LOCATION BASED TECHNOLOGIES, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) FORWARD LOOKING STATEMENTS This report contains certain forward-looking statements of our intentions, hopes, beliefs, expectations, strategies, and predictions with respect to future activities or other future events or conditions within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are usually identified by the use of words such as "believe," "will," "anticipate," "estimate," "expect," "project," "plan," "intend," "should," "could," or similar expressions. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under Part I, Item 1A. "Risk Factors" and other sections of this report, that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements, express or implied by these forward-looking statements.

Although we believe that the assumptions underlying the forward-looking statements contained in this report are reasonable, any of the assumptions could be inaccurate, and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate.

When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report and any amendments to this report. We will not update these statements unless the securities laws require us to do so. Accordingly, you should not rely on forward-looking statements because they are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those contemplated by the forward-looking statements.

-------------------------------------------------------------------------------- Overview. We were incorporated under the laws of the State of Nevada in April 2006 as Springbank Resources, Inc. ("SRI"). SRI was formed to engage in the exploration and development of oil and gas, and by 2007 had disposed of all of its assets and satisfied its liabilities. In October 2007, SRI acquired all of the outstanding stock of Location Based Technologies, Corp. ("Old LBT"), following which SRI merged Old LBT into itself and, in the process, SRI's name was changed to Location Based Technologies, Inc. Old LBT was incorporated in September 2005 by David Morse, Joseph Scalisi and Desiree Mejia, who became our officers and directors, in order to develop the PocketFinder personal locators.

Our principal executive offices are located at 49 Discovery, Suite 260, Irvine, California 92618, and our telephone number is 888-600-1044.

Our shares of common stock are currently traded in the over-the-counter market and our stock price is reported on the OTC Bulletin Board under the symbol "LBAS." Unless otherwise stated, all references to "we," "us," "our," the "company" and similar designations refer to Location Based Technologies, Inc.

Location Based Technologies®, PocketFinder® and PocketFinder Pets® are registered trademarks, and PocketFinder Network™, PocketFinder People™, PocketFinder Vehicle™, PocketFinder Luggage™, PocketFinder Mobile™, PF-886™, "Powered by LBT" and VehicleFleetFinder™ are trademarks, of the company. With respect to this report, we reserve all rights to the foregoing trademarks regardless of whether they carry the "®" or "™" designation.

Our Business. We market and sell affordable, leading-edge, proprietary, and easy-to-use consumer and commercial location devices and services. Our devices utilize Assisted Global Positioning System ("A-GPS") and General Packet Radio Service ("GPRS") technologies in conjunction with our patented, proprietary technologies designed to enhance and enrich the way businesses and families interact and stay connected around the world.

39 -------------------------------------------------------------------------------- Our flagship product, the PocketFinder, is a small, waterproof, rugged and completely wireless location device that enables users to easily locate anyone or anything they care about, from a computer or web-enabled device. Our products deliver critical information to users, such as: device location, longitude, latitude, heading speed and 60 days of location history. This information can be viewed passively through a user's account or can be actively sent to a user via SMS text, email or push notification if the user sets an alert. The target markets for the PocketFinder include: young children, seniors, people with special needs and people who need to track valuable assets such as luggage or sporting equipment. In addition to the PocketFinder, we also sell the PocketFinder Pet and the PocketFinder Vehicle products. The PocketFinder Pet is designed for pets weighing 15 pounds or more, and we market the PocketFinder Vehicle to families with new drivers, car enthusiasts, motorcycle owners, watercraft owners and business fleets. The PocketFinder Vehicle attaches directly to a battery or fuse box, so it has a constant supply of power. All PocketFinder products operate on the same user interface, which enables our customers receive the same features, functionality and user-experience, regardless of which product they own. To access their account or locate their devices, users can logon to our website at www.pocketfinder.com or use our native iPhone, iPad or Android Apps.

We generate revenue by selling our products and charging customers an ongoing service fee, for which we offer monthly and annual subscription plans. All of our products that are sold in the US operate on the AT&T cellular network. The GPS data which is collected by the device is transmitted to our customers (via our servers) on AT&T's network. Since AT&T's network operates in over 95% of the wireless world, our products can work around the globe. Customers who use their devices internationally will incur a higher monthly charge.

In addition to the PocketFinder family of products, we also sell devices and services that are designed for business and governmental use. These devices include the PF-886 and the LBT Solutions Vehicle. The PF-886 functions similarly to the PocketFinder, but is much larger in size primarily due to its larger battery. The PF-886 is designed to last for up to 5 months on a single charge and is ideal for asset and cargo tracking. The LBT Solutions Vehicle comes with 2, 3 and 4 wire options, which provides additional features such as engine on/off monitoring and engine kill capability. All of our commercial customers also have access to enhanced reporting features. Commercial customers access their account and view their devices by visiting www.locationbasedtech.com or by downloading our native iPhone, iPad or Android Apps.

We have completed our first year of sales for our PocketFinder products in the Apple Stores in the U.S. and Canada. We also continued sales through Apple Online for both the PocketFinder and the PocketFinder Vehicle.

We recently expanded the sales channel for our consumer products to include Crutchfield and Amazon. PocketFinder Pet and Vehicle locators are also available to purchase from our website at www.pocketfinder.com. Combined sales and activations are showing steady increases of approximately 15% month over month. Advertising and general market awareness over the past calendar year include our PocketFinder products highlighted by Dr. Gadget on the radio and on ABC's The View and Extra, NBC's Today Show, and a month long focus on teen driving safety in partnership with NBCUniversal in Texas. In addition, Jennifer Jolly presented our products in Chicago, Atlanta, and Los Angeles on CNN, CBS, WGN, WLS, Daily Motion, and ABC's Money Matters. Similarly, Steve Greenberg presented our products on NYC WPIX, NBC in Philadelphia, Washington DC, Miami, Seattle, Minnesota, and Denver, Chicago's WGN, ABC in Dallas and on CBS in Houston. We are significantly expanding our presence on the web through social media as well as in digital and print media.

Our Apple device sales are restricted to the United States and Canada yet our devices continue to draw international attention. We currently have devices working in over 70 countries (37% of all countries in the world) and multiple requests for distribution opportunities from 64 countries around the world. Associated with this kind of interest, we are working with a select few of these distributors and addressing the need for local wireless carrier involvement in order to be able to provide a reasonably priced monthly service fee, solid customer and technical support, and market reach. In November 2012, we entered into an agreement with our first European distributor, EE (a partnership between Orange Telecom and Deutsche's Telecom), which is the largest M2M telecommunications company in the United Kingdom. We expect to have devices for sale in EE retail stores in the first calendar quarter of 2013.

Commercial growth has been a meaningful revenue contributor. The company officially launched its Business Solutions Platform (www.locationbasedtech.com) in August of 2012 and through October of 2012 approximately 150 business customers are benefitting from our Business Solutions location services. Our largest business customer is AT&T and they will use our devices to track their own equipment domestically. The majority of our customers are small and mid-sized customers seeking high value pricing and simplified interfaces that minimize training time and requirements. We are adding approximately 1.5 new business customers per day. Orders for combined hardware sales of approximately $1.2M were received for delivery in the fourth quarter of calendar 2012.

40 -------------------------------------------------------------------------------- Government and military organizations are also in various stages of testing our products. We anticipate the military could complete its testing by February of 2013. Our relationship with The World Famous West Coast Customs ("WCC") is moving forward as well. We have entered into a co-branding relationship with WCC, and they will be selling a co-branded WCC PocketFinder and PocketFinder Vehicle through their distribution channels, which include Best Buy and www.bestbuy.com. Additionally, our products will appear in several episodes the coming season of Inside West Coast Customs, and we are planning to have one episode devoted entirely to our PocketFinder Vehicle product. The show is scheduled to air in the beginning of 2013 and will reach an estimated 28.5M households.

We continue to work diligently on selling devices into Mexico. Our products have received all of the necessary governmental certifications and we recently signed a distribution agreement with Sales and Support Representatives ("SaS Reps" or www.sasreps.com). SaS Reps is a Distributor/Reseller/Agent of communications products and services to Central, North and South American service providers, manufacturers and resellers. There continues to be pent up demand for various tracking applications in the world of logistics and we plan to address it through our relationship with SaS Reps.

Our products continue to be supported by feature rich Apps that allow users to maximize the functionality and benefits of PocketFinder devices from almost anywhere at any time. The iPhone, native iPad, and Android Apps are free downloads available through the iTunes Store or on Google Play and the Android Market respectively. They deliver the ability to set up and manage devices while users are on the go throughout the day or night from virtually anywhere in the world that the user's phone has network connectivity. BlackBerry and Windows Mobile Professional 6.0 Operating Systems are able to access the existing www.pocketfinder.com website to manage and set up accounts due to the Mobile Device optimization that has been done over the past few months.

In February 2012, ABIresearch released a report ("Personal Location Devices and Applications Market") stating that GPS personal tracking devices and applications were forecasted to grow with a Compounded Annual Growth Rate ("CAGR") of 40% with both markets breaking $1Billion in revenue in 2017.

Senior analyst Patrick Connolly stated, "The hardware market remained below 100,000 units in 2011. However, it is forecasted to reach 2.5 million units in 2017, with significant growth in elderly, health, and lone worker markets. Dedicated devices can offer significant benefits, with insurance and liability increasingly encouraging the use of approved equipment." LBT's PocketFinder device was specifically cited in Mr. Connolly's research findings.

In May 2012, Kumu Puri, Senior Executive, Accenture's Electronics & High-Tech Group shared that over the past few years Accenture has studied usage of technology by consumers to identify major trends that might assist their corporate clients. Their most recent survey of 19 different technologies across users in 10 countries revealed four major trends that they believe will be crucial over the next several years. They are: · Consumers are reaching a state of "hypermobility," rapidly adopting mobile technologies and downloading applications that keep them connected anywhere, anytime.

· Consumers are increasingly reaching into the network and modifying their behaviors as they rely on cloud services.

· Consumers' use of electronics is increasingly more dependent on the exploding number of applications now within their reach.

· Emerging markets lead in usage and spending growth of many consumer technologies.

41-------------------------------------------------------------------------------- Puri went on to say that, "Consumers are adopting mobile technology so rapidly that the mobility trend is in hyper-drive. While consumers still have strong ownership and usage of desktop or laptop computers (90% surveyed own them), purchase intentions for computers are slowly declining. Simultaneously, smartphone and tablet PC ownership is rising steeply. More than half of consumers we surveyed own a smartphone - up 25 points in the past 12 months. This marks a growth rate of 89% over the previous year. One-third of respondents bought a smartphone in 2011, an increase of 15 percentage points compared with 2010. On a similar trajectory, ownership of tablets grew by 50% last year, from 8% of consumers owning them to 12%, according to our study. These survey findings paint a picture of consumers striving to get and stay connected wherever they are via mobile technologies, abundant app choices and a growing set of service alternatives from the cloud. The era of hypermobility has numerous implications for consumer electronics companies as they work to capture the greatest share of wallet among their target customers." We are aggressively moving LBT's family of products and web-based features and functionality onto more functional mobile platforms to better meet the needs of this highly mobile society. We are seeing similar demands and requirements in families and in businesses. By taking advantage of the latest in GPS, GSM, and Internet technology, small and medium sized businesses are able to more effectively and efficiently manage their mobile assets and key human resources as well as to carefully monitor the shipping and delivery of high value assets.

Although we are only actively selling devices in the US and Canada, we find that many people have purchased our devices while visiting the US and then returned home to activate. Global usage now comprises countries in much of Europe, Russia, Romania, Ukraine, Mexico, China, Hong Kong, Australia, and many countries in South America.

We receive customer feedback from vertical applications including outdoor enthusiasts, adult children of the elderly, elder care providers of patients with Alzheimer's and dementia, special needs providers for those with disabilities, pet owners, and for the tracking and recovery of valuable property and luggage while traveling. Our PocketFinder device is only fifty millimeters in diameter (about 2 inches). It fits easily into a child's pocket, into a backpack, or onto a belt. The PocketFinder People and PocketFinder Pets devices come with a form-fitting silicone pouch or a rugged ballistic nylon casing that can easily slide onto a belt or a pet's collar.

We continue to tightly control our overhead and ensure that we have the right resources in place at the right time. We have a very talented senior management team that brings the right knowledge, skills and abilities to deliver world-class products and services. Distribution opportunities are being negotiated as we carefully analyze each market opportunity against the cost of entry, potential growth, economic value, and support capability metrics. We are developing a business model for international market opportunities and are in discussions with wireless carriers and/or distributors in multiple countries at this time. Key personnel have been brought in as independent contractors to supplement our existing team with customer, sales and business development skills. Our customer service center personnel have received consistently high feedback from customers who desired assistance and we offer support in English and Spanish.

Our Personal Locator Services. Our products are currently being sold through various brick-and-mortar and online retailers and through our website. We provide customer service and support in the United States through existing, award winning call centers owned by Affinitas. In the consumer market we are seeing multiple vertical market segments including the following: Parents of young children (primarily 5 to 12 years of age) who seek the peace of mind of being able to know that their children are where they are supposed to be when they are supposed to be there; Small, mid-sized, and enterprise class business owners; First time family drivers or for added security in heavy snow states; Elder care and special needs support and applications such as Autism, Down Syndrome, Dementia, and Alzheimer's; Pet care and location capability; and Asset tracking and location capability: cars, trucks, snowmobiles, fleet management, luggage, boats, RVs, and other high-valued assets.

Our Intellectual Property Investment. We continue to invest in intellectual property that consists of apparatus patents and applications and system and method patents and applications. We have filed claims that cover many aspects of the PocketFinder, its operating system and user interface. We expanded and filed additional claims this fiscal year that cover new aspects of the PocketFinder People device, its operating system and user interface. Our intellectual property portfolio includes 33 issued US patents, 12 pending US patents, 7 pending foreign patents, 6 PCT filings, 17 registered trademarks and 4 Madrid protocol trademark cases.

42 -------------------------------------------------------------------------------- We own the Internet domain name www.pocketfinder.com and www.locationbasedtech.com as well as the names of numerous other related domains that could have use in future business and vertical marketing initiatives and for Internet marketing purposes. Under current domain name registration practices, no one else can obtain an identical domain name, but someone might obtain a similar name, or the identical name with a different suffix, such as ".org," or with a country designation. The regulation of domain names in the United States and in foreign countries is subject to change, and we could be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our domain names.

Our Target Markets and Marketing Strategy. We provide wireless location based solutions for global positioning products along with its proprietary "friendly user interface" software system. We deliver rugged, compact products with near real time location-based information over its proprietary server architecture. Our products optimize the way businesses and families stay connected with one another: for pet owners to know where their pets are on demand and also provide solutions for asset tracking - such as shipping of high value assets or LoadRack Tracker's trucking solution for controlled temperature environments. We have the ability to add our customer's existing location devices onto our superior location platform in order to simplify the customers need to manage all location-based devices through one easy tool.

PocketFinder and PocketFinder Vehicle devices are being sold in the United States and in Canada through the Apple Online Store and Apple Retail Stores. PocketFinder devices for Pets are available for purchase on our website. We are also working on several "white label" marketing opportunities. In addition, licensing opportunities are being explored on the international front.

Our marketing initiatives will include: Licensing opportunities for the products in international areas or regions; Self-branded or "white label" opportunities for niche market or vertical market sales; Affinity group marketing and outreach opportunities; Utilization of direct response sales due to public relations outreach in special interest magazines and newsletters; and Retail distribution initiatives.

Our Revenue Sources. We expect our revenues to be derived from the following sources: Potential licensing fees; Organizations that will self-brand the PocketFinder for specialized niche markets ("white label"); Asset and Personal Locator device sales to commercial customers and through retailers; Personal Locator device sales through affinity groups and through our website; Personal Locator device accessory sales; and Monthly recurring service fees.

Our Growth Strategy. Our objective is to become a premier provider of personal and asset location services in the Location Based Services market. Our strategy is to provide high quality devices that meet the market's requirements whether it is for business applications, for equipment and any other mobile asset, or for children, pets, or personal asset tracking (luggage, vehicles, boats, etc.). Key elements of our strategy include market education of this new GPS mobile application and: A mass market retail price of under $150.00 for Personal Location devices (customized asset and trucking solutions with additional features and capabilities will be sold at a higher cost); A basic monthly service fee in the U.S. for family applications of $12.95 and for most business applications under $20/month with multiple convenient access points (Smartphone and/or via the Internet); Ease of use at the location interface point as well as with the device; and Rugged design that meets the rigors of life and work.

43-------------------------------------------------------------------------------- Our Competition. Personal location and property tracking devices are beginning to significantly penetrate the marketplace. We believe this condition represents a tremendous opportunity as customers will be attracted in large numbers once the intrinsic value of such devices is recognized and mass market adoption begins.

Our competitors include, but are not limited to: Geospatial Platform Providers, Application Developers, Garmin's GTU-10, Qualcomm's Tagg, Lo-Jack, SpotLight, and commercial providers such as Fleetmatics,NetworkFleet, and Qualcomm. Some competitors may be better financed, or have greater marketing and scientific resources than we do.

In related markets, GPS devices have become widely used for automotive and marine applications where line-of-sight to GPS satellites is not a significant issue. Manufacturers such as Garmin, Navman, Magellan, TomTom, Pharos, NovAtel and DeLorne are finding a market interested in using these products for both business and leisure purposes. As a result, use of GPS technology in devices such as chart plotters, fitness and training devices, fish finders, laptop computers, and personal digital assistant ("PDA") location devices are gaining significant market acceptance and commercialization. Prices range from $100 to several thousand dollars. We expect that increasing consumer demand in these markets will drive additional applications and lower price points.

Government Regulation. We are subject to federal, state and local laws and regulations applied to businesses generally as well as Federal Communications Commission, Internationale Canada ("IC") and CE (European Economic Area) wireless device regulations and controls. We believe that we are in conformity with all applicable laws in all relevant jurisdictions. We are NOM and NYCE certified and ready to begin sales in Mexico. We do not believe that we are subject to any environmental laws and regulations of the United States and the states in which we operate.

Our Research and Development. We will continue to invest in ongoing research and development to enhance the size and performance of our existing products as well as to customize products to better fit specific vertical market needs and requirements. We will continue to work with our U.S. based manufacturer and several other entities that are conducting research on key aspects of the device itself (including expanded antennae capability, battery capacity, Iridium Satellite connectivity, and enhanced location reliability and accuracy) in an ongoing effort to provide the best quality product at the very best size and value in the market. We anticipate ongoing involvement with some level of developmental activity throughout the foreseeable future.

Employees and Outsourced Assistance. We have limited our use of contracted professionals who have been engaged in hardware and software development, early marketing and sales preparation, and preparation for customer service support. Mr. Scalisi, our Co-President and Chief Development Officer, Mr. Morse, our Co-President and Chief Executive Officer, and Mrs. Mejia, our Chief Operating Officer, and Mr. Gregory Gaines, our Chief Marketing and Sales Officer, currently devote 100% of their business time to our operations. Our CFO, Mr. Eric Fronk, is currently serving part-time. In addition to our new Board members, we have added several key contributors with customer service, general counsel/business development, and sales leadership experience. Remaining true to our "outsourced" model for growth and expansion, any large personnel increase will be accomplished through sales and customer support outsourced organizations contracted to provide respective services. The company will remain focused on our core competency of providing location devices and services.

Our Website. Our corporate websites, www.locationbasedtech.com and www.pocketfinder.com, provide a description of our corporate business along with our contact information including address, telephone number and e-mail address or product information and sales, respectively. Our PocketFinder website also provides prospective customers with relevant information about our products, pricing and payment options, pre-ordering capability, frequently asked questions. See www.locationbasedtech.com to access Business Solutions and our corporate investor relations information. Information contained on our websites is not a part of this report.

44 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS For the three months ended November 30, 2012 as compared to the three months ended November 30, 2011.

Revenue. For the three months ended November 30, 2012, we generated $208,555 of net revenue as compared to $44,116 of net revenue for the three months ended November 30, 2011. Net revenue for the three months ended November 30, 2012, consisted of $127,856 from the sales of PocketFinder devices and $80,699 from monthly subscription service income.

Cost of Revenue. For the three months ended November 30, 2012, cost of revenue totaled $309,040 resulting in a negative gross margin of $100,485 or 48% as compared to a negative gross margin of $210,611 for the three months ended November 30, 2011. The negative gross margin was less favorable during the three months ended November 30, 2011, as we incurred labor cost overages and higher than anticipated bill of material components costs to accelerate our initial production run to meet our distributor delivery deadlines. We anticipate that our unit cost will be significantly lower as component costs decrease and as our production volumes grow.

Operating Expenses. For the three months ended November 30, 2012, our total operating expenses were $1,910,485 as compared to total operating expenses of $1,723,763 for the three months ended November 30, 2011. Operating expenses increased by $186,722 or 11% in 2012 from 2011. The increase in operating expenses is primarily attributed to the following fluctuations: · An $158,846 increase in general and administrative expenses to $607,360 for the three months ended November 30, 2012, as compared to $448,514 for the three months ended November 30, 2011. The increase in general and administrative expenses in 2012 as compared to 2011 is primarily due to increased advertising and marketing fees to market our products and increased computer expenses related to our website and development of the PocketFinder apps; · A $94,670 increase in officer compensation to $229,670 for the three months ended November 30, 2012, as compared to $135,000 for the three months ended November 30, 2011, which was due to the addition of our Chief Marketing and Sales Officer and part-time Chief Financial Officer. In addition, officer compensation related to the vesting of officer stock options amounted to $30,170 during the quarter ended November 30, 2012; · A $359,819 decrease in professional fees to $404,928 for the three months ended November 30, 2012, as compared to $764,747 for the three months ended November 30, 2011. For the three months ended November 30, 2011, there were significant legal fees related to the Gemini Master Fund, Ltd. loan defaults and to prepare the filing of our registration statement on Form S-1, whereby there were no such fees incurred during the three months ended November 30, 2012; · A $313,935 decrease in research and development to $42,364 for the three months ended November 30, 2012, as compared to $356,299 for the three months ended November 30, 2011, as a result of entering the final R&D phase for our PF886 product; · An $150,720 increase in salaries and wages to $150,720 for the three months ended November 30, 2012, whereby there were no such expenses for the three months ended November 30, 2011 due to the transition of six persons from consultant to employee status. In addition, compensation related to the vesting of employee stock options amounted to $51,685 during the quarter ended November 30, 2012; and · The recognition of an asset impairment on certain patents totaling $455,916 during the three months ended November 30, 2012; whereby, there was no such impairment recognized during the three months ended November 30, 2011.

45-------------------------------------------------------------------------------- Other Income/Expenses. For the three months ended November 30, 2012, we reported net other expenses totaling $1,413,734 that mainly consisted of net interest expense, financing costs, amortization of beneficial conversion feature, deferred financing costs, and loss on the change in the fair value of derivative liabilities as compared to net other expenses totaling $35,559 for the three months ended November 30, 2011. The $1,378,175 increase in other income and expenses is primarily due to the following: · A $65,030 increase in financing costs to $81,000 for the three months ended November 30, 2012, as compared to $15,970 for the three months ended November 30, 2011, primarily due to a $20,000 per month increase in the financing fee related to the personal guarantee for the line of credit; · A $61,233 increase in the amortization of beneficial conversion features on notes payable to $61,233 for the three months ended November 30, 2012, as there was no such amortization for the three months ended November 30, 2011; · A $79,465 increase in the amortization of deferred financing costs to $81,966 for the three months ended November 30, 2012, as compared to $2,501 for the three months ended November 30, 2011 as there were several promissory notes with financing costs entered into 2012 to be amortized over the life of the related debt; · The recognition of a loss due to the change in fair value of derivative liabilities totaling $1,144,647 during the three months ended November 30, 2012; whereby, there was no such derivative liabilities during the three months ended November 30, 2011; and · A $27,763 increase in interest expense to $44,872 for the three months ended November 30, 2012, as compared to $17,109 for the three months ended November 30, 2011 as there were approximately $2.5 million in notes payable at November 30, 2012 as compared to $750,000 of note payables at November 30, 2011.

Net Loss. For the three months ended November 30, 2012, we reported a net loss of $3,425,504 as compared to a net loss of $1,970,733 for the three months ended November 30, 2011, due to fluctuations in operating and other expenses as previously discussed.

LIQUIDITY AND CAPITAL RESOURCES We had cash and cash equivalents of $130,435 as of November 30, 2012, as compared to $376,554 as of November 30, 2011.

Accounts receivable, net of allowance for doubtful accounts, totaled $91,799 as of November 30, 2012 as compared to $188,273 as of August 31, 2012. The majority of accounts receivable at November 30, 2012, consists of amounts due from Navarre/Apple and several other distributors and wholesalers.

Inventory totaled $3,227,748 as of November 30, 2012, as compared to $3,332,966 as of August 31, 2012 and consisted of $1,652,127 of device components, $1,634,094 of finished goods, net of a $58,473 inventory valuation reserve. Inventories totaling $1,350,000 which may not be realized within a 12-month period have been classified as long-term as of November 30, 2012 and August 31, 2012.

Prepaid expenses and other assets including deferred financing costs totaled $138,245 as of November 30, 2012, as compared to $127,581 as of August 31, 2012 and consisted of prepaid advisor retainers, insurance, commissions, license fees, and prepaid manufacturing costs.

As of November 30, 2012, the total of our property and equipment, less accumulated depreciation, was a net value of $234,134 compared to the net value of $123,982 for our property and equipment, less accumulated depreciation, as of August 31, 2012. The increase is due to machinery and equipment purchases during the three months ended November 30, 2012.

Other assets, consisted of patents and trademarks, net of amortization, and deposits. Deposits consisted of the security deposit for our office lease and amounted to $30,000 as of November 30, 2012 and August 31, 2012. Patents and trademarks, net of amortization, amounted to $775,900 as of November 30, 2012, as compared to $1,248,608 as of August 31, 2012. We periodically assess our patents and intellectual property for impairment and recorded a $445,916 impairment during the three months ended November 30, 2012.

46 -------------------------------------------------------------------------------- Our total assets as of November 30, 2012, were $4,725,129 as compared to our total assets as of August 31, 2012, which were $5,487,298. The decrease in our total assets between the two periods was primarily due to fluctuations as previously discussed.

As of November 30, 2012, our accounts payable and accrued expenses were $1,595,256 as compared to $1,304,648 as of August 31, 2012.

As of November 30, 2012, deferred compensation was $1,092,408 as compared to $998,458 as of August 31, 2012 and consisted of amounts due to officers and employees for back pay.

As of November 30, 2012, deferred revenue was $11,376 as compared to $16,539 as of August 31, 2012 and consisted of prepaid services fees from monthly subscribers.

Convertible notes payable, net of the $122,050 beneficial conversion feature, amounted to $1,810,450 as of November 30, 2012, as compared to $1,878,770, net of the $193,694 beneficial conversion feature, as of August 31, 2012. The accrued interest on these convertible notes totaled $159,001 as of November 30, 2012, as compared to $163,093 as of August 31, 2012. The $1,969,451 of convertible promissory notes outstanding as of November 30, 2012 are short term, to be repaid out of future operating cash flow.

Related party convertible notes payable, net of the $30,411 beneficial conversion feature, amounted to $519,589 as of November 30, 2012. The accrued interest on these related party convertible notes totaled $10,767 as of November 30, 2012. The $550,000 of related party convertible promissory notes outstanding as of November 30, 2012 are short term, to be repaid out of future operating cash flow.

Derivative liabilities consist of embedded derivatives related to two outstanding short term JMJ convertible promissory notes payable. The fair value of the derivatives at the inception date (note payable default date) and as of November 30, 2012, amounted to $399,410 and $1,144,647, respectively.

On January 5, 2011, we entered into a Loan and Security Agreement with Silicon Valley Bank for a $1,000,000 line of credit originally expiring January 5, 2012. On August 24, 2011, the Loan and Security Agreement was amended by a First Amendment to Loan and Security Agreement to waive existing and pending defaults on loan covenants. On February 3, 2012, the Loan and Security Agreement was amended by a Second Amendment to Loan and Security Agreement to extend the maturity date to April 4, 2012 and to waive existing and pending defaults on loan covenants. On April 17, 2012, the Loan and Security Agreement was amended by a Third Amendment to Loan and Security Agreement to extend the maturity date to October 5, 2012 and to waive existing and pending defaults on loan covenants. On November 19, 2012, but effective as of October 5, 2012, the Loan and Security Agreement was amended by a Fourth Amendment to Loan and Security Agreement to extend the maturity date to October 5, 2013, to amend the interest rate and to waive existing and pending defaults on loan covenants. All other terms and conditions remain unchanged. Silicon Valley Bank maintains a security interest in all of our personal property. The outstanding balance on our line of credit was $1,000,000 as of November 30, 2012 and August 31, 2012. The related accrued interest totaled $8,583 and $5,597, as of November 30, 2012 and August 31, 2012, respectively.

Commitments as of November 30, 2012, amounted to $0 compared to $48,054 as of August 31, 2012, and consisted of the liability on losses from inventory purchase commitments recognized in August 2011.

47 -------------------------------------------------------------------------------- On December 1, 2010, in anticipation of entering into the Loan and Security Agreement with Silicon Valley Bank and in connection with loans that he had made to us, we entered into a Financing Agreement with Greggory S. Haugen under which, among other things, Mr. Haugen agreed to personally guaranty our obligations under the Loan and Security Agreement with Silicon Valley Bank. We are obligated to reimburse Mr. Haugen for any amounts, including interest, he pays under the guaranty. To compensate Mr. Haugen for his guaranty, we issued a warrant to him to purchase 3,600,000 shares of our common stock at an exercise price of $0.20 per share and we agreed to pay him $5,000 per month for so long as he has any obligation under the guaranty or he has not been reimbursed by us for any amounts paid by him under the guaranty. The $5,000 monthly fee is payable in cash or shares of our common stock at Mr. Haugen's option. Under the Financing Agreement, we initially granted Mr. Haugen board observation rights that subsequently resulted in the appointment as lead director on the board, certain registration rights, and the right to approve our use of funds drawn under the Loan and Security Agreement. We also agreed to grant Mr. Haugen a security interest in all of our assets, junior only to the security interest of Silicon Valley Bank. In the event of an "Actionable Violation," which is defined to include, among other things, our failure to maintain certain minimum net income levels, our failure to maintain a specified minimum account balance, or our failure to make any payment required under the Financing Agreement or any other agreement between Mr. Haugen and us, Mr. Haugen may, among other things, market our assets (including our intellectual property) and require us to sell such assets (subject to the approval of Silicon Valley Bank) with the proceeds to be applied to all amounts then due to Silicon Valley Bank and thereafter to any amounts due by us to Mr. Haugen under the Financing Agreement or any other agreement or instrument. In January 2011, we entered into the following agreements with Mr. Haugen: (i) a Security Agreement granting him a security interest in all of our assets to secure the reimbursement obligation under the Financing Agreement and every other debt, liability or obligation that we currently or at any time in the future owe to him and (ii) a related Intellectual Property Security Agreement granting him a security interest in all of our intellectual property. On April 18, 2012, but effective as of January 6, 2012, we entered into a Second Amendment to Loan Guarantor Agreement to provide an additional monthly compensation fee of $20,000 per month to act as guarantor and to extend the term of the original Financing Agreement until July 6, 2012. On August 30, 2012, we entered into a Third Amendment to Loan Guarantor Agreement to extend the terms of the original Financing Agreement and Second Amendment until January 6, 2013. On November 19, 2012, but effective as of October 5th 2012, we entered into the Fourth Amendment to the Loan Guarantor to extend the terms of the original Financing Agreement and the Fourth Amendment until October 5, 2013.

CASH REQUIREMENTS We are an early stage wireless technology company focused on the marketing and sales of the PocketFinder family of products for retail distribution. Since our inception, we have generated significant losses. As of November 30, 2012, we had an accumulated deficit of $48,440,466 and we expect to incur continual losses until sometime in calendar year 2013.

We have a limited history of operations. To date, we have funded our operations primarily through personal loans by the founders and the private placement of our common stock and convertible notes.

As of November 30, 2012, we had $130,435 in cash and cash-equivalents. Over the next several quarters we expect to invest significant amounts of funds to develop our sales and marketing programs associated with the commercialization and launch of the PocketFinder family of products. We also expect to fund any additional inventory requirements and any necessary general overhead requirements.

We expect to have to obtain additional financing in the coming months for general and administrative expenses as well as purchasing and maintaining inventory, and for related purposes such as packaging, shipping, and direct sales and marketing costs. We are not able to estimate the amount of funds necessary as it will be determined by the volume represented by purchase orders from targeted distributors and direct end users.

Our funding requirements will depend on numerous factors, including: Costs involved in production and manufacturing to fill purchase orders, software and interface customization for OEM partners, and the network necessary to commence the commercialization of the PocketFinder People and PocketFinder Pets devices; The costs of outsourced manufacturing; The costs of commercialization activities, including product marketing, sales and distribution, and customer service and support; Our revenues, if any, from successful commercialization of the PocketFinder devices and the PocketFinder Network platform services; and Other general and administrative expenses associated with running the day to day operations of our Company.

48-------------------------------------------------------------------------------- On December 10, 2012, we initiated a financing with ECPC II Capital, LLC ("ECPC") which could net us up to $1,000,000 in capital. As of January 14, 2013, we have not received any investments from ECPC related to this financing and future capital distributions shall be made solely at ECPC's discretion. Due to the uncertain nature of any future funding from ECPC, we may need to raise debt or equity capital this coming quarter. The sale of additional equity securities may result in additional dilution to our stockholders. The sale of debt securities could involve substantial operational and financial covenants that might inhibit our ability to follow our business plan. Additional financing may not be available in amounts or on terms acceptable to us or at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned commercialization activities, which could adversely affect our financial conditions and operating results.

Product Research and Development We plan to continue to develop new products and to continue making enhancements to our existing products. We also continue to upgrade our device software and End-User Interface. Since October of 2012, there have been four firmware upgrades and we are currently using device firmware version 1.4.4. We are also evaluating a satellite-only GPS platform.

Plant and Equipment, Employees We do not plan to purchase or sell any significant equipment, plant or properties during the foreseeable future. Our business operations are based on a strategic outsourcing model, thereby negating the need for significant amounts of plant and equipment, or significant numbers of employees. We currently have nine employees and do not anticipate hiring any significant number of additional employees during the next 12 months but will add a few selected and strategic employees.

Off-Balance Sheet Arrangements As of November 30, 2012, we had no off-balance sheet arrangements.

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