unit or units.
Step 2 involves allocating the fair value of the reporting unit to each asset and liability, with the excess being implied goodwill.  An
impairment loss results if the amount of recorded goodwill exceeds the implied goodwill.  Any resulting goodwill impairment
should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption.  This
ASU is not expected to have any material impact to our financial statements.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">  </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">In
December 2010, the FASB issued FASB ASU No. 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations,”
which is now codified under FASB ASC Topic 805, “Business Combinations.”  A public entity is required to
disclose pro forma data for business combinations occurring during the current reporting period.  This ASU provides
amendments to clarify the acquisition date to be used when reporting the pro forma financial information when comparative financial
statements are presented and improves the usefulness of the pro forma revenue and earnings disclosures.  If a public
company presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though
the business combination(s) which occurred during the current year had occurred as of the beginning of the comparable prior annual
reporting period only.  The supplemental pro forma disclosures required are also expanded to include a description of
the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included
in the reported pro forma revenue and earnings.  FASB ASU No. 2010-29 is effective on a prospective basis for business
combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2010, with early adoption permitted.  The adoption of this ASU will not have a material effect on
our financial position, results of operations or cash flows.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">For the three month period ended September 30, 2011, we incurred
a net gain of $29,420.  For the nine month period ended September 30, 2011, we incurred net losses of $101,479, and incurred
cumulative losses of $1,093,481.  During the nine month period ended September 30, 2011 and the year ended December 31,
2010, we continued to experience close to neutral cash flows from operations largely due to our continued investment spending for
product development of game titles for the PC and other popular gaming platforms that are expected to benefit future periods.  Those
facts, along with our lack of access to a significant bank credit facility, create an uncertainty about our ability to continue
as a going concern.  Accordingly, we are currently evaluating our alternatives to secure financing sufficient to support
the operating requirements of our current business plan, as well as continuing to execute our business strategy of distributing
our game titles to digital distribution outlets, including mobile gaming app stores, online PC and Mac gaming portals, and opportunities
for new devices such as tablet (mobile internet device) applications, mobile gaming platforms and international licensing opportunities.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Our ability to continue as a going concern is dependent upon our
success in securing sufficient financing and to successfully execute our plans to return to positive cash flows during fiscal 2011.  Our
financial statements do not include any adjustments that might be necessary if we were unable to continue as a going concern.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0">Capitalized Production Costs, Net consists of the following at:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="line-height: 115%; font-weight: bold; text-align: center"> </td>
<td style="line-height: 115%; font-weight: bold; text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">September 30, 2011</td>
<td nowrap="nowrap" style="line-height: 115%; font-weight: bold; text-align: center"> </td>
<td style="line-height: 115%; font-weight: bold; text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">December 31, 2010</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 76%; padding-left: 18.35pt; line-height: 115%">Capitalized Production Costs</td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 9%; line-height: 115%; text-align: right">1,402,419</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 9%; line-height: 115%; text-align: right">979,390</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 18.35pt; line-height: 115%">Accumulated Production Costs Amortization</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">(685,690</td>
<td nowrap="nowrap" style="line-height: 115%">)</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">(500,145</td>
<td nowrap="nowrap" style="line-height: 115%">)</td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Total Capitalized Production Costs, Net</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%">$</td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">716,729</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%">$</td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">479,245</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">        Current</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">274,859</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">185,794</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">        Long Term</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">441,870</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">293,451</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">We recognized amortization expense of $185,547 and $161,030 for
the nine month period ended September 30, 2011 and 2010, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">On
June 22, 2011, the Company entered into a technology transfer agreement with an unaffiliated third party, which included a liability
in the amount of $36,000 (Note 9) and 96,000 shares of common stock (Note 11) in exchange for the right, title, and interest in
the Marishco Game Engine.  The liability is payable in 24 installments of $1,500 per installment. The common stock is
payable in eight quarterly installments of 12,000 shares per installment.  On September 21, 2011, the Company issued
12,000 shares to the unaffiliated third party and reduced common stock payable accordingly.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">The
game engine will be amortized on a straight-line basis over the useful life of three years. For the nine month period ended September
30, 2011 and 2010 amortization expense was $5,800 and $0 respectively.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0">Fixed assets, Net, consists of the following at:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="line-height: 115%; font-weight: bold; text-align: center"> </td>
<td style="line-height: 115%; font-weight: bold; text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">September 30, 2011</td>
<td nowrap="nowrap" style="line-height: 115%; font-weight: bold; text-align: center"> </td>
<td style="line-height: 115%; font-weight: bold; text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">December 31, 2010</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 76%; line-height: 115%">Computer Equipment</td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 9%; line-height: 115%; text-align: right">5,347</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 9%; line-height: 115%; text-align: right">5,347</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Communications Equipment</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">830</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">830</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Accumulated Depreciation</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">(4,402</td>
<td nowrap="nowrap" style="line-height: 115%">)</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">(3,696</td>
<td nowrap="nowrap" style="line-height: 115%">)</td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Total Fixed Assets, Net</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%">$</td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">1,775</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%">$</td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">2,481</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Property and equipment are recorded at cost and are depreciated
using the straight-line method over the estimated useful lives of the related assets.  All assets are currently depreciated
over three years.  For the nine month period ended September 30, 2011 and 2010 depreciation expense was $706 and $162,
respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> Accrued Compensation Consists of the following at:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">September 30, 2011</td>
<td nowrap="nowrap" style="line-height: 115%; font-weight: bold"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">December 31, 2010</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 76%; line-height: 115%">Employee Reimbursements owed</td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 9%; line-height: 115%; text-align: right">-</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 9%; line-height: 115%; text-align: right">3,170</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Payroll Liabilities</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">391</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">392</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Accrued Vacation</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">64,556</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">55,540</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Accrued Salary</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">93,600</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">93,600</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Total Accrued Compensation</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%">$</td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">159,806</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%">$</td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">152,702</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Accrued Royalties consists of money owed to other parties with whom
we have revenue-sharing agreements or from whom we license certain trademarks or copy writes.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Unearned Royalties consists of royalties received from licensees,
which have not yet been earned.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Accrued and Unearned Royalties consists of the following at: </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="line-height: 115%; font-weight: bold; text-align: center"> </td>
<td style="line-height: 115%; font-weight: bold; text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">September 30, 2011</td>
<td nowrap="nowrap" style="line-height: 115%; font-weight: bold; text-align: center"> </td>
<td style="line-height: 115%; font-weight: bold; text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">December 31, 2010</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 76%; line-height: 115%">Accrued Royalties</td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 9%; line-height: 115%; text-align: right">341,793</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 9%; line-height: 115%; text-align: right">270,956</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Unearned Royalties</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">286,423</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">229,852</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Total Accrued and Unearned Royalties</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%">$</td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">628,216</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%">$</td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">500,808</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Leases</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">We have been residing in our current building at 228 W. Main Street,
Tustin, California since 2006.  Since that time, we have paid our rent on a month-to-month basis. As such, we are free
to leave our current premises at any time with 30 days courtesy notice but we do not have a lease agreement with the property owner.  This
is our preference since it is our desire to be able to quickly expand to alternative office space should our growth require additional
square footage than our current offices.  The Company or Company employees or contractors own all of the computer and
office equipment that is used in the course of business.  We do not have any lease agreements for any office equipment.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">We have a one year contract in place with an Internet service provider
(one year contract that expires in March 2012).</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Technology Payable</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">On June 22, 2011, the Company entered into a technology transfer
agreement with an unaffiliated third party which included a liability in the amount of $36,000 and 96,000 shares of common stock
(Note 11) in exchange for the right, title, and interest in the Marishco Game Engine.  The liability is payable in 24
installments of $1,500 per installment and there is no stated interest rate.  Therefore the balance of $36,000 was recorded
as a liability, net of a discount of $2,834 with the discount to be amortized over the life of the liability using the effective
interest method.  As of September 30, 2011, the Company recognized a current liability of $18,000, long term liability
of $11,217 and amortization of debt discount of $551.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0">Debt consists of the following at:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">September 30, 2011</td>
<td nowrap="nowrap" style="line-height: 115%; font-weight: bold"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">December 31, 2010</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 76%; padding-left: 18.35pt; line-height: 115%">Line of Credit</td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 9%; line-height: 115%; text-align: right">1,400</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 9%; line-height: 115%; text-align: right">18,300</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 18.35pt; line-height: 115%">Notes Payable-Related Party</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">125,000</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">125,000</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 18.35pt; line-height: 115%">Notes Payable</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">103,900</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">-</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Total Debt</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">230,300</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">143,300</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Less: Current</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">230,300</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">93,300</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Long Term</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">-</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">50,000</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><b>Line of Credit</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">In October 2006, the Company obtained a $200,000
secured line of credit with Sunwest Bank in Tustin, California.  The line of credit is secured with a $50,000 certificate
of deposit and liens against the personal property of Craig Holland, CEO, and Mick Donahoo, CFO.  The line of credit
was set to mature on December 31, 2010 and bears interest of 7% per annum.  The line of credit was renewed each year
and terms were re-negotiated between the Company and Sunwest Bank.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">On August 3, 2010, the Company entered into
a Change of Terms Agreement, which modified the terms of its promissory note with Sunwest Bank dated October 20, 2006, as amended.  Under
the Change of Terms Agreement:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 48px; line-height: 115%; font-family: Calibri, Halvetica, Sans-Serif; text-align: right">·  </td>
<td style="line-height: 115%">The facility changed from a “Commercial Non-Revolving Line-of-Credit” to a “Commercial Term Loan” with the effect being that no further funds would be advanced;</td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%; font-family: Calibri, Halvetica, Sans-Serif; text-align: right">·  </td>
<td style="line-height: 115%">Sunwest Bank released a deposit account which was being used to secure the repayment of the amounts owed under promissory note in exchange for Mr. Craig Holland (a guarantor of the promissory note and owner of the deposit account) agreeing $50,000 of the funds in the deposit account would be used to pay down the amount owed under the promissory note;</td></tr>
</table>
<p style="font: 11pt Calibri, Halvetica, Sans-Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 48px; line-height: 115%; font-family: Calibri, Halvetica, Sans-Serif; text-align: right">·  </td>
<td style="line-height: 115%">As a result of the $50,000 payment, beginning July 31, 2010, the monthly principal payment was reduced from $5,000 to $1,900; and</td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%; font-family: Calibri, Halvetica, Sans-Serif; text-align: right">·  </td>
<td style="line-height: 115%">The date on which the principal and any accrued interest were due under the promissory note, as amended (the Maturity Date), was extended from December 31, 2010 to September 30, 2011.</td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0">For the nine month period ended September 30, 2011 and year ended
December 31, 2010, the balance was $1,400, and $18,300, respectively.  As of September 30, 2011 and December 31, 2010,
all interest payments were current therefore no accrued interest is recorded.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><b>Convertible Note Payable</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">On July 21, 2011, we entered into a Securities Purchase Agreement
with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible Promissory Note in the original principal amount
of $62,500 (the “Note”).  The Note has a maturity date of April 25, 2012, and is convertible into our common
stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price.  The “Variable Conversion
Price” shall mean 55% multiplied by the Market Price (representing a discount rate of 45%).  “Market Price”
means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on
the latest complete Trading Day prior to the Conversion Date.  “Fixed Conversion Price” shall mean $0.00009.  The
shares of common stock issuable upon conversion of the Note will be restricted securities as defined in Rule 144 promulgated under
the Securities Act of 1933.  The purchase and sale of the Note closed on August 1, 2011, the date that the purchase price
was delivered to us.  The issuance of the Note was exempt from the registration requirements of the Securities Act of
1933 pursuant to Rule 506 of Regulation D promulgated thereunder.  The purchaser was an accredited and sophisticated
investor, familiar with our operations, and there was no solicitation.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">On September 16, 2011, we entered into a Securities Purchase Agreement
with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible Promissory Note in the original principal amount
of $40,000 (the “Note”). The Note has a maturity date of June 20, 2012, and is convertible into our common stock at
the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price”
shall mean 55% multiplied by the Market Price (representing a discount rate of 45%). “Market Price” means the average
of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete
Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009. The shares of common stock
issuable upon conversion of the Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act
of 1933. The purchase and sale of the Note closed on September 22,2011, the date that the purchase price was delivered to us.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Total Accrued interest is $1,095 as of September 30, 2011.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Convertible Note Payable – Related Party</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">On July 2, 2010, a convertible note loan from Holland Family Trust,
(whose sole trustee is Franklena Holland, mother of Company president Craig Holland), was secured for $100,000.  The
Company has received $75,000 of the purchase price, with the remaining $25,000 to be paid at a later date.  The promissory
note is convertible into the Company’s common stock at a rate of $0.10 per share.  The convertible promissory note
bears interest at the rate of 10% per annum and matures 12 months from the date each purchase installment was received.  Interest
on the notes is paid each month at the first of the month as such there is no accrued interest as of September 30, 2011.  The
Company had a convertible note payable balance of $75,000 for period ended September 30, 2011 and December 31, 2010.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Note Payable- Related Party</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">As of July 1, 2010, there is a note payable to Craig Holland and
Mick Donahoo for $25,000 each (a total of $50,000 notes payable) for money that was loaned to the company to secure the Sunwest
Bank debt.  The money was loaned to the company at a rate of 10% interest compounded annually and matures on June 30,
2012.  The Company had a note payable balance of $50,000 for period ended September 30, 2011 and December 31, 2010.  For
the period ended September 30, 2011, and year ended December 31, 2010, the Company recorded accrued interest of $6,646 and $2,580,
respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company recorded total interest expense for all debt of $12,177
and $7,455 for the nine month period ended September 30, 2011 and 2010, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> <b>Stock Issuance</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company is authorized to issue up to 100,000,000 shares of its
$.001 par value common stock, and up to 10,000,000 shares of its $.001 par value preferred stock.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">On January 31, 2010, the Private Placement Offering closed, and
the Company entered into and closed a stock purchase agreement with multiple accredited investors for the sale of 3,444,000 shares
of its common stock at a purchase price of $0.10 per share totaling $344,400.  See discussion of 2010 Private Placement
Offering below.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">As of June 30, 2010, the Company issued 3,326,121 shares of its
common stock to consultants in exchange for legal, financial, and marketing consulting related to the 2010 Private Placement Offering.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">On June 22, 2011, the Company entered into a technology transfer
agreement with an unaffiliated third party included a liability in the amount of $36,000 (Note 9) and 96,000 shares of common stock.  The
liability of $36,000 was recorded net of a debt discount of $2,834 which was included in additional paid in capital at June 30,
2011. The common stock is payable in eight quarterly installments of 12,000 shares per installment.  The first installment
was delivered effective September 16, 2011.  As the third party has no future performance obligation, the Company valued
the 96,000 shares at $33,600 based on the closing price of $0.35 per share on the measurement date.  The amount is recorded
in common stock payable as of June 30, 2011. As of September 30, 2011, stock payable was $29,400 due to issuance of 12,000 shares
of common stock on September 21, 2011.  See below.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">On September 21, 2011, we issued 100,000 shares of our common stock,
restricted in accordance with Rule 144, to Empire Relations Group, Inc. as consideration under a consulting agreement dated September
16, 2011 for public and financial relations services. The fair value was $30,000 based on the closing stock price of $0.30 per
share on the measurement date as the shares are non-refundable and no future performance obligation exists. The issuance of the
shares was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. The consultant
was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">On September 21, 2011, we issued 12,000 shares of our common stock,
restricted in accordance with Rule 144, to an unaffiliated thirty party as consideration under the Technology Transfer Agreement
entered into on June 22, 2011. This is the first of eight identical quarterly installments of shares to be issued. The fair value
of $4,200 based on the closing price of $0.35 per share on the measurement date was deducted from common stock payable. The issuance
of the shares was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. The
shareholder was a sophisticated investor, familiar with our operations, and there was no solicitation.</p>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> <b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Capitalized Private Placement Costs</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">In October of 2009, the Company created a Private Placement Memorandum
to raise funds primarily for our upcoming public stock listing, working capital and general corporate purposes.  Through
the Memorandum, we offered to qualified accredited investors a maximum of 12,500,000 shares of our common stock.  The
subscription price per Share was $0.10 and the minimum purchase was Fifteen Thousand (15,000) Shares ($1,500).  We reserved
the right to accept subscriptions for fewer Shares at our sole discretion.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">We agreed to pay Monarch Bay Associates, LLC, a licensed FINRA broker
dealer (the “placement agent”), a commission of 5% of the gross proceeds of the Offering.  In addition, we
agreed to indemnify the Placement Agent against certain liabilities under the Securities Act of 1933, as amended.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Each Investor must qualify as an “Accredited Investor”
under Regulation D of the Securities Act of 1933, as amended.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Shares offered and sold pursuant hereto were not registered
under the 1933 Act or under the securities laws of any state and were offered and sold in reliance upon exemptions from such registration
requirements for non-public offerings pursuant to Regulation D under the Securities Act and applicable state securities laws, and
therefore, are considered “restricted securities” as such is defined in Rule 144 promulgated under the 1933 Act.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The private placement offering closed on January 31, 2010, and $344,400
in funds were received and we issued 3,444,000 shares to those investors ($0.10/share).  At this time, the Company issued
1,108,707 shares of its common stock to each of the following for legal and consulting services: The Lebrecht Group, Michael Southworth
and Cardiff Partners.  A total of $19,656 was paid to Monarch Bay Associates for the placement agent commission.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">For the nine month period ended September 30, 2011 and the year
ended December 31, 2010 we capitalized $6,364 and $145,914, respectively, of costs associated with the offering as a charge to
Additional Paid in Capital.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Discussion of 2006 Stock Option plan</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The 2006 Stock Option Plan was adopted by our Board of Directors
in March of 2006.  A total of 550,000 shares of Common Stock have been reserved for issuance to employees, consultants
and directors upon exercise of incentive and non-statutory options and stock purchase rights which may be granted under the Company’s
2006 Stock Plan (the “2006 Plan”).  On October 15, 2009, 235,000 of those options were exercised, leaving
315,000 shares available for issuance to employees.  Because of the 5.31-for-one forward stock split of the Company’s
common stock on October 15, 2009, there are now 1,512,650 shares available for issuance as a part of this stock plan.  As
of the period ended September 30, 2011, there were 560,000 options outstanding to purchase shares of Common Stock, and no shares
of Common Stock had been issued pursuant to stock purchase rights under the 2006 Plan.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Under the 2006 Plan, options may be granted to employees, directors,
and consultants.  Only employees may receive “incentive stock options,” which are intended to qualify for
certain tax treatment, and consultants and directors may receive “non-statutory stock options,” which do not qualify
for such treatment.  A holder of more than 10% of the outstanding voting shares may only be granted options with an exercise
price of at least 110% of the fair market value of the underlying stock on the date of the grant, and if such holder has incentive
stock options, the term of the options must not exceed five years.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Options and stock purchase rights granted under the 2006 Plan generally
vest ratably over a four year period (typically 1⁄4 or 25% of the shares vest after the 1st year and 1/48 of the remaining
shares vest each month thereafter); however, alternative vesting schedules may be approved by the Board of Directors in its sole
discretion.  Any unvested portion of an option or stock purchase right will accelerate and become fully vested if a holder’s
service with the Company is terminated by the Company without cause within twelve months following a Change in Control (as defined
in the 2006 Plan).</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">All options must be exercised within ten years after the date of
grant.  Upon a holder’s termination of service for any reason prior to a Change in Control, the Company may repurchase
any shares issued to such holder upon the exercise of options or stock purchase rights.  The Board of Directors may amend
the 2006 Plan at any time.  The 2006 Plan will terminate in 2016, unless terminated sooner by the Board of Directors.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company granted 560,000 stock options during the year ended
December 31, 2010.  As of September 30, 2011, the stock options became fully vested and expensed accordingly.  The
Company did not grant any stock options for the period ended September 30, 2011.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Stock-based compensation expense recognized in our statement of
operations for the nine month period ended September 30, 2011 and 2010 was $16,003 and $21,992, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company did not grant any warrants during year ended December
31, 2010 or the period ended September 30, 2011.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Exercising of Stock Warrants and Options</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">For the nine month period ended September 30, 2011 and the year
ended December 31, 2010, no shares of common stock were issued on the cashless exercise of warrants or options.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">A summary of the status of the warrants and options issued by the
Company as of September 30, 2011 and December 31, 2010 are as follows:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: justify">September 30, 2011</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: justify">December 31, 2010</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: justify">Number of Warrants & Options</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: justify">Weighted Average Exercise Price</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: justify">Number of Warrants & Options</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: justify">Weighted Average Exercise Price</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td colspan="2" style="line-height: 115%; text-align: justify"> </td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td colspan="2" style="line-height: 115%; text-align: justify"> </td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td colspan="2" style="line-height: 115%; text-align: justify"> </td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td colspan="2" style="line-height: 115%; text-align: justify"> </td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 52%; line-height: 115%; text-align: justify">Outstanding at beginning of year</td>
<td style="width: 1%; line-height: 115%; text-align: justify"> </td>
<td style="width: 1%; line-height: 115%; text-align: justify"> </td>
<td style="width: 9%; line-height: 115%; text-align: justify">560,000</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%; text-align: justify"> </td>
<td style="width: 1%; line-height: 115%; text-align: justify"> </td>
<td style="width: 1%; line-height: 115%; text-align: justify">$</td>
<td style="width: 9%; line-height: 115%; text-align: justify">0.10</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%; text-align: justify"> </td>
<td style="width: 1%; line-height: 115%; text-align: justify"> </td>
<td style="width: 1%; line-height: 115%; text-align: justify"> </td>
<td style="width: 9%; line-height: 115%; text-align: justify">-</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%; text-align: justify"> </td>
<td style="width: 1%; line-height: 115%; text-align: justify"> </td>
<td style="width: 1%; line-height: 115%; text-align: justify">$</td>
<td style="width: 9%; line-height: 115%; text-align: justify">-</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%; text-align: justify"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%; text-align: justify">Granted</td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify">-</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify">-</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify">560,000</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify">0.10</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%; text-align: justify">Exercised for cash</td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify">-</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify">-</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify">-</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify">-</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%; text-align: justify">Exercised for cashless</td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify">-</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify">-</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify">-</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify">-</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%; text-align: justify">Expired and cancelled</td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify">-</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify">-</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify">-</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify">-</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%; text-align: justify">Outstanding, end of period</td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: justify"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: justify">560,000</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: justify">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: justify">0.10</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: justify"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: justify">560,000</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td>
<td style="line-height: 115%; text-align: justify"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: justify">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: justify">0.10</td>
<td nowrap="nowrap" style="line-height: 115%; text-align: justify"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company accounts for income taxes in accordance with standards
of disclosure propounded by the FASB, and any related interpretations of those standards sanctioned by the FASB. Accordingly, deferred
tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and liabilities,
as well as a consideration of net operating loss and credit carry forwards, using enacted tax rates in effect for the period in
which the differences are expected to impact taxable income.  A valuation allowance is established, when necessary, to
reduce deferred tax assets to the amount that is more likely than not to be realized.  Due to the uncertainty as to the
utilization of net operating loss carry forwards, a valuation allowance has been made to the extent of any tax benefit that net
operating losses may generate.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Income tax expense consists entirely of California minimum franchise
taxes of $800 and Delaware state taxes of $125. For Federal and California income tax purposes, the Company has net operating loss
carry forwards that expire through 2027. The net operating loss as of September 30, 2011 is approximately $159,000. The net operating
loss as of December 31, 2010 is approximately $311,000. No tax benefit has been reported in the financial statements because after
evaluating our own potential tax uncertainties, the Company has determined that there are no material uncertain tax positions that
have a greater than 50% likelihood of reversal if the Company were to be audited.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Deferred tax asset and the valuation account consists of the following at: </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">September 30, 2011</td>
<td nowrap="nowrap" style="line-height: 115%; font-weight: bold"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">December 31, 2010</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 76%; line-height: 115%">Deferred Tax Asset</td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 9%; line-height: 115%; text-align: right">54,086</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 9%; line-height: 115%; text-align: right">105,819</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Valuation Allowances</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">(54,086</td>
<td nowrap="nowrap" style="line-height: 115%">)</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">(105,819</td>
<td nowrap="nowrap" style="line-height: 115%">)</td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Total:</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">-</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">-</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Basic loss per share is calculated based on the weighted-average
number of outstanding common shares. Diluted loss per share is calculated based on the weighted-average number of outstanding common
shares plus the effect of dilutive potential common shares.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Net Income/ (Loss) per share for the three month period ended:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">September 30, 2011</td>
<td nowrap="nowrap" style="line-height: 115%; font-weight: bold"> </td>
<td style="line-height: 115%; font-weight: bold"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; font-weight: bold; text-align: center">September 30, 2010</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 76%; line-height: 115%">Net Income/Loss</td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 9%; line-height: 115%; text-align: right">(67,785</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%">)</td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 9%; line-height: 115%; text-align: right">(146,774</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%">)</td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Weighted number of common shares outstanding-basic</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">39,055,111</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">37,664,806</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Income/ (Loss) per share-basic</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">(0.00</td>
<td nowrap="nowrap" style="line-height: 115%">)</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">(0.00</td>
<td nowrap="nowrap" style="line-height: 115%">)</td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 115%">Weighted number of common shares outstanding- fully diluted</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">40,882,968</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right">37,664,806</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 115%">Income/ (Loss) per share- fully diluted</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">(0.00</td>
<td nowrap="nowrap" style="line-height: 115%">)</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">(0.00</td>
<td nowrap="nowrap" style="line-height: 115%">)</td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">On
August 2, 2010, we granted Craig Holland, our President, Chief Executive Officer, and a Director, options to purchase up to 115,000
shares of our common stock at an exercise price of $0.11 per share.  The options were granted under the Freeze Tag,
Inc. 2006 Stock Plan.  As of September 30, 2011, the stock option are fully expensed and included in stock based compensation
of $16,003.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">As
of July 1, 2010, there are notes payable to Craig Holland and Mick Donahoo for $25,000 each (a total of $50,000 notes payable)
for money that was loaned to the company to secure the Sunwest Bank loan.  The money was loaned to us at a rate of 10%
interest compounded annually.  The Company had a note payable balance of $50,000 for period ended September 30, 2011
and December 31, 2010.  For the period ended September 30, 2011, and year ended December 31, 2010, the Company recorded
accrued interest of $6,646 and $2,580, respectively.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">On
July 1, 2010, we entered into one (1) $100,000 principal amount convertible promissory note, which is convertible any time at
$0.10 per share.  The holder of this note is the Holland Family Trust, which is not controlled by any of our officers
and directors, but is controlled by Franklena E. Holland, the mother of one of our officers and directors.  Under the
note we have received $75,000 of the purchase price, with the remaining $25,000 to be paid at a later date.  The note
matured on July 1, 2011, and was renewed for another 1 year term.  Interest on the notes is paid each month at the first
of the month as such there is no accrued interest as of September 30, 2011.  The Company had a convertible note payable
balance of $75,000 for period ended September 30, 2011 and December 31, 2010.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><font style="font-size: 10pt">There are currently no subsequent
events to report.</font></p>
15578
16003
21992
30000
161030
102500
105000
91136
69600
33166
5600
5600
4402
3696
23532
17732
.001
.001
10000000
10000000
0
0
0
0
0.001
0.001
100000000
100000000
39150720
39150720
39150720
39150720
344400
21400
84000
76108
0
32268599
39038720
39038720
32268599
39038720
39150720
-3326
3326121
3326121
3444000
3444000
3444
340956
344400
-6364
3326
-145914
-6364
-145914
16003
39985
16003
39985
12000
33600
12
29400
4188
2834
2834
100000
30000
100
29900
91136
91136