



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2008

o Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from To

Commission file number 000-31573

ProElite, Inc.

(Exact name of registrant as specified in its charter)

New Jersey 22-3161866 (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)

12121 Wilshire Blvd., Suite 1001

Los Angeles, CA 90025

(Address of Principal Executive Offices)

(310) 526-8700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” an “accelerated filer,” a “non-accelerated filer,” or a “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x





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

Yes o No x

As of August 9, 2008 there were 55,854,726 shares of Common Stock outstanding.

ProElite, Inc.

INDEX

Page No. PART I. FINANCIAL INFORMATION Item 1 Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007 3 Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2008 and 2007 4 Condensed Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2008 5 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 6 Notes to Condensed Consolidated Financial Statements 8 Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 26 Item 3 Quantitative and Qualitative Disclosures about Market Risk 32 Item 4 Controls and Procedures 33 PART II. OTHER INFORMATION Item 1 Legal Proceedings 34 Item 1A Risk Factors 34 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 34 Item 3 Defaults Upon Senior Securities 34 Item 4 Submission of Matters to a Vote of Security Holders 34 Item 5 Other Information 34 Item 6 Exhibits 34 Signatures 35 Exhibit Index 36

302 Certification of Chief Executive Officer 302 Certification of Chief Financial Officer 906 Certification of Chief Executive Officer 906 Certification of Chief Financial Officer





2

PART I. FINANCIAL INFORMATION

ProElite, Inc.

June 30, 2008 December 31, 2007 (unaudited) Assets Current assets Cash and cash equivalents $ 3,460,239 $ 4,427,303 Restricted cash 405,817 277,500 Accounts receivable, net of allowance of $150,000 and $255,900, respectively 340,589 338,596 Accounts receivable - Showtime, CBS 430,000 - Prepaid expenses 633,598 133,673 Other current assets 72,182 1,077,896 Total current assets 5,342,425 6,254,968 Fixed assets, net 1,312,356 1,428,548 Other assets Acquired intangible assets, net 5,284,618 9,022,181 Goodwill 285,933 6,238,652 Investment in Entlian/SpiritMC 1,654,894 1,848,003 Prepaid distribution costs, net 555,723 764,109 Prepaid license fees, net 80,764 111,052 Prepaid services, net 302,221 408,889 Deposits and other assets 206,415 143,915 Total other assets 8,370,568 18,536,801 Total assets $ 15,025,349 $ 26,220,317 Liabilities and Shareholders’ Equity Current liabilities Notes payable and accrued interest - Showtime $ 4,769,303 $ 1,822,086 Accounts payable 1,583,516 1,531,342 Accrued expenses 581,493 733,638 Accounts payable and accrued expense - Showtime, CBS 585,935 125,000 Future payments due for acquired companies 1,487,500 1,162,500 Accrued liabilities from predecessor company 346,572 346,572 Other accrued liabilities 12,924 - Deferred revenue 45,046 - West Coast settlement 150,000 150,000 Total current liabilities 9,562,289 5,871,138 Deferred rent and lease incentive 153,483 153,309 Total liabilities 9,715,772 6,024,447 Commitments and contingencies Shareholders’ equity Preferred stock, $0.0001 par value, 20,000,000 shares authorized, 0 shares issued - - Common stock, $0.0001 par value, 250,000,000 shares authorized, 55,854,726 and 51,659,488 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively 5,586 5,166 Common stock to be issued 1,062,473 2,249,997 Additional paid-in-capital 59,977,936 49,404,897 Accumulated other comprehensive income (expense) 31,215 (86,793 ) Accumulated deficit (55,767,633 ) (31,377,397 ) Total shareholders’ equity 5,309,577 20,195,870 Total liabilities and shareholders’ equity $ 15,025,349 $ 26,220,317





See Notes to Condensed Consolidated Financial Statements

3

ProElite, Inc.

(Unaudited)

Three Months Ended June 30, 2008 Three Months Ended June 30, 2007 Six Months Ended June 30, 2008 Six Months Ended June 30, 2007 Revenue Live events $ 2,027,351 $ 1,488,558 $ 5,084,790 $ 1,799,661 Pay per view and television licensing 178,866 10,858 314,141 10,858 Showtime, CBS 925,000 410,856 2,125,000 410,856 Internet 208,991 16,963 235,454 20,463 Other 346,442 - 465,912 - Total revenue 3,686,650 1,927,235 8,225,297 2,241,838 Cost of revenue Live events 2,865,002 2,495,618 7,013,024 3,402,308 Pay per view and television licensing 17,425 - 41,779 - Showtime, CBS 500,000 1,127,060 500,000 2,460,835 Non-cash amortization of prepaid distribution costs and expense for vesting warrants - Showtime, CBS 3,183,562 - 3,305,637 - Internet 34,237 53,259 63,138 111,814 Other 83,471 - 91,826 - Total cost of revenue 6,683,697 3,675,937 11,015,404 5,974,957 Gross loss (2,997,047 ) (1,748,702 ) (2,790,107 ) (3,733,119 ) Operating expenses Marketing 107,713 165,544 206,878 269,438 Website operations 666,201 772,008 1,390,464 1,187,167 Live events 1,381,590 395,609 2,722,882 731,558 General and administrative expenses 3,247,118 4,394,153 6,945,746 6,223,907 Impairment and other charges 10,292,139 - 10,292,139 - Total operating expenses 15,694,761 5,727,314 21,558,109 8,412,070 Operating loss (18,691,808 ) (7,476,016 ) (24,348,216 ) (12,145,189 ) Other income (expense) Interest income (expense), net (27,556 ) 82,816 (42,020 ) 199,041 Loss before income taxes (18,719,364 ) (7,393,200 ) (24,390,236 ) (11,946,148 ) Income taxes - - - - Net loss $ (18,719,364 ) $ (7,393,200 ) $ (24,390,236 ) $ (11,946,148 ) Net loss per share - basic and diluted $ (0.34 ) $ (0.17 ) $ (0.43 ) $ (0.28 ) Weighted average shares outstanding - basic and diluted 55,814,726 42,838,150 54,365,037 42,559,512





See Notes to Condensed Consolidated Financial Statements

4

ProElite, Inc.

Condensed Consolidated Statement of Changes in Shareholders’ Equity

(Unaudited)





Accumulated Common Stock Additional Other Comprehensive Total Issuable Common Stock Paid- Income Accumulated Shareholders’ Shares Amount Shares Amount In Capital (Expense) Deficit Equity Balance at December 31, 2007 278,571 $ 2,249,997 51,659,488 $ 5,166 $ 49,404,897 $ (86,793 ) $ (31,377,397 ) $ 20,195,870 Common stock issuable in connection with website acquisition and for services 39,280 62,473 - - - - - 62,473 Issuance of common stock related to King of the Cage acquisition (178,571 ) (1,249,997 ) 178,571 18 1,249,979 - - - Common stock issued in connection with warrant exercise by Showtime - - 2,000,000 200 3,999,800 - - 4,000,000 Warrant issued to CBS for distribution agreement - - - - 2,255,446 - - 2,255,446 Warrant issued to Showtime in connection with note payable - - - - 149,040 - - 149,040 Warrants exercised on a cashless basis by private placement investors and placement agent - - 2,016,667 202 (202 ) - - - Compensation expense for stock options and warrants - - - - 2,336,201 - - 2, 336,201 Expense for vesting of CBS broadcast warrant tranche 1 - - - - 582,775 - - 582,775 Cumulative translation adjustment - - - - - 118,008 - 118,008 Net loss - - - - - - (24,390,236 ) (24,390,236 ) Balance at June 30, 2008 139,280 $ 1,062,473 55,854,726 $ 5,586 $ 59,977,936 $ 31,215 $ (55,767,633 ) $ 5,309,577

See Notes to Condensed Consolidated Financial Statements

5

ProElite, Inc.

(Unaudited)

Six Months Ended June 30, 2008 Six Months Ended June 30, 2007 Cash flows from operating activities Net loss $ (24,390,236 ) $ (11,946,148 ) Adjustments to reconcile net loss to net cash used in operating activities Stock and warrant based compensation 2,918,977 3,379,801 Stock issued for services 17,831 - Impairment and other charges 10,292,139 - Depreciation and amortization 3,526,660 419,580 Loss in equity interest in Entlian Corp. 193,109 - Provision for uncollectible accounts 71,758 13,000 Abandonment of equipment - 212,300 Amortization of deferred financing costs 29,544 - Change in operating assets and liabilities: (Increase) in accounts receivable (503,751 ) (1,386,875 ) (Increase) decrease in prepaid expense and other assets (412,897 ) (33,358 ) Increase (decrease) in accounts payable, accrued expenses and other liabilities 689,240 2,322,816 Increase in deferred revenue (21,754 ) - Net cash used in operating activities (7,589,380 ) (7,018,884 ) Cash flows from investing activities Purchase of fixed assets (128,211 ) (1,083,163 ) Net cash used in investing activities (128,211 ) (1,083,163 ) Cash flows from financing activities Proceeds from issuance of note payable - Showtime, net of issuance costs 2,985,000 - Issuance of common stock and warrants for cash - Showtime - 5,000,000 Proceeds from exercise of options and warrants - Showtime 4,000,000 Cash pledged as collateral for credit card facility (128,317 ) (240,000 ) Payments related to acquisitions (224,164 ) - Net cash provided by financing activities 6,632,519 4,760,000 Effect of exchange rates 118,008 - Net decrease in cash and cash equivalents (967,064 ) (3,342,047 ) Cash and cash equivalents at beginning of period 4,427,303 7,295,825 Cash and cash equivalents at end of period $ 3,460,239 $ 3,953,778

Supplemental disclosures of non-cash investing and financing activities:





In connection with the warrant issued to Showtime on January 5, 2007, the Company recorded the $608,000 value of the warrant as prepaid distribution costs.

6





At March 31, 2007, the Company reduced its registration rights liability related to the shares issued in a October 2006 private placement by $100,000, with a corresponding increase to paid-in capital.





In January 2008, the Company recorded 35,714 issuable shares of restricted common stock for an acquisition of website-related assets. These shares were valued at $44,643, and this amount was recorded in goodwill.





On February 21, 2008, the Company issued 4,000,000 warrants to purchase common stock at $2.00 per share to Showtime in connection with a television distribution agreement with CBS Entertainment. At the grant date, 2,000,000 of these warrants were vested, and the $2.3 million value of the vested warrants was recorded as prepaid distribution costs.





On March 15, 2008, the Company’s placement agent exercised 2,750,000 warrants with a strike price of $2.00 per share on a cashless basis and received 2,016,667 shares of common stock.





On June 18, 2008, the Company issued to Showtime for proceeds of $3.0 million a note payable with a face value of $3.5 million and a warrant to purchase 100,000 shares of common stock at $0.01 per share. The $0.5 million discount from the face value of the note payable and the $149,040 value of the warrants issued will be accreted into the note liability balance over the term of the note.

During the six months ended June 30, 2008, the Company accrued a liability of $325,000 for contingent consideration related to the KOTC acquisition.

During the six months ended June 30, 2008, the Company issued 178,571 shares of common stock, previously recorded as common stock issuable, related to the KOTC acquisition.

In June 2008, the Company recorded in deferred financing costs $45,000 of accrued legal fees.

See Notes to Condensed Consolidated Financial Statements

7

ProElite, Inc.

(Unaudited)





Note 1 Basis of Presentation and Summary of Significant Accounting Policies





Financial Statement Presentation

The accompanying unaudited condensed consolidated financial statements of ProElite, Inc., a New Jersey company and its subsidiaries (“ProElite” or the “Company”), have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q. Accordingly, certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations.





In the opinion of management, these financial statements reflect all adjustments, consisting of normal recurring accruals, which are considered necessary for a fair presentation. These financial statements should be read in conjunction with the audited consolidated financial statements included in our annual report on Form 10-KSB for the year ended December 31, 2007. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year or any other future periods.





Principles of Consolidation

The Company’s consolidated financial statements include the assets, liabilities and operating results of ProElite and its wholly-owned subsidiaries since formation or acquisition of these entities. All significant intercompany accounts and transactions have been eliminated in consolidation. The equity method of accounting is used for its investment in Entlian Corp. in which ProElite has significant influence; this represents common stock ownership of at least 20% and not more than 50% (see Note 4).





Revenue Recognition

In general, the Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements modified by Emerging Issues Task Force ("EITF") No. 00-21 and SAB No. 104 which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured.





The Company earns revenue primarily from live event ticket sales, site fees, sponsorship, television license fees and pay per view fees. The Company also earns incidental revenue from merchandise and video sales and from online advertising, subscriptions and online store sales. Ticket sales are managed by third parties, ticket agencies and live event venues. Revenue from ticket sales is recognized at the time of the event when the venue provides estimated or final attendance reporting to the Company. Revenue from merchandise and video sales is recognized at the point of sale at live event concession stands. Revenue from sponsorship and television distribution agreements is recognized in accordance with the contract terms, which are generally at the time events occur. Website revenue is recognized as advertisements are shown, as subscription terms are fulfilled, and as products are shipped.





Cost of Revenue





Costs related to live events are recognized when the event occurs. Event costs incurred prior to an event are capitalized to prepaid costs and then charged to expense at the time of the event. Costs primarily include: fighter purses, travel, arena costs, television production and amortization of capitalized value of warrants issued to Showtime. Cost of other revenue streams are recognized at the time the related revenues are realized.

8





Significant Estimates for Events





The Company is required to estimate significant components of live event revenues and costs because actual amounts may not become available until one or more months after an event date. Pay-per-view revenue is estimated based upon projected sales of pay-per-view presentations. These projections are based upon information provided from distribution partners. The amount of final pay-per-view sales is determined after intermediary pay-per-view distributors have completed their billing cycles. The television production costs of live events are based upon the television distribution agreements with Showtime and CBS, event-specific production and marketing budgets and historical experience. Should actual results differ from estimated amounts, a charge or benefit to the statement of operations would be recorded in a future period.





Advertising Expenses





Advertising is expensed as incurred. Total advertising expense was $764,827 and $464,825 during the six months ended June 30, 2008 and 2007, respectively.





Accounts Receivable





Accounts receivable relate principally to amounts due from television networks for license fees and pay-per-view presentations and from live event venues for ticket sales. Amounts due for pay-per-view programming are based primarily upon estimated sales of pay-per-view presentations and are adjusted to actual after intermediary pay-per-view distributors have completed their billing cycles. If actual sales differ significantly from the estimated sales, the Company records an adjustment to sales. Accounts receivable from foreign television distribution is generally based upon contracted fees per event or showing. Accounts receivable from venues for ticket sales to live events are generally received within 30 days of an event date.





An allowance for uncollectible receivables is estimated each period. This estimate is based upon historical collection experience, the length of time receivables are outstanding and the financial condition of individual customers.





Fixed Assets





Fixed assets primarily consist of computer, office, and video production equipment; furniture and fixtures; leasehold improvements; computer software; Internet domain names purchased from others; and website development costs. Fixed assets are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets or, when applicable, the life of the lease, whichever is shorter. Equipment is depreciated over estimated useful lives ranging from three to five years. Furniture, fixtures and leasehold improvements are depreciated over estimated useful lives ranging from five to seven years. Computer software is amortized over estimated useful lives ranging from one to five years. Internet domain names are amortized over ten years. Website development costs are amortized over three years.





Goodwill and Intangible Assets





Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. During 2007, the Company acquired amortizable intangible assets consisting of non-compete agreements, fighter contracts, merchandising rights and distribution agreements and indefinite-lived intangible assets consisting of brands and trademarks. The Company amortizes the cost of acquired intangible assets over their estimated useful lives, which range from one to five years.





SFAS No. 142 requires goodwill and other indefinite-lived intangible assets to be tested for impairment at least on an annual basis and more often under certain circumstances, and written down by a charge to operations when impaired. An interim impairment test is required if an event occurs or conditions change that would more likely than not reduce the fair value of the reporting unit below the carrying value. At June 30, 2008, the Company modified its operating plan for its Cage Rage subsidiary, due to its recent operating performance, and as a result recorded a charge of approximately $5.2 million to reduce the carrying value of goodwill and acquired intangible assets to their estimated fair values. Additionally, as of June 30, 2008, management assessed the financial performance of and market conditions affecting its ICON and King of the Cage acquisitions. Management evaluated recent adverse economic trends in the Hawaii market and as a result recorded an impairment of approximately $1.8 million to reduce goodwill and acquired intangible assets from the ICON acquisition to estimated realizable value. Management also evaluated industry trends, including increasing fighter purses and higher than anticipated promotion expenses in the Company’s King of the Cage subsidiary. Based upon this analysis, the Company recorded an impairment charge of approximately $2.4 million to reduce goodwill related to the King of the Cage to estimated fair value.

9





Maintaining the goodwill and indefinite-lived intangible assets is predicated upon the Company executing the revised operating plan for Cage Rage and improving profitability of the other acquisitions. If the Company does not execute successfully against these plans, it may record non-cash charges to operations in future periods to reduce the amount of goodwill and indefinite-lived intangible assets.





Prepaid Distribution Costs





Prepaid distribution costs represent the value of warrants issued to Showtime Networks, Inc. (“Showtime”) in November 2006, January 2007 and February 2008 in connection with television and pay-per-view distribution agreements with Showtime and CBS Corp. (“CBS”). Showtime and CBS are related parties. The value of the warrants issued in 2006 and 2007 is being amortized to cost of revenue over the three-year term of the distribution agreement with Showtime.





As of June 30, 2008, management determined the warrants issued in 2008 in connection with the CBS distribution agreement had no future value as the likelihood of realizing gross profit on the CBS events was remote. Therefore, the entire $2.3 million value of these warrants was charged to cost of revenue during the three months ended June 30, 2008.





Prepaid Services





Prepaid services included in other assets represent the value of shares issued to MMA Live Entertainment, Inc. for fighter services. The value of the shares is being amortized to expense over the three-year term of the related agreement.





Valuation of Long-Lived Assets





The carrying amounts of long-lived assets are periodically evaluated for impairment when events and circumstances warrant such a review.





Fair Value of Financial Instruments





The Company measures its financial assets and liabilities in accordance with the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 107, “Disclosures about Fair Value of Financial Instruments.” The carrying values of cash equivalents, accounts receivable, accounts payable, and payments due for acquired companies approximate fair value due to the short-term maturities of these instruments.





Foreign Currency





The functional currencies of the Company’s international subsidiary and investee are the local currency. The financial statements of the foreign subsidiary are translated into United States dollars using period-end rates of exchange for assets and liabilities and average rates of exchange for the period for revenues and expenses. Foreign currency transaction gains and losses were insignificant during the period. Foreign currency translation adjustments are shown as other comprehensive income (expense) in the accompanying consolidated balance sheet.

10





Loss per Share





The Company utilizes Statement of Financial Accounting Standards No. 128, “Earnings per Share.” Basic earnings (loss) per share are computed by dividing earnings (loss) available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Potential common shares include stock that would be issued on exercise of outstanding options and warrants reduced by the number of shares which could be purchased from the related exercise proceeds.





Recent Accounting Pronouncements





In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. It applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. This statement is effective for all financial instruments issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted SFAS No. 157 as of January 1, 2008 and it had no effect on the Company’s financial position, operations or cash flows.

In December 2007, the FASB issued SFAS 141(R), “Business Combinations”, replacing SFAS 141, “Business Combinations”. This statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 termed the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This Statement clarifies that acquirers are required to expense costs related to any acquisitions. SFAS 141R will apply prospectively to business combinations for which the acquisition date is on or after fiscal years beginning December 15, 2008. Early adoption is prohibited. Determination of the ultimate effect of this statement will depend on the Company’s acquisitions, if any, subsequent to December 31, 2008.





In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51”. SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, with retrospective presentation and disclosure for all periods presented. Early adoption is prohibited. The Company does not expect it will be affected by the adoption of SFAS 160.





Reclassifications





Certain prior year amounts have been reclassified to conform to the current year presentation.

11





Note 2 Going Concern





The Company has incurred losses from operations and negative cash flows from operations since its inception. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s business plan calls for expanding the scale of live events, including pay per view, and Internet operations. As a result, the need for cash has correspondingly increased. Although the Company had approximately $3.5 million of cash at June 30, 2008, the Company continues to expend more cash than it brings in through operations.





The Company is actively negotiating to consummate a financing of approximately $3.5 million in secured debt (with a funded amount of $3.0 million after an original issue discount of $0.5 million) and believes a successful closing is reasonably likely, but there is no assurance that it will be successful in doing so at all or on a timely basis. Any such failure to obtain financing in the immediate future would have a material adverse effect on the Company’s liquidity and capital resources and ability to continue as a going concern.





Even if the Company successfully closes on the debt financing referred to above, it expects that its capital resources would be sufficient only until the end of the year, and only if the Company makes significant reductions in or cessation of operations and expenditures before the end of the year, including dramatically reducing costs by reducing administrative expenses and some lines of business. Such actions would limit our potential for growth and could materially adversely affect the Company’s business and prospects.





To address its liquidity needs beyond the immediate period, the Company is actively seeking additional financing beyond the $3.0 million referred to above to enable the Company to execute its operating plans without significant reductions in operations, but there is no assurance as to whether any such financing will be available on reasonable terms or at all.





The auditor's opinion contained in our Annual Report on Form 10-KSB for the year ended December 31, 2007 states substantial doubt exists about our ability to continue as a going concern. The financial statements in this Quarterly Report on Form 10-Q do not contain any adjustments that may be required should we be unable to continue as a going concern.





Note 3 Net Loss Per Share





Net loss per share was calculated by dividing the net loss by the weighted average number of shares outstanding during the period. The following table summarizes the shares of stock included in calculating earnings per share for the three months ended March 31, 2008 and 2007:





Three Months Ended June 30, 2008 Three Months Ended June 30, 2007 Six Months Ended June 30, 2008 Six Months Ended June 30, 2007 Weighted-average common shares outstanding - basic 55,814,726 42,838,150 54,365,037 42,559,512 Dilutive effect of stock options and warrants - - - - Weighted-average common shares outstanding - diluted 55,814,726 42,838,150 54,365,037 42,559,512 Net loss per share - basic and diluted $ (0.34 ) $ (0.17 ) $ (0.45 ) $ (0.28 )





The effect of the following options and warrants on the computation of diluted net loss per share is excluded because their effect is anti-dilutive:

For the Three and Six Month Periods ended June 30, 2008 June 30, 2007 Options 5,281,797 4,330,729 Warrants 30,391,720 31,935,000

12

Note 4 Acquisitions and Investments





King of the Cage





On September 11, 2007, the Company acquired the outstanding capital stock of King of the Cage, Inc. (“KOTC”), a promoter of MMA events primarily in the United States. The acquisition was made in order to increase the Company’s event activity. The total purchase price, not including contingent consideration, was $5.0 million consisting of: $3,250,000 cash paid at closing, $500,000 cash paid in November 2007, 178,571 restricted shares of common stock valued at $1,249,997, or $7 per share that were issued in April 2008, plus nominal direct, capitalizable transaction costs. Under the stock purchase agreement, the calculation of the number of common shares to be issued is based upon the quoted market price of the Company’s common stock subject to a maximum per share price of $7.00 and a minimum price of $2.00. Additionally, the Company entered into a five year employment contract with one of the selling shareholders. (See Note 9.)





The stock purchase agreement also calls for contingent consideration to be paid annually if certain operating results are achieved by KOTC over five years. Contingent consideration performance thresholds and payment amounts are as follows:





Performance Thresholds Annual Contingent Consideration Payable Years Ending September 11, Number of Live Events Produced per Year Annual EBITDA (as defined in Stock Purchase Agreement) Cash Common Stock 2008 to 2012 15 n/a $ 500,000 $ - 2008 to 2012 22 n/a $ 75,000 $ 75,000 2008 to 2012 22 Increasing from $700,000 to $1,500,000 $ 175,000 $ 175,000

The maximum additional contingent consideration is $3.75 million in cash and $1.25 million in common stock. At June 30, 2008, the Company had accrued a liability of $325,000 for estimated contingent consideration payable, which is due in September 2008.

As security for the contingent consideration, the Company granted the former KOTC shareholders a first priority security interest in the shares of KOTC.





The purchase price was allocated approximately $0.1 million to tangible assets, $1.1 million to amortizable intangible assets, $1.7 million to non-amortizable intangible assets, $0.1 million to liabilities and $2.4 million to goodwill.





In the quarter ended June 30, 2008, the Company recorded a goodwill impairment charge of approximately $2.4 million to reduce the carrying value of goodwill from the KOTC acquisition to their estimated fair value. Management determined the impairment charge was needed as a result of industry trends, particularly increasing fighter purses, that caused KOTC’s financial performance to be less than projected when KOTC was acquired in September 2007. The maintenance of the remaining goodwill and acquired intangible assets is predicated upon improving the profitability of KOTC. If future financial results are less than anticipated, the Company may record additional impairment charges.

13





For the three and six months ended June 30, 2008, respectively, KOTC recognized revenue of approximately $527,000 and $1,027,000 and after expenses, including amortization of approximately $105,000 and $209,000 related to acquired intangible assets and a goodwill impairment charge of approximately $2.4 million in the quarter ended June 30, 2008 as discussed above, a net loss of approximately $2.5 million and $2.6 million.





Cage Rage





On September 12, 2007, the Company acquired the outstanding capital stock of two entities that promote MMA events: Mixed Martial Arts Promotions Limited, a British domiciled company (“MMAP”), and Mixed Martial Arts Productions Limited, a British domiciled company (“MMAD”) (collectively “Cage Rage”). The acquisition gives the Company an event promotion business in the United Kingdom. The total purchase price was $8.6 million consisting of: $4,000,000 cash paid at closing, 500,000 shares of restricted common stock issued in October 2007, $1,000,000 cash to be paid in September 2008 plus $100,398 of direct transaction costs. The Company valued the common stock to be issued at $3.5 million, or $7.00 per share.





The purchase price was allocated approximately $0.9 million to accounts receivable, $0.1 million to tangible assets, $1.7 million to amortizable intangible assets, $3.8 million to non-amortizable intangible assets, $0.5 million to accounts payable and $2.6 million to goodwill.





In the quarter ended June 30, 2008, the Company recorded an impairment charge of approximately $5.2 million to reduce the carrying value of goodwill and acquired intangible assets from the Cage Rage acquisition to their estimated fair value. During July 2008, the Company’s management revised the operating plan for Cage Rage in an attempt to achieve profitable live events and reduce operating losses sooner than originally planned in September 2007, when Cage Rage was acquired. Key aspects of the revised operating plan are to use smaller venues for live event production and secure a long-term television licensing agreement. If management is unable to successfully execute the revised operating plan, the Company may record further impairment charges. Also with respect to assets acquired, the Company recorded a charge of approximately $0.9 million during the quarter ended June 30, 2008 because the likelihood of future recoverability of these assets was uncertain.





For the three and six months ended June 30, 2008, respectively, Cage Rage recognized revenue of approximately $505,000 and $971,000 and after expenses - including amortization of approximately $216,000 and $432,000 related to acquired intangible assets and the asset impairment and other charges of approximately $6.1 million in the quarter ended June 30, 2008 discussed above - a net loss of approximately $7.0 million and $7.8 million.





Future Fight Productions, Inc.





On December 7, 2007, the Company acquired substantially all the assets of Future Fight Productions, Inc., (“ICON”) a promoter of MMA events primarily in Hawaii. The acquisition gives the Company additional promotion talent and access to fighters and venues. The assets acquired consisted primarily of a brand name. Additionally the owner of ICON signed a consulting contract with the Company to continue promoting ICON and other Company-run events. The total purchase price was $2.35 million consisting of: $350,000 cash paid at closing and 200,000 shares of restricted common stock, 100,000 of which were issued at closing and the remaining 100,000 are issuable over 3 years. Additionally, the Company will issue, in three equal installments, 50,000 shares of restricted common stock in connection with the consulting agreement with the seller. The shares were valued at $10 per share. The purchase price was allocated approximately $0.4 million to amortizable intangible assets, $0.6 million to non-amortizable assets and $1.3 million to goodwill. The value of the shares to be issued for the consulting agreement, $500,000, will be recorded into expense ratably over the service period.





In the quarter ended June 30, 2008, the Company recorded an impairment charge of approximately $1.8 million to reduce the carrying value of goodwill and acquired intangible assets from the ICON acquisition to their estimated fair value. A recessionary economic environment in Hawaii has adversely impacted the Company’s ability to sell tickets in that market during the first six months of 2008. Therefore, the Company revised its operating plan for ICON and recorded an impairment charge to reduce goodwill and acquired intangible assets to their estimated fair value.

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For the three and six months ended June 30, 2008, under the ICON brand name the Company recognized revenue of approximately $205,000 for both periods and after expenses, including amortization of approximately $20,500 and $41,000 related to acquired intangible assets and an impairment charge of $1.8 million in the quarter ended June 30, 2008 as discussed above, a net loss of approximately $1.8 million and $1.9 million.





Detail of Acquisitions





The following table details the fair value of assets and liabilities acquired at the date of acquisition:





KOTC Cage Rage ICON Total Current assets, exclusive of cash $ - $ 904,000 $ - $ 904,000 Fixed assets 30,000 61,000 - 91,000 Intangible assets with indefinite lives 1,700,000 3,800,000 628,000 6,128,000 Other intangible assets 1,110,000 1,723,000 410,000 3,243,000 Goodwill 2,356,000 2,571,000 1,312,000 6,239,000 Current liabilities (34,000 ) (459,000 ) - (493,000 ) Consideration $ 5,162,000 $ 8,600,000 $ 2,350,000 $ 16,112,000





The Company allocated purchase prices to amortizable intangible assets of $1.9 million to noncompete agreements (with a weighted average amortization period of 3.9 years), fighter contracts of $1.2 million (with a weighted average amortization period of 2 years), and $0.1 million to distribution contracts (with a weighted average amortization period of 2.4 years). The Company recorded amortization expense of approximately $341,000 and $681,000 related to these intangible assets during the three and six months ended June 30, 2008.





Additionally, as discussed above, the Company recorded asset impairment and other charges totaling approximately $10.3 million during the quarter and six months ended June 30, 2008.





Purchase Price Allocations





The purchase price allocations for the acquisitions were based upon discounted expected cash flow models. Valuation methods including relief from royalty, excess earnings/contributory asset charges, lost profits, and with and without competition, were applied to the discounted expected cash flow models to determine the value of the intangible assets acquired. The purchase prices of the acquisitions were then allocated based upon the values of intangible assets calculated and the carrying values of assets and liabilities acquired.





Additionally, the maintenance of goodwill and indefinite-lived intangible assets on the Company’s balance sheet requires management to achieve improvements in and expansion of the acquired entities’ operations. Should operations not improve to desired levels, the Company may be required to record an additional charge to operations for impairment of these assets.





SpiritMC





On September 18, 2007, the Company made an investment in Entlian Corporation (“SpiritMC”), a South Korean company promoting MMA events in South Korea. The investment gives the Company access to event promotion in South Korea and to fighters and venues under contract with SpiritMC. The cost of the investment was $2 million consisting of $1 million cash and $1 million in restricted common shares (100,000 common shares valued at $10.00 per share). The $10.00 per share valuation resulted from the Company’s guarantee of a minimum per share value of $10.00 to Entlian. If the Company’s quoted market price is below $10 per share on the date the lock up period expires in March 2009, the Company is required to issue up to 100,000 additional common shares.

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The Company acquired approximately 54% of SpiritMC’s common stock. This ownership percentage will dilute down to approximately 32% when SpiritMC’s existing debt facility with a third party mandatorily converts to common stock at any time but no later than January 2010. The Company has one third of the seats on SpiritMC’s Board of Directors, and therefore will not exercise control over SpiritMC. The Company has also determined that it is not the primary beneficiary. As such, the Company accounts for the investment in SpiritMC using the equity method. The Company recorded a charge of approximately $78,000 and $193,000, representing the Company’s share of SpiritMC’s loss for the three and six months ended June 30, 2008.





Note 5 Other Current Assets





Other current assets included a balance due of approximately $940,000 from a business owned by a former shareholder of Cage Rage. This amount was due primarily for event sponsorship prior to the Company’s acquisition of Cage Rage. During the quarter ended June 30, 2008, the Company wrote off this asset into impairment and other charges due to the uncertainty of future recoverability.





Note 6 Fixed Assets, Net





Fixed assets, net consisted of the following:





June 30, 2008 December 31, 2007 Computer, office and video production equipment $ 573,535 $ 535,581 Transportation equipment 26,702 - Furniture and fixtures 340,717 325,481 Live event set costs 234,865 236,780 Leasehold improvements 232,835 231,335 Computer software 98,787 66,193 Internet domain names and other 44,420 28,280 Website development costs 349,976 349,976 1,901,837 1,773,626 Accumulated depreciation and amortization (589,481 ) (345,078 ) $ 1,312,356 $ 1,428,548





Note 7 Liabilities





Notes Payable - Showtime





The Company owed the following related to notes payable:





June 30, 2008 December 31, 2007 Note payable - Showtime due March 31, 2009 $ 1,822,086 $ 1,822,086 Note payable - Showtime due June 17, 2009 3,500,000 - Original issue discount and warrant value, unaccreted portion (621,996 ) - Accrued interest 69,213 - Total $ 4,769,303 $ 1,822,086

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The $1.8 million note payable dated December 17, 2007 to Showtime was issued to extend payment of the net amount due to Showtime for television production costs incurred in 2007. In June 2008, Showtime and the Company extended the note due date from December 17, 2008 to March 31, 2009, and the note was given a first priority security interest in the unpledged assets of the Company. The note bears interest at the daily prime rate as published by JPMorganChase bank with interest payable at maturity.





On June 18, 2008, the Company entered into a Senior Secured Note Purchase Agreement and related documents with Showtime. Under the agreements, Showtime funded a note payable by the Company and the Company issued warrants to Showtime. The note has a face value of $3,500,000, of which the Company received $3,000,000 after an original issue discount of $500,000, and a first priority security interest in the unpledged assets of the Company. The note accrues interest at 10% per annum payable at maturity. The note matures on June 17, 2009. The note agreement includes a covenant that the Company maintain a minimum unrestricted cash balance of $550,000. The face value of the note together with accrued, unpaid interest may be prepaid without penalty prior to maturity. The $0.5 million discount from the face value of the note payable will be accreted into the note liability balance over 12 months, the term of the note.





In connection with the financing, the Company issued a warrant to purchase 100,000 shares of common stock. The warrant has an exercise price of $0.01 per share, a term of 36 months and an estimated fair value of $149,040. The warrant value is being amortized to interest expense over 12 months, the term of the note.





The Senior Secured Note Purchase Agreement allows the Company to raise additional indebtedness up to $3,500,000 (“Additional Indebtedness”) with collateral pari pasu with the Showtime notes, provided that Showtime has approval rights over any new holder of Additional Indebtedness, the right to purchase any Additional Indebtedness from new holders of debt, and sole power to exercise remedies upon a default of any Additional Indebtedness.





Other Accrued Liabilities





In connection with the reverse merger of the Company and the predecessor registrant, the Company assumed accounts payable of approximately $210,000 and notes payable of approximately $137,000, which existed at the time the predecessor registrant ceased operations. These liability balances remained unchanged from the date of the reverse merger.





Note 8 Income Taxes





As a result of the Company’s losses, no income taxes were due for the six and three months ended June 30, 2008 and 2007. The provision for income taxes was offset by an increase in the deferred tax asset valuation allowance.





As of January 1, 2007, the Company implemented FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109 (“FIN 48”) , which clarifies the accounting for uncertainty in tax positions. This Interpretation provides that the tax effects from an uncertain tax position can be recognized in the financial statements, only if the position is more likely than not of being sustained on audit, based on the technical merits of the position. The adoption on FIN 48 did not have an effect on the Company’s consolidated financial statements. The total amount of unrecognized tax benefits that if recognized would affect the Company’s effective tax rate is zero based on the fact that the Company currently has a full reserve against its unrecognized tax benefits.





Current income taxes (benefits) are based upon the year’s income taxable for federal, state and foreign tax reporting purposes. Deferred income taxes (benefits) are provided for certain income and expenses, which are recognized in different periods for tax and financial reporting purposes. Deferred tax assets and liabilities are computed for differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the period in which the differences are expected to affect taxable income. The Company had a full valuation allowance against deferred tax assets at June 30, 2008.

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At June 30, 2008, the Company had net operating loss carryforwards of approximately $24.4 million for federal tax purposes, expiring through 2028. In addition, the Company had net operating loss carryforwards of approximately $24.4 million for state tax purposes, which expire through 2018. However, a change in ownership could result in an “ownership change” under Internal Revenue Code Section 382 which restricts the ability of a corporation to utilize existing net operating losses. The Company also had net operating loss carryforwards of approximately $4.1 million for UK tax purposes that had been accumulated since acquisition of Cage Rage.





The Company is subject to Federal and state tax in the United States and tax in the United Kingdom. The tax years 2006 and 2007 of the parent company remain open to examination by the major taxing jurisdictions to which the Company is subject. The acquired subsidiaries may have earlier years subject to examination. The Company is not currently under examination by any tax authorities.





Note 9 Commitments





The Company’s lease agreement for its corporate office space specifies monthly payments starting at $25,176 and increasing to $36,472, and the lease expires on July 31, 2012. The Company also leases additional office space requiring monthly payments of approximately $2,600 through 2017. Future minimum annual payments remaining under these leases are as follows:





Year ending December 31, Amount 2008 $ 226,000 2009 429,000 2010 445,000 2011 462,000 2012 286,000 Thereafter 142,000 $ 1,990,000

The Company incurred rent expense of approximately $222,000 and $92,000, respectively, for the six months ended June 30, 2008 and 2007, respectively.

The Company has contracts with vendors, including a live events venue. The minimum annual payments under these contracts are approximately $716,000 and $54,000 in the years ending December 31, 2008 and 2009, respectively.





The Company entered into contracts with executives, key employees and consultants. These contracts call for following minimum annual payments:





Year ending December 31, Amount 2008 $ 2,357,000 2009 2,135,000 2010 740,000 2011 438,000 2012 229,000 $ 5,899,000

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Additionally, some employment contracts include performance bonuses related to the operations of recently acquired businesses. In regards to the KOTC subsidiary, the Company pays a bonus equal to 20% of the subsidiary’s earnings before interest, taxes, depreciation and, amortization (“EBITDA”) in excess of specified amounts, escalating from $850,000 to $1.6 million for each of the twelve-month periods ending September 30, 2008 through 2012. In regards to the ICON asset purchase, the Company pays a bonus of $100,000 if the subsidiary’s EBITDA exceeds $196,000 for the twelve-month period ending November 30, 2008. No bonuses have been accrued for the three and six months ended June 30, 2008.





Note 10 Litigation and Potential Claims





On December 14, 2006, the Company received a demand letter (the “Demand Letter”) from counsel for Wallid Ismail Promocoes E Eventos LTDA EPP and Wallid Ismail (collectively “Wallid”). The Demand Letter alleges that the Company entered into a “fully enforceable agreement” to compensate Wallid for allegedly assisting the Company in raising financing, and that the Company or its directors committed unspecified fraudulent acts, misappropriated Wallid’s “confidential and proprietary information,” and engaged in an “intentional and well-orchestrated scheme to wrongfully remove Wallid” as a principal of the Company. Wallid did not specify the amount of damages he claims to have sustained as a result of these acts.





The Company denies Wallid’s allegations, and denies that it has, or has breached, any obligations to Wallid. On January 2, 2007, the Company filed a lawsuit against Wallid in the Superior Court for the State of California, County of Los Angeles, LASC Case No. BC 364204 (the “California Lawsuit”). In the California Lawsuit, the Company seeks a judicial declaration that the allegations in the Demand Letter are false. In addition, the California Lawsuit alleges that Wallid has misappropriated the Company’s business plan and other confidential and proprietary information, that Wallid has been unjustly enriched at the Company’s expense, that Wallid is engaging in unfair competition with the Company , and that Wallid’s actions violate California Business and Professions Code sections 17200, et seq . Wallid answered the complaint on March 22, 2007, and then transferred the case to federal court. The case will be litigated in federal court, discovery is underway and the case is set for trial on September 16, 2008. However, it is anticipated that the court will vacate this trial date to accommodate pending defense motions for summary adjudication of issues.

On January 10, 2007, Wallid filed suit against the Company, among others, in federal court in New Jersey (the “New Jersey Lawsuit”). He amended his complaint on February 1, 2007. On April 18, 2007, the Company filed a motion to dismiss or stay the New Jersey Lawsuit because the California Lawsuit was filed first, or in the alternative to transfer the case to the federal court in California where the California Lawsuit is pending. On June 26, 2007, the court granted the Company’s motion and ordered the New Jersey Lawsuit transferred to the federal court in California.





On November 5, 2007, the federal court in the California lawsuit approved a stipulation by Wallid and the Company granting Wallid leave to file a Counterclaim and Third Party Complaint in the California Lawsuit, and providing for dismissal of the New Jersey Lawsuit without prejudice upon completion of the transfer of that action to California. The Counterclaim and Third Party Complaint asserts substantially the same claims Wallid asserted in the New Jersey Lawsuit. Wallid seeks: a 23.25% to 26.67% equity interest in the Company; damages for his losses in an amount to be determined at trial, but no less than $75,000; punitive damages of no less than $10,000,000; an imposition of a receiver to oversee the assets of the Company; an accounting on all income earned by the Company; and attorneys’ fees and costs of suit. The Company denies Wallid’s allegations and intends to assert a vigorous defense.





West Coast Productions, Inc. (“West Coast”) filed a civil action against Frank “Shamrock” Juarez (“Shamrock”) on January 23, 2007, and sought and obtained a temporary restraining order which prohibited Shamrock from fighting in the Company’s February 10, 2007 event. The Company subsequently entered into a settlement agreement on February 5, 2007, pursuant to which West Coast dismissed its civil action and agreed to permit Shamrock to fight in the February 10, 2007 event. The Company agreed to pay an aggregate of $250,000 to West Coast, out of future compensation due to Shamrock from the Company under the personal services agreement. The Company also entered into a co-promotion agreement with West Coast, pursuant to which it agreed to co-promote up to three live MMA events that feature Shamrock. To date the Company has paid West Coast $100,000 of the $250,000 owed. The remaining portion totaling $150,000 will be paid to West Coast from future co-produced events. A liability of $150,000 has been accrued.

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On March 22, 2007, Zuffa, LLC filed a complaint against Showtime, the Company and Cage Rage in which it alleges that the defendants infringed Zuffa’s copyrights by airing footage from certain Ultimate Fighting Championship events and alleges that the defendants utilized portions of Zuffa’s copyrights in the televised broadcast of the February 10, 2007 MMA event that was held at the Desoto Civic Center in Southaven, Mississippi. Zuffa has alleged causes of action for copyright infringement and unfair competition, and seeks injunctive relief, compensatory damages or statutory damages, and litigation expenses. Zuffa has not specified the amount of monetary damages it seeks. ProElite filed a motion to dismiss the case. The court dismissed ProElite for lack of personal jurisdiction, and deferred judgment concerning Showtime until further discovery is conducted. The parties met for mediation on February 11, 2008 and agreed to the terms of a settlement agreement, which did not have an adverse financial impact on the Company. The settlement was entered into the US District Court, District of Nevada on February 11, 2008. The parties agreed to dismiss the actions with prejudice upon closing a long-form settlement agreement, which is pending.





Note 11 Shareholders’ Equity





CBS and Showtime





In connection with a television distribution agreement, the Company and Showtime, an affiliate of CBS, entered into a Subscription Agreement dated as of February 22, 2008 pursuant to which the Company agreed to issue two warrants to Showtime (the "New Warrants") each for the purchase of 2,000,000 shares of the Company's Common Stock at an exercise price of $2.00 per share. The first New Warrant vests immediately and is for a term of five years from February 22, 2008. The second New Warrant vests in four equal tranches of 500,000 shares with each respective tranche to vest if an Event is broadcast pursuant to the Broadcast Agreement. The term of each tranche is five years from the date that such tranche vests. Pursuant to an Investor Rights Agreement between the Company and Showtime dated as of February 22, 2008, the Company granted to Showtime certain registration rights with respect to the shares issuable upon exercise of the New Warrants, and Showtime agreed that such shares and the New Warrants are subject to certain transfers restrictions until March 5, 2009. The value of the first New Warrant computed using a Black-Scholes model was approximately $2.3 million. As of June 30, 2008, management determined the warrants issued in 2008 in connection with the CBS distribution agreement had no future value as the likelihood of realizing gross profit on the CBS events was remote. Therefore, the entire $2.3 million value of these warrants was charged to cost of revenue during the three months ended June 30, 2008. The value of the second New Warrant computed using a Black-Scholes model was approximately $2.5 million and will be charged to operations on the dates of the first four broadcasts under the television distribution agreement.





Additionally, Showtime exercised part of the warrants previously issued to Showtime in January 2007. The exercise was for an aggregate of 2,000,000 shares of the Company's Common Stock (the "Warrant Shares") resulting in proceeds to the Company of $4,000,000.





On June 18, 2008 in connection with the $3.5 million face value note payable, the Company issued to Showtime a three-year warrant to purchase 100,000 shares of common stock at $0.01 per share. The value of this warrant calculated using a Black-Scholes model was $149,040 and will be charged to interest expense over the term of the note using the effective interest method.





Stock-Based Compensation





The Company adopted its 2006 Stock Option Plan and amended the plan in 2007, reserving a total of 8,000,000 shares. The plan provides for the issuance of statutory and non-statutory stock options to employees, directors and consultants, with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. Options granted under the plan generally vest quarterly over four years and have a life of 10 years. As of June 30, 2008, options to purchase 5,281,797 shares of common stock had been granted under the plan.

20





The Company accounts for stock-based compensation arrangements with its employees, consultants and directors in accordance with SFAS No. 123 (revised), “Share-Based Payment” (SFAS No. 123R). Under the fair value recognition provisions of SFAS No. 123R, the Company measures stock-based compensation cost at the grant date based on the fair value of the award and recognizes compensation expense over the requisite service period, which is generally the vesting period. For the quarters ended June 30, 2008 and 2007, the Company incurred approximately $0.7 million and $0.2 million, respectively, of expense related to stock based compensation under this plan and approximately $1.1 million and $2.8 million, respectively, of expense related to warrants. For the six months ended June 30, 2008 and 2007, the Company incurred approximately $1.2 million and $0.6 million, respectively, of expense related to stock based compensation under this plan and approximately $1.7 million and $2.9 million respectively, of expense related to warrants.





Stock Options





The Company uses a Black-Scholes option pricing model to estimate the fair value of stock-based awards with the weighted average assumptions noted in the following table.





Six Months Ended June 31, 2008 Six Months Ended June 31, 2007 Black-Scholes Model: Risk-free interest rate 1.84% - 3.41 % 4.50 - 4.84 % Expected life, in years 5.8 - 6.0 5.8 - 6.5 Expected volatility 96.0 % 60.0 % Dividend yield 0.0 % 0.0 %





Expected volatility is based on the historical volatility of the share price of companies operating in similar industries. The volatility of industry peers is considered more representative of expected volatility because there is currently minimal daily trading volume in the Company’s stock. The expected term is based on management’s estimate of when the option will be exercised which is generally consistent with the vesting period. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.





The following table represents stock option activity for the six months ended June 30, 2008:





Plan Options Weighted Average Exercise Price Outstanding at December 31, 2007 4,875,859 $ 2.77 Granted 1,555,000 $ 2.23 Forfeited (192,395 ) $ 2.91 Expired (956,667 ) $ 2.00 Exercised - $ - Outstanding at June 30, 2008 5,281,797 $ 2.74 Exercisable at June 30, 2008 2,655,235 $ 2.31

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At June 30, 2008 the aggregate intrinsic value of options outstanding and the aggregate intrinsic value of options exercisable was approximately zero and zero, respectively. The weighted-average grant-date fair value of options granted during the six months ended June 30, 2008 and 2007 was $1.53 and $0.64, respectively. The weighted-average remaining life of outstanding and exercisable options at June 30, 2008 and 2007 was 6.0 years and 4.4 years, respectively.





At June 30, 2008 there was approximately $4.8 million of unrecognized compensation cost related to non-vested options, which is being expensed through 2012.





During the quarter ended March 31, 2008, the Company granted 1,260,000 options to employees in individual grants ranging from 10,000 to 1,000,000 options. The options have exercise prices ranging from $2.00 to $7.01, vest over two or four years and have terms of 10 years. The aggregate fair value of these options at the dates of grant was approximately $1.8 million and is being amortized on a straight-line basis over the respective vesting periods.





During the quarter ended June 30, 2008, the Company granted 295,000 options to employees and a director in individual grants ranging from 20,000 to 100,000 options. The options have exercise prices of $2.00, vest over three to four years and have terms of 10 years. The aggregate fair value of these options at the dates of grant was approximately $0.6 million and is being amortized on a straight-line basis over the respective vesting periods.





Warrants





The Company uses a Black-Scholes option pricing model to estimate the fair value of warrants with the assumptions noted in the following table.





Six Months Ended June 30, 2008 Six Months Ended June 30, 2007 Risk-free interest rate 1.87% - 2.71 % 4.52 - 5.11 % Expected life, in years 1.5 - 3.1 1.5 - 6.0 Expected volatility 96.0 % 60.0 % Dividend yield 0.0 % 0.0 %





The following table represents warrant activity for the six months ended June 30, 2008:





Warrants Weighted Average Exercise Price Outstanding at December 31, 2007 30,500,137 $ 2.85 Granted 4,689,500 $ 2.59 Expired (47,917 ) $ 4.96 Exercised (4,750,000 ) $ 2.00 Outstanding at June 30, 2008 30,391,720 $ 2.94 Exercisable at June 30, 2008 11,194,554 $ 3.10

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At June 30, 2008 the aggregate intrinsic value of warrants outstanding and the aggregate intrinsic value of warrants exercisable was approximately $0.7 million and $0.8 million, respectively. The weighted-average remaining life of outstanding and exercisable warrants at June 30, 2008 and 2007 was 4.6 years and 4.4 years, respectively.





At June 30, 2008 there was approximately $25.6 million of unrecognized cost related to non-vested warrants (including approximately $23.4 million of unrecognized cost related to Burnett warrant tranches three through nine, which is discussed below), which is being expensed through 2012.





During the quarter ended March 31, 2008, the Company issued 4,000,000 warrants with exercise prices of $2.00 to Showtime, as discussed above. Also during the quarter ended March 31, 2008, the Company’s placement agent for prior financings exercised on a cashless basis 2.75 million warrants at $2.00 per share for 2,016,667 shares of common stock.





During the quarter ended June 30, 2008, the Company issued 100,000 warrants with exercise prices of $0.01 per share to Showtime, as discussed above and also issued 100,000 warrants with an exercise price of $8.00 per share.





Burnett Warrants





Effective June 15, 2007 (and as amended on June 28, 2007 and June 1, 2008), the Company entered into an agreement (the "Series Agreement") with JMBP, Inc. ("MBP"), wholly-owned by Mark Burnett ("Burnett") in connection with a possible television series involving mixed martial arts ("Series") for initial exhibition during prime time on one of specified networks or cable broadcasters. MBP (or a separate production services entity owned or controlled by MBP) will render production services in connection with the Series and will be solely responsible for and have final approval regarding all production matters, including budget, schedule and production location. It is anticipated that, as a condition to involvement in the Series, each of the Series contestants will sign a separate agreement with the Company or an affiliate of the Company for services rendered outside of the Series. MBP will own all rights to the Series. The Company and MBP will jointly exploit the Internet rights in connection with the Series on ProElite.com and other websites controlled by ProElite.com. The Company will be entitled to a share of MBP's Modified Adjusted Gross Proceeds, as defined. Subject to specified exceptions, MBP and Burnett have agreed to exclusivity with respect to mixed martial arts programming. The term of the Agreement, as amended effective June 1, 2008, extends until the earlier of the end of the term of the license agreement with the broadcaster of the Series (the “License Agreement”) or the failure of MBP to enter into a License Agreement by November 17, 2008.





Pursuant to the Series Agreement, the Company and Burnett entered into a Subscription Agreement (the “Subscription Agreement”) relating to the issuance to Burnett of warrants to purchase up to 17,000,000 shares of the Company's common stock. As amended effective June 1, 2008, the warrants are divided into nine tranches as follows:





Tranche Number of Shares under Warrants Vesting Date One 2,000,000 June 15, 2007 Two 2,000,000 500,000 shares to be vested on each of June 15, 2008, 2009, 2010 and 2011. Three 1,000,000 The date that the pilot or first episode of a Series is broadcast on a Network or Cable Broadcaster. Four 1,000,000 The date that the second episode of a Series is broadcast on a network or cable broadcaster. Five 2,000,000 The date that the pilot or first episode of an additional Series is broadcast on a specified network or cable broadcaster. Six 1,000,000 The last day of the first completed season of any Series. Seven 2,000,000 The last day of any additional completed season of any series (or the last day of the first completed season of any additional series). Eight 4,000,000 1,333,333 shares to be vested on the last day of each additional completed season of any series. Nine 2,000,000 1,000,000 shraes to be vested on the date of broadcast of each of the first two derivative pay-per-view events.

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The vesting date of each tranche is subject to acceleration under certain circumstances. However, the warrants are not exercisable if a License Agreement is not entered into by June 15, 2008, except for 1,000,000 warrants from tranche one. Additionally, the warrants and any shares purchased through exercise of the warrants are subject to forfeiture, except for 1,000,000 warrants from tranche one, if a License Agreement is not entered into by November 17, 2008.





The warrants have an exercise price of $3.00 per share. The exercise price is reduced if the Company issues or sells shares of its common stock, excluding shares issued as compensation for services or in connection with acquisitions, for less than $3.00 per share. The expiration date for a particular tranche of warrants is the latest to occur of (i) June 15, 2013; (ii) the date which is one year after the vesting date of any such tranche, and (iii) one year after the expiration of the term of the License Agreement.

The value of the warrants under the June 1, 2008 amendment was less than the previously calculated value. Therefore, the previous warrant values will be used for any expense to be recognized. The value of the warrants was calculated as approximately $2.6 million for tranche one and $2.9 million for tranche two using a Black-Scholes option pricing model with the following assumptions: expected term of 3 years (for tranche one) and from 3 to 4 years (for separate 500,000 vesting blocks of tranche two), expected volatility of 60%, risk-free interest rate of 5.07% to 5.09% and dividend yield of 0%. The value of the tranche one warrants was charged to expense in June 2007. The value of the tranche two warrants is being amortized to expense over the vesting period of each 500,000 warrant vesting block (i.e., from 1 to 4 years).





The current value of warrants in tranches three through nine was calculated as approximately: $1.8 million (tranche three), $1.8 million (tranche four), $3.6 million (tranche five), $1.8 million (tranche six), $3.6 million (tranche seven), $7.3 million (tranche eight), and $3.6 million (tranche nine) or approximately $23.7 million in aggregate. The values were calculated using a Black-Scholes option pricing model with an expected term of 6 years, expected volatility of 60%, risk-free interest rate of 5.1% and dividend yield of 0%. The Company will begin expensing the value of these tranches once there is a reasonable likelihood of achieving the performance criteria of each tranche (as described above) and would be based on the current values at that time. During the quarter ended June 30, 2008, the Company recognized approximately $0.3 million expense related to tranche three based upon the status of production of a series pilot. No expense has been recognized related to tranches four through nine.





The Company, Burnett and Santa Monica Capital Partners II LLC, ("SMCP"), one of the Company's shareholders, entered into an Investor Rights Agreement providing certain registration rights with respect to the shares purchasable under the warrants, co-sale rights with SMCP, restrictions on resale and board observation rights.





Note 12 Related Party Transactions





The Company earns revenue from and incurs expenses to Showtime and CBS in connection with a television production and distribution agreement. The Company recorded revenue for television license fees of $0.9 million and $0.4 million during the three months ended June 30, 2008 and 2007, respectively and $2.1 million and $0.4 million during the six months ended June 30, 2008 and 2007, respectively. The Company incurred television production expenses charged by Showtime of approximately $0.5 million and $1.1 million during the three months ended June 30, 2008 and 2007, respectively, and approximately $0.5 million and $2.5 million during the six months ended June 30, 2008 and 2007, respectively. The Company also incurred non-cash expenses of $2.9 million and $0.1 million for warrant vesting and amortization of prepaid distribution costs for the three months ended June 30, 2008 and 2007, respectively, and $3.0 million and $0.2 million during the six months ended June 30, 2008 and 2007, respectively.

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In October 2006, the Company entered into a three-year term consulting agreement and pays a monthly fee of $30,000 to Santa Monica Capital Partners II (“SMCP”) for services relating to strategic planning, investor relations, acquisitions, corporate governance and financing. The Company paid $90,000 to SMCP for this monthly fee during the three months ended June 30, 2008 and 2007, respectively, and $180,000 during the six months ended June 30, 2008 and 2007, respectively. Additionally, the Company incurred costs for services to provided to SMCP of approximately $28,000 and $43,000 during the three months ended June 30, 2008 and 2007, respectively, and $55,000 and $52,000 during the six months ended June 30, 2008 and 2007, respectively





On June 18, 2008, the Company issued to Showtime a note payable with $3.5 million principal and warrants to purchase 100,000 shares of common stock. This transaction is more fully described in Note 7 above.

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Item 2. Management’s Discussion and Analysis of Operations.





Forward Looking and Cautionary Statements





This Form 10-Q contains certain forward-looking statements. For example, statements regarding our financial position, business strategy and other plans and objectives for future operations, and assumptions and predictions about future product demand, supply, manufacturing, costs, marketing and pricing factors are all forward-looking statements. These statements are generally accompanied by words such as “intend,” “anticipate,” “believe,” “estimate,” “potential(ly),” “continue,” “forecast,” “predict,” “plan,” “may,” “will,” “could,” “would,” “should,” “expect” or the negative of such terms or other comparable terminology. We believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, based on information available to us on the date hereof, but we cannot assure you that these assumptions and expectations will prove to have been correct or that we will take any action that we may presently be planning. However, these forward-looking statements are inherently subject to known and unknown risks and uncertainties. Actual results or experience may differ materially from those expected or anticipated in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, regulatory policies, competition from other similar businesses, and market and general policies, competition from other similar businesses, and market and general economic factors. This discussion should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we project. Any forward-looking statement you read in this report reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy, and liquidity. All subsequent forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. You should specifically consider the factors identified in this report, which would cause actual results to differ before making an investment decision. We are under no duty to update any of these forward-looking statements after the date of this report or to conform these statements to actual results.





Overview





Mixed Martial Arts, commonly referred to as MMA, is a sport growing in popularity around the world. In MMA matches, athletes use a combination of a variety of fighting styles, including boxing, judo, jiu jitsu, karate, kickboxing, muay thai, tae kwon do, and wrestling. Typically, MMA sporting events are promoted either as championship matches or as vehicles for well-known individual athletes. Professional MMA competition conduct is regulated primarily by rules implemented by state athletic commissions and is currently permitted in twenty-one states. Athletes win individual matches by knockout, technical knockout (referee or doctor stoppage), submission, or judges’ decision.





Since the Company’s formation in August 2006, we have established ourselves as a leading, global promoter of live MMA events and provider of a social-networking website focused exclusively on MMA. We have agreements to distribute content by television and DVD throughout the world. To date, we have focused our efforts primarily on events in the United States and United Kingdom and on our website.





In 2007, we accomplished the following strategic objectives:





· Acquired well-regarded MMA live event brands throughout the world:

· King of the Cage, Inc. (“KOTC”), a promoter of live MMA events, that has historically produced in excess of 20 events per year.





· Mixed Martial Arts Promotions, Ltd. and Mixed Martial Arts Productions, Ltd. (together “Cage Rage”), a United Kingdom-based promoter of live MMA events.

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· The assets of Future Fight Promotions, Inc. (“ICON”), a Hawaii-based promoter of live MMA events.





· Invested in Entlian Corp., a South Korea-based promoter of live MMA events.





· Launched our social-networking MMA community website, www.proelite.com.





During 2008, the Company increased the number of live events that it promoted. In February 2008, the Company signed a television distribution agreement with CBS, which led to the first MMA event broadcast on network television on May 31, 2008. In June 2008, the Company amended its Series Agreement with JMBP, Inc. and Mark Burnett, extending the time to secure an agreement to run a MMA reality television pilot episode, which has been filmed. The Company also began a series of reductions costs designed to reduce monthly expenditures and improve the profitability of live events. There is no guarantee that the Company will be successful in its efforts to reduce expenses.





In 2008, the Company encountered liquidity issues. The Company’s auditors have issued a going concern opinion in their report for the year ended December 31, 2007 that states substantial doubt exists about the Company’s ability to continue as a going concern. In June 2008, the Company secured $3.0 million proceeds from a note payable from Showtime. Additionally, the Company is actively negotiating to consummate a financing of approximately $3.5 million in secured debt (with a funded amount of $3.0 million after an original issue discount of $0.5 million) and believes a successful closing is reasonably likely, but there is no assurance that it will be successful in doing so at all or on a timely basis. Any such failure to obtain financing in the immediate future would have a material adverse effect on the Company’s liquidity and capital resources and ability to continue as a going concern.





Even if the Company successfully closes on such financing, it expects that its capital resources are sufficient only until the end of the year, and only if the Company makes significant reductions in or cessation of operations and expenditures. The Company is also actively seeking additional financing beyond the $3.0 million to enable the Company to execute its operating plans without significant reductions in operations, but there is no assurance as to whether any such financing will be available on reasonable terms or at all. Liquidity matters are discussed in more detail below.





Results of Operations





For the three months ended June 30, 2008.





Revenue





Revenue from live events, consisting primarily of ticket sales, site fees and sponsorship, was $2,027,351 for the three months ended June 30, 2008 compared to $1,488,558 for the three months ended June 30, 2007. The increase was due to higher operating activity in the second quarter of 2008 compared to the second quarter of 2007 when the Company commenced operations and to newly acquired subsidiaries. The Company’s EliteXC subsidiary earned revenue of approximately $1.3 million from promoting three events in the second quarter of 2008 compared to $1.5 million from promoting two events in the second quarter of 2007. Also, the Company’s KOTC and Cage Rage subsidiaries, which were acquired in September 2007, earned live event revenues of $0.5 million and $0.5 million, respectively, during the second quarter of 2008.





Revenue from pay-per-view programming (PPV) and television licensing was $178,866 for the three months ended June 30, 2008 compared to $10,858 for the three months ended June 30, 2007. The increase was primarily due to acquisitions in late 2007.





The Company began earning television license fees in 2008 under the distribution agreement with Showtime and under the distribution agreement with CBS signed in 2008. In 2007, the Company earned no television license fees from Showtime or CBS. In the second quarter of 2008, the Company received television license fees of $925,000 from Showtime and CBS.

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Revenue from our website was $208,990 for the three months ended June 30, 2008 compared to $16,963 for the three months ended June 30, 2007. This increase was primarily due to licensing the Company’s social networking technology.





Other revenues, which includes DVD sales and fees for licensing fighters under contract, was $346,442 for the three months ended June 30, 2008 compared to $0 for the three months ended June 30, 2007. The increase was due to the Company releasing DVD titles of its live events for sale during the quarter ended June 30, 2008 and to the acquisition of KOTC, which had DVD distribution agreements in place at acquisition.





Cost of revenue





Cost of revenue for live event production (excluding expenses payable to Showtime and CBS) was $2,865,002 for the three months ended June 30, 2008 compared to $2,495,618 for the three months ended June 30, 2007. Live event production costs consist principally of fighters purses, arena rental and related expenses (e.g., staffing, staging, and video equipment rental), event-specific marketing expenses (e.g., Internet, radio and television advertising, posters and street teams), and travel. Live event production costs increased primarily due to inclusion of the KOTC and Cage Rage subsidiaries (acquired in September 2007). Cost of revenue for KOTC and Cage Rage were approximately $0.3 million and $0.8 million, respectively, for the quarter ended June 30, 2008. Our EliteXC subsidiary incurred costs of approximately $1.7 million to promote three events in the second quarter of 2008 compared to approximately $2.2 million to promote two events in the second quarter of 2007. The decrease in these expenses for the EliteXC subsidiary was primarily the result of “Barker shows” (i.e., event-specific promotional videos) produced in 2007 (for approximately $0.6 million) but not in 2008 and to a charge of $0.3 million for set equipment abandoned in 2007. These decreases were partially offset by higher purses, marketing and travel.





Also included in non-cash cost of revenue was a non-cash expense of $2.3 million related to expensing prepaid distribution costs. As of June 30, 2008, management determined the likelihood of realizing gross profit on the CBS events was remote. Therefore, the entire $2.3 million prepaid distribution costs were charged to cost of revenue during the three months ended June 30, 2008.





Additionally, we incurred related-party production costs for television production by Showtime of $500,000 for the three months ended June 30, 2008 compared to $1,127,060 for the three months ended June 30, 2007. The decrease was as a result of the terms of the distribution agreement with Showtime. This agreement called for the Company to pay production expenses in 2007 but not in 2008 for events distributed on Showtime. In 2008, the Company used Showtime’s production staff to produce the event broadcast on CBS in May 2008 and incurred expenses of approximately $0.5 million. We expect cost of revenue for live events will increase in 2008 as we promote more events. However, we expect television production costs payable to Showtime to decrease in 2008 in accordance with the terms of the distribution agreement.





Cost of revenue for our website was $34,237 for three months ended June 30, 2008 compared to $53,259 for the three months ended June 30, 2007 and consisted primarily of merchandise sold through our online store and Internet streaming expenses.





Marketing expenses





Marketing expenses primarily consist of marketing, advertising and promotion expenses not directly related to MMA events. Marketing, advertising and promotion expenses related directly to MMA events are charged to cost of revenue. Marketing expenses were $107,713 for the quarter ended June 30, 2008 compared to $165,544 for the quarter ended June 30, 2007 and primarily consisted of Internet and print advertising, public relations and marketing consultants. We anticipate marketing expenses will decrease as we shift marketing efforts towards specific events (which are recorded in cost of revenue) and away from brand awareness campaigns.

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Website operations





Website operations expenses were $666,201 for the three months ended June 30, 2008 compared to $772,008 for the three months ended June 30, 2007. The decrease was due primarily to staffing reductions initiated in January 2008.





Live events operations





Live events operations expenses were $1,381,590 for the three months ended June 30, 2008 compared to $395,609 for the three months ended June 30, 2007. Live events operations expenses consist primarily of wages and consultants’ fees related to day-to-day administration of the Company’s live events. The increase was primarily the result of acquiring KOTC and Cage Rage in September 2007. KOTC and Cage Rage incurred operating expenses of approximately $0.3 million and $0.6 million, respectively, during the quarter ended June 30, 2008.





In 2008, we expect expenses related to our fight operations to increase due to higher average staffing levels than 2007 and inclusion of a full year of operations of companies acquired in late 2007.





General and administrative expenses





General and administrative expenses were $3,247,118 for the three months ended June 30, 2008 compared to $4,394,153 for the three months ended June 30, 2007. A significant component of general and administrative expenses was non-cash expense related to option and warrant grants of approximately $0.9 million in the second quarter of 2008 versus approximately $3.1 million in the second quarter of 2007. The decrease in option and warrant expense was primarily due to exercisable warrants issued to JMBP, Inc. in June 2007. The increase in general and administrative expenses was also due to higher employee head count resulting in wages of approximately $0.9 million in the second quarter of 2008 versus $0.4 million in the second quarter of 2007 and consulting fees of $0.4 million in the second quarter of 2008 versus $0.3 million in the second quarter of 2007. Also, legal expenses increased to $0.3 million in the second quarter of 2008 from $0.1 million in the second quarter of 2007.





In the first and second quarters of 2008, the Company reduced staffing and did not rehire for open positions resulting from employee turnover in an effort to cut costs. However, we expect 2008 general and administrative expenses will increase over 2007 primarily due to higher average staffing levels.





During the three months ended June 30, 2008, the Company recognized impairment charges totaling approximately $10.3 million related to goodwill and non-amortizable intangible assets and other assets resulting from the acquisitions of Cage Rage, KOTC and ICON. The impairment charges were recorded to reduce the carrying value of goodwill and acquired intangible assets to estimated fair value. The Company recorded an impairment charge of approximately $5.2 million related to a change in the operating plan of Cage Rage and a charge of approximately $0.9 million related to future realization of assets acquired. The Company recorded an impairment charge of approximately $2.4 million related to unfavorable industry trends (i.e., increasing fighter purses) affecting KOTC. The Company recorded an impairment charge of approximately $1.8 million due to a recessionary economy affecting ICON’s market.





For the six months ended June 30, 2008.





Revenue





Revenue from live events, consisting primarily of ticket sales, site fees and sponsorship, was $5,084,790 for the six months ended June 30, 2008 compared to $1,799,661 for the six months ended June 30, 2007. The increase was due to higher operating activity in 2008 compared to 2007 when the Company commenced operations and to newly acquired subsidiaries. The Company’s EliteXC subsidiary earned revenue of approximately $3.7 million from promoting eight events in 2008 compared to $1.9 million from three events in 2007. Also, the Company’s KOTC and Cage Rage subsidiaries, which were acquired in September 2007, earned live event revenues of $0.9 million and $1.0 million, respectively, during 2008.





Revenue from pay-per-view programming (PPV) and television licensing was $314,141 for 2008 compared to $10,858 for 2007. The increase was primarily due to acquisitions in late 2007.

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The Company began earning television license fees in 2008 under the distribution agreement with Showtime and under the distribution agreement with CBS signed in 2008. In 2007, the Company earned no television license fees from Showtime or CBS. In 2008, the Company received television license fees of $2,125,000 from Showtime and CBS.





Revenue from our website was $235,454 for the six months ended June 30, 2008 compared to $20,463 for the six months ended June 30, 2007. This increase was primarily due to licensing the Company’s social networking technology.





Other revenues, which includes DVD sales and fees for licensing fighters under contract, was $465,912 for the six months ended June 30, 2008 compared to $0 for the six months ended June 30, 2007. The increase was due to the Company releasing DVD titles of its live events for sale during the quarter ended June 30, 2008 and to the acquisition of KOTC, which had DVD distribution agreements in place at acquisition.





Cost of revenue





Cost of revenue for live event production (excluding expenses payable to Showtime and CBS) was $7,013,024 for the six months ended June 30, 2008 compared to $3,402,308 for the six months ended June 30, 2007. Live event production costs consist principally of fighters purses, arena rental and related expenses (e.g., staffing, staging, and video equipment rental), event-specific marketing expenses (e.g., Internet, radio and television advertising, posters and street teams), and travel. Live event production costs increased primarily due to inclusion of the KOTC and Cage Rage subsidiaries (acquired in September 2007). Cost of revenue for KOTC and Cage Rage were approximately $0.7 million and $1.5 million, respectively, for the six months ended June 30, 2008. Our EliteXC subsidiary incurred costs of approximately $5.0 million to promote eight events in 2008 compared to approximately $3.4 million to promote three events in 2007. The increase in EliteXC’s expenses was primarily due to producing more events resulting in increases in fight purses to $2.4 million in 2008 from $1.2 million in 2007, arena and related expenses to $1.2 million in 2008 from $0.4 million in 2007, and event-specific marketing to $0.5 million from $0.3 million in 2007. These increases were partially offset by reduced production spending of $0.2 million in 2008 versus $1.0 million in 2007 primarily due to no Barker shows produced in 2008 (i.e., event-specific promotional videos produced in 2007 for approximately $0.6 million) and a charge of $0.3 million for set equipment abandoned in 2007.





Also included in non-cash cost of revenue was a non-cash expense of $2.3 million related to expensing prepaid distribution costs. As of June 30, 2008, management determined the likelihood of realizing gross profit on the CBS events was remote. Therefore, the entire $2.3 million prepaid distribution costs were charged to cost of revenue during the six months ended June 30, 2008.





Additionally, we incurred related-party production costs for television production by Showtime of $500,000 for the six months ended June 30, 2008 compared to $2,460,835 for the six months ended June 30, 2007. The decrease was as a result of the terms of the distribution agreement with Showtime. This agreement called for the Company to pay production expenses in 2007 but not in 2008 for events distributed on Showtime. In 2008, the Company used Showtime’s production staff to produce the event broadcast on CBS in May 2008 and incurred expenses of approximately $0.5 million. We expect cost of revenue for live events will increase in 2008 as we promote more events. However, we expect television production costs payable to Showtime to decrease in 2008 in accordance with the terms of the distribution agreement.





Cost of revenue for our website was $63,138 for six months ended June 30, 2008 compared to $111,814 for the six months ended June 30, 2007 and consisted primarily of merchandise sold through our online store and Internet streaming expenses.





Marketing expenses





Marketing expenses primarily consist of marketing, advertising and promotion expenses not directly related to MMA events. Marketing, advertising and promotion expenses related directly to MMA events are charged to cost of revenue. Marketing expenses were $206,878 for the six months ended June 30, 2008 compared to $269,438 for the six months ended June 30, 2007 and primarily consisted of Internet and print advertising, public relations and marketing consultants. We anticipate marketing expenses will decrease as we shift marketing efforts towards specific events (which are recorded in cost of revenue) and away from brand awareness campaigns.

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Website operations





Website operations expenses were $1,390,464 for the six months ended June 30, 2008 compared to $1,187,167 for the six months ended June 30, 2007. The increase was due primarily to higher average staffing levels in 2008 than in 2007.





In the first and third quarters of 2008, the Company reduced staffing and did not rehire for open positions resulting from employee turnover in an effort to cut costs. Therefore, we expect website operations expenses will decrease in 2008.





Live events operations





Live events operations expenses were $2,722,882 for the six months ended June 30, 2008 compared to $731,558 for the six months ended June 30, 2007. Live events operations expenses consist primarily of wages and consultants’ fees related to day-to-day administration of the Company’s live events. The increase was primarily the result of acquiring KOTC and Cage Rage in September 2007. KOTC and Cage Rage incurred operating expenses of approximately $0.7 million and $1.5 million, respectively, during 2008.





In 2008, we expect expenses related to our fight operations to increase due to higher average staffing levels than 2007 and inclusion of a full year of operations of companies acquired in late 2007.





General and administrative expenses





General and administrative expenses were $6,945,746 for the six months ended June 30, 2008 compared to $6,223,907 for the six months ended June 30, 2007. A significant component of general and administrative expenses was non-cash expense related to option and warrant grants of approximately $2.3 million in 2008 versus approximately $3.2 million in 2007. The decrease in option and warrant expense was primarily due to exercisable warrants issued to Burnett in June 2007 offset by additional option and warrant grants in 2008. Contributing to the increase in general and administrative expenses were higher employee head count resulting in wages and consulting fees of approximately $1.8 million in 2008 versus $0.6 million in 2007 and consulting fees of $0.7 million in 2008 versus $0.6 million in 2007. Legal expenses increased to $0.6 million in 2008 from $0.3 million in 2007 related primarily to ongoing litigation. Insurance expense increased to $0.4 million in 2008 from $0.1 million in 2007 as the Company expanded its policy coverage, and rent expense increased to $0.2 million in 2008 from $0.1 million in 2007 due to moving to new office space.





In the first and second quarters of 2008, the Company reduced staffing and did not rehire for open positions resulting from employee turnover in an effort to cut costs. However, we expect 2008 general and administrative expenses will increase over 2007 primarily due to higher average staffing levels.





During the quarter ended June 30, 2008, the Company recognized impairment charges totaling approximately $10.3 million related to goodwill and non-amortizable intangible assets resulting from the acquisitions of Cage Rage, KOTC and ICON. The impairment charges were recorded to reduce the carrying value of goodwill and acquired intangible assets to estimat