Luxeyard, Inc.

During the third quarter of 2012, the Company’s chairman of the Board of Directors and interim CEO, loaned the Company a total of $575,000. The notes bear no interest and are payable when the Company closes an equity or equity linked financing of $500,000 and above. The note holder also has the option to convert the notes into securities issuable in such financing. During the three months ended September 30, 2012, the Company made repayments to the notes amounting to $225,000. As of September 30, 2012, the notes have an outstanding balance of $350,000.

The Series D warrants expired during the quarter ended September 30, 2012 and as of the expiration date; the related warrants have a fair value of zero. Consequently, the remaining derivative liability related to these warrants amounting to $471,874 was credited to gain on derivatives. As the Series E warrants were exercisable only when the Series D warrants are exercised, the Series E warrants were forfeited. The derivative liability related to the Series E warrants was marked to market as of the date that these were forfeited and the related fair value of $756,858 was reclassified to additional paid in capital.

During the three months ended September 30, 2012, the Company entered into two lease agreements for warehouse space. Both properties are located in High Point, North Carolina. The base rent for one is 2,215 sq. ft. at $23 per sq. ft. per year. The agreement was effective August 1, 2012 and expires on April 30, 2013. The base rent for the other is $6,000 per month starting September 25, 2012 and expiring on September 24, 2013.

On September 18, 2012, Khaled Alattar filed suit against the Company in the District Court of Harris County, Texas. The Company was joined in the lawsuit by other defendants.  The defendants in the action include various persons or entities who plaintiff alleges aided in fraud against the plaintiff.  The plaintiff alleges that the defendants unlawfully “pumped” the Company’s stock and then “dumped” the Company’s unrestricted stock.  Plaintiff seeks actual damages, exemplary damages, disgorgement of profits, attorney’s fees, and other litigation costs, estimated to be approximately $500,000.  The Company believes that the case is without merit and intends to defend it vigorously.

On November 13, 2012, LY Retail, LLC (California), the Company’s wholly-owned subsidiary, filed suit in Los Angeles Superior Court against Ferris Holding Co. dba Bari Leather Furniture (“Bari”), Lou Ferris, Tom Tilaro, Braden Richter, Victoria Richter, Jaxon International, LLC, Bryan Semmens, First Data Merchant Services Corp., and Banc of America Merchant Services, LLC for breach of contract, fraud, conspiracy, among other claims.  This case stems from a breach of the management services agreement between the Company and Bari, and other defendants’ conspiracy to convert Company funds.  The Company seeks damages in an amount exceeding $600,000.