FORWARD-LOOKING STATEMENTS

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

The following discussion and analysis should be read in conjunction with the financial statements of Conspiracy Entertainment Holdings, Inc., included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2008 COMPARED TO YEAR ENDED
DECEMBER 31, 2007

For the fiscal year ended December 31, 2008 we had total revenue of $10,905,490, compared to revenue of $8,791,131 for the fiscal year ended December 31, 2007. The major components of revenues are flat fee revenue, product sales and license revenue. Flat fee revenue represents revenues generated on a flat fee basis or obtaining manufacturing approval for specific products, product sales represent revenues for products manufactured and sold to distributors. License revenue represents license fees earned for the sale of certain products under certain licenses to third parties. We occasionally enter into such license agreements if management determines that it is in our best interest to sell rights to a particular product to a third party, rather than publishing the product our self. For the period ended December 31, 2008, we earned $90,000 in license revenue as compared to $0 license revenue earned in 2007. License revenue in 2008 consisted of revenues generated for products licensed to EUR. Product sales for the period ended December 31, 2008 were $10,615,490 was as compared to $5,516,131 for the period ended December 31, 2007. The increase in product sales revenue of $2,024,358, or 23%, is the result of our releasing 14 new titles. We also generated $200,000 in flat fee revenue for the year ending December 31, 2008 as compared to $3,275,000 for the year ending December 31, 2007 which was a result of our 10 title deal with Data Design being terminated.

The below table provides a comparison of the nature and source of our revenue for the periods indicated.

                                                                     Fiscal Year Ended
                                                               December 31,      December 31,
                                                                   2008              2007
Number of New Titles Released                                             18               14
Number of Titles Reordered                                                 8                1
Average Price Per Title                                        $        9.78     $       6.70
Revenue From Internally Developed Titles                       $           0     $          0
Partially Complete Sales                                                   0                0
Translated Sales                                               $  10,615,490     $  5,516,131
License Revenue                                                $      90,000     $          0
Other Revenue (packaging)                                      $     200,000     $  3,275,000

The major components of cost of sales are production costs and license/development costs. Productions costs are the manufacturing costs of the games we sell and are generally proportional to the number of units manufactured. These costs include manufacturing of the software, packaging and assembly fees. License/development costs are the costs of having the product created, translated, or developed. They include, but are not limited to, translations fees for translating foreign game titles that we re-release in the United States. For the period ended December 31, 2008, we had license/development costs of $2,841,260 as compared to $1,949,393 for period ending December 31, 2007. The increase in license/development costs of $891,867 or 45.7% was primarily the result of higher sales and the impairment of the MOB project which was cancelled in 2008.

Gross profit totaled $1,986,165 for the fiscal year ended December 31, 2008 as compared to gross profit of $2,142,983 for the fiscal year ended December 31, 2007, a decrease of $156,818 or 7.3%. Gross profit as a percentage of sales for the fiscal year ended December 31, 2008 was 18.2% as compared to gross profit as a percentage of sales of 14.5% for the fiscal year ended December 31, 2007. The increase in our gross profit percentage is a result of the company continuing to sell Winter Sports on the Nintendo Wii format in 2008 which had a flat fee license cost, or royalty free sales.

Total operating expenses in each of the fiscal years ended December 31, 2008 and December 31, 2007 were comprised of selling, general and administrative expenses. Operating expenses for the fiscal years ended December 31, 2008 and 2007 were $2,274,978 and $2,014,776 respectively, which constituted a increase of $260,198 or 12.9%. The increase in operating expenses is attributable to increases in Marketing Fees of $160,469 for the fiscal year ended December 31, 2008, which can be attributed to both IR activity as well as Games Marketing which was used to help promote the release of Summer Athletics and Winter Sports
2. Salary and Wages increased $194,523 or 41.9% due to the hiring of additional staff in late. Because we had no Bad Debt in 2008, we incurred $101,520 less expense in 2008. We also incurred $160,384 or 24% less in Professional Fees due to renegotiation with consultants despite increases in attorney fees. We continue to make a strong effort in saving money and reducing expenses whenever possible.

Other income/expense is income and expense not related to the buying or selling of games and or licenses or income obtained for services not generally part of the company's normal operation. For the period ending December 31, 2008, we incurred Other Income of $554,416 compared to Other Income of $2,945,252 for the period ending December 31, 2007 a decrease of $2,390,836. The decrease in other income is related to our financing agreements with our investors (interest expense and financing expense) and also consists of a significant Gain on Valuation of Derivative Liability for the period ending December 31, 2007 of $3,398,517 as compared to $765,697 for the period ending December 31, 2008. We also incurred Financing Costs of $109,463 for the fiscal year ended December 31, 2008 which was $106,499 or 49.3% less than the $215,962 incurred for the fiscal year ended December 31, 2007.

Our net income was $ 265,603 in the fiscal year ended December 31, 2008 compared to a net income $3,073,458 in the fiscal year ended December 31, 2007 despite we incurred higher cost of goods sold, additional expenses but significantly the change can be attributed to the substantial decrease in Gain on Valuation of Derivative Liabilities of $2,632,620 which was unrelated to our operations.

SEASONALITY AND OTHER TRENDS

The interactive entertainment software industry is a seasonal and cyclical industry. The majority of sales are generated in the fourth quarter of each year due to the winter holiday, followed by the first quarter of each year which consists of sales to those who received new video game platforms over the winter holiday. If we miss this key selling period, due to product delays or delayed introduction of a new platform for which we have developed products, our sales will suffer disproportionately. Second and third quarter sales generally drop off considerably unless new products are introduced. Introducing new products during this period however do not do as well as products introduced in either the fourth or first quarters.

The interactive entertainment software industry is also cyclical. Videogame platforms have historically had a life cycle of four to six years. As one group of platforms is reaching the end of its cycle and new platforms are emerging, consumers often defer game software purchases until the new platforms are available, causing sales to decline. This decline may not be offset by increased sales of products for the new platform.

RESEARCH AND DEVELOPMENT

We did not spend any money on research and development during the fiscal years ended December 31, 2008 and 2007.

CONTRACTUAL OBLIGATIONS

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

                                                Payments due by period
                                               Less than                       More
Contractual Obligations          Total         One Year      Years 1-2     than 2 years
Notes Payable                 $ 2,716,088     $ 2,716,088
Operating Lease Obligations   $   178,606     $    99,029      $ 79,577
License Fee Obligations       $    60,000     $    60,000
Total                         $ 2,954,694     $ 2,875,117      $ 79,577

In September 2008, we enetered into two notes payable agreements totaling $80,000 with two related parties. The notes have a fixed interest amount of $5,000 per each loan and will be repaid in 2009.

In February 2008, we entered into a two notes payable agreements with accredited investors totaling $224,595. The notes will become due on February 2009.

In July 2007, we entered into a convertible debenture in the amount of $200,000.

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

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

On August 5, 2005 and August 8, 2005, two accredited investors loaned us an aggregate of $223,600 in gross proceeds in exchange for two notes payable. The notes bear no interest and were due February 1, 2006. As of December 31, 2008 the balance owed is $194,093.

On February 9, 2005, we entered into three convertible notes payable agreements totaling $650,000 And in September and October 2004, we entered into two convertible notes payable agreements totaling $1.1 million. The balance due as of 12/31/08 is $1,690,400. To date, these notes are past due and have not been called.

We currently lease office space at 612 Santa Monica Boulevard in Santa Monica, California. Beginning March 1, 2008 we have leased the space directly adjacent to 612 Santa Monica Boulevard. In February 2009 we extended both leases through October 2010. Through the remainder of the lease term, our minimum lease payments are as follows:

2009 $ 99,029
2010 $ 79,577

Our license agreement with Discovery for "The Jeff Corwin Experience" requires payments of the remaining $80,000 to be paid in full during the year 2005. Although we have only made $20,000 in payments during 2006, we are looking into our options on how to best handle this matter and plan to pay the balance in full by the end of 2009.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2008, our cash balance was $424,529 as compared to $539,990 at December 31, 2007. Total current assets at December 31, 2008 were $681,349, as compared to $927,385 at December 31, 2007. We currently plan to use the cash balance and cash generated from operations for increasing our working capital reserves and, along with additional debt financing, for new product development, securing new licenses, building up inventory, hiring more sales staff and funding advertising and marketing. Management believes that the current cash on hand and additional cash expected from operations in fiscal 2009 will be sufficient to cover our working capital requirements for fiscal 2009. The Company reached this conclusion by assuming that because a major portion ($2,217,400) of our debt is attributed to convertible notes payable, this debt will be converted into shares (although there is no assurance that this debt will actually be converted into shares), Deferred Revenue ($2,145,632) will be reclassified as revenue upon the completion of the current projects in development, and Derivative Liability ($2,816,604) would be the amount of cash required should our investors call in our outstanding loans. We do not believe will happen anytime in the near future. We have informally negotiated with the IRS to pay down our Payroll Taxes liability in the amount of $10,000 per month and 2008 we have negotiated with an individual to waive the unpaid portion of notes payable in the amount of $110,128. The Company is negotiating with several other parties to waive portions of our debt, or to pay the debt with the issuance of company stock including Deferred Compensation ($371,555). In addition, based on our schedule of development for the remainder of the year, we anticipate an increase in sales, profitability and cash receipts in 2009 which will allow the Company to continue to pay down our working capital requirements and help avoid additional need for working capital.

For the year ended December 31, 2008, net cash provided by operating activities was $3,159,557, compared to net cash provided by operating activities of $1,775,798 for the period ended December 31, 2007. The change in net cash provided by operating activities of $1,383,759 was primarily the result of our Net Income for the fiscal year ended December 31, 2007 of $3,073,458 which was considerably more than the Net Income of $265,603 for 2008. In addition, we realized a significant net change in derivative liability of $2,632,620, as well as a decrease of $490,200 in Deferred Revenue which was offset against larger amortization and impairment of capitalized development and licenses of $ 2,133,571.

For the year ended December 31, 2008 net cash used in investing activities totaled $3,520,018, compared to net cash used in investing activities of $1,518,284 for the year ended December 31, 2007. The increase of $2,001,734 is due to increase of $ 3,510,781 in cash paid for acquisition of products and licenses in the fiscal year ended December 31, 2008.

For the period ended December 31, 2008, we received $245,000 in net cash provided by financing, compared to net cash provided by financing activities of $257,500 for the period ended December 31, 2007. The decrease of net cash provided by financing activities of $257,500 was primarily the result of payments of $40,000 on notes payable for the year ended December 31, 2008 as compared to payments of only $22,500 for the year ended December 31, 2007.

Our accounts receivable at December 31, 2008 was $256,820, as compared to $110,195 at December 31, 2007. We had no substantial orders being placed toward the end of the fiscal year, nor any significant late paying customers.

As of December 31, 2008 we had a working capital deficiency of $11,233,483. A major portion of our debt is attributed to consulting fees, attorney fees, deferred compensation, notes payable, convertible notes payable and payroll taxes payable. Despite increasing Accounts Receivable in the fiscal year ended December 31, 2008, we also increased our debt by receiving advances from our customers, accruing additional interest for our recent fundings, and increased the convertible notes payable adjustments. We plan to continue to reduce these debts with proceeds generated from normal operational cash flow as well as the issuance of company stock.

As of December 31, 2008, we owed payroll taxes to the IRS in the amount of $335,762 as compared to $405,732 as of December 31, 2007. The decrease is due to payroll taxes due as of December 31, 2008 is due to our agreement with the IRS to pay $10,000 every month to reduce our balance.

At December 31, 2008 and December 31, 2007 we had no bank debt.

FINANCING NEEDS

We expect our capital requirements to increase over the next several years as we continue to develop new products, increase marketing and administration infrastructure, and embark on in-house business capabilities and facilities. Our future liquidity and capital funding requirements will depend on numerous factors, including, but not limited to, the cost and hiring and training production personnel who will produce our titles, the cost of hiring and training additional sales and marketing personnel to promote our products, and the cost of hiring and training administrative staff to support current management. We anticipate that we may require additional financing to expand our operations over the next twelve months. We cannot guarantee that we will be able to obtain any additional financing or that such additional financing, if available, will be on terms and conditions acceptable to us. The inability to obtain additional financing should it be required will restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our marketing and development plans.

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

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

On July 7, 2007, we sold an aggregate of $200,000 principal amount of 15% secured convertible notes to two accredited institutional investors for gross proceeds of $200,000 less expenses of $35,000.

We currently have outstanding 35,000,000 Class A Warrants and 35,000,000 Class B Warrants with exercise prices of the lower of $0.20 and $0.05, respectively. Exercise of all of these warrants would provide gross proceeds of $8,750,000. However, at recent market prices of our common stock, none of these warrants are in the money. Thus, if the market price of our common stock does not increase and warrant holders do not exercise their warrants, we may be required to seek additional debt or equity financing. If additional financing is required and we cannot obtain additional financing in sufficient amounts or on acceptable terms when needed, our financial condition and operating results will be materially adversely affected.

OFF BALANCE SHEET ARRANGEMENTS

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

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT MANAGEMENT ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, long-lived assets, and deferred taxes. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

REVENUE RECOGNITION

We recognize revenue in accordance with current generally accepted accounting principles. Revenue recognition requirements require us to make significant judgments and estimates which may be difficult and complex. We make determinations regarding revenue that is recognized in the current period and the revenue that will be deferred. This is performed through judgment and estimates with regard to the software and related services to be provided to our customers. Our assumptions and judgments regarding revenue recognition could differ from actual events.

Funds received in advance of software completion are recorded as a liability and deferred until the products are completed and delivered.

We utilize the completed contract method of revenue recognition as opposed to the percentage-of-completion method of revenue recognition for substantially all of our products since the majority of our products are completed within six to eight months. We complete the products in a short period of time since we obtain video game software code that may be partially complete and/or we obtain foreign language video game software code that is published by foreign manufacturers that are completed and we develop and market them in the United States.

License revenue is generated when we sell an acquired license to another publisher to develop and sell. Revenues are recorded when the royalty payments are received from that publisher subsequent to sale of the product.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments where applicable. The majority of the Company's sales are done through exclusive distribution which requires advance payments from the distributor. If payments are not received, product will not be published. This eliminates the need for allowance for doubtful accounts for the majority of the Company's receivables. However the Company regularly reviews the adequacy of its accounts receivable allowance for all sales not made under the explained scenario, and after considering the size of the accounts receivable balance, each customer's expected ability to pay and our collection history with each customer an allowance is established if deemed necessary by the Company's findings. The Company reviews significant invoices that are past due to determine if an allowance is appropriate based on the risk category using the factors described above. In addition, the Company maintains a general reserve for certain invoices by applying a percentage based on the age category. The Company also monitors its accounts receivable for concentration to any one customer, industry or geographic region. The allowance for doubtful accounts represents the Company's best estimate, but changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. As of December 31, 2008, the allowance for doubtful accounts holds a balance of $62,500 representing receivables which have been deemed uncollectible.

VALUATION OF LONG-LIVED INTANGIBLE ASSETS INCLUDING CAPITALIZED DEVELOPMENT COSTS AND LICENSES

Capitalized development costs include payments made to independent software developers under development agreements, as well as direct costs incurred for internally developed products.

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

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

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

Capitalized development costs and licenses, net of accumulated amortization, totaled approximately $2,543,710 at December 31, 2008. Factors we consider important which could trigger an impairment review include, but are not limited to, significant under-performance relative to expected historical or projected future operating results, significant changes in the manner of our use of our assets or the strategy for our overall business or significant negative economic trends. If this evaluation indicates that the value of an intangible asset may be impaired, an assessment of the recoverability of the net carrying value of the asset over its remaining useful life is made. If this assessment indicates that an intangible asset is not recoverable, based on the estimated undiscounted future cash flows or other comparable market valuations, of the entity or technology acquired over the remaining amortization period, the net carrying value of the related intangible asset will be reduced to fair value and the remaining amortization period may be adjusted. Any such impairment charge could be significant and could have a material adverse effect on our reported financial statements.

INCOME TAXES

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