LEFT BEHIND GAMES INC.

As defined in ASC 820 “Fair Value Measurements”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

The three levels of the fair value hierarchy defined by ASC 820 are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

In August of 2011, the Company entered into a Game Development Agreement with a lead game developer for future services. Under the terms of the agreement, the Company will issue the lead game developer $120,000 in common shares monthly for six months. In addition, the Company will issue the lead game developer a non-recoupable bonus equal to $314,000 in common stock to be paid over 12 months beginning January 1, 2012. The lead game developer will also receive a 10% royalty, payable based upon any “net profits” of the products he develops. In September of 2011, the Company issued 700,000,000 shares of common stock to the lead game developer for the first monthly payment.

As of September 30, 2011, the Company did not have sufficient authorized common shares to settle all of its convertible notes and outstanding warrants.  As a result, in accordance with ASC 815-15 “Derivatives and Hedging”, the Company must classify all of its share-settleable instruments as liabilities.  These instruments will be recorded at their fair values and re-measured at the end of each reporting period with the change in fair value reported in earnings.  As of September 30, 2011, the Company reclassified $96,251 from additional paid-in capital to liabilities.  This amount represents the fair value of the conversion options embedded in its notes payable described in Note 6 and its outstanding warrants described in Note 5, calculated using the Black-Scholes option-pricing model as of September 30, 2011.  

Consulting and professional fees were $1,076,697 for the six months ended September 30, 2011 compared to $2,193,315 for the six months ended September 30, 2010, a decrease of $1,116,618.  Both periods had non-cash charges for the fair value of stock based compensation to consultants.  The 2011 period had a $349,918 charge attributable to the fair value of the warrants issued to one of our law firms for past and current services and the 2010 period had a $1,725,841 charge related to convertible debt for services arrangements with several of our consultants. The 2011 period did not have any such charges for the convertible debt for services arrangements.  The charges in the 2011 period largely related to the fair value of warrants issued for compensation to service providers.