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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended May 31, 2011

For the transition period              to             

Commission File Number 0-29901

PUBLIC MEDIA WORKS, INC.

(Exact name of small business issuer as specified in its charter)

2330 Marinship Way, Ste. #300

Sausalito, CA 94965

(Address of principal executive offices)

(415) 331-7700

(Issuer’s telephone number, including area code)

(Former address)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ¨    NO  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    YES  ¨    NO  x

On July 14, 2011, the registrant had outstanding 35,165,294 shares of Common Stock, which is the registrant’s only class of common equity

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting Company” in Rule 12b-2 of the Exchange Act.

Transitional Small Business Disclosure Format (Check one):    Yes  ¨    No  x

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PUBLIC MEDIA WORKS, INC.

Form 10-Q

For the Quarter Ended May 31, 2011

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PART I

PUBLIC MEDIA WORKS, INC.

Condensed Consolidated Balance Sheets

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PUBLIC MEDIA WORKS, INC.

Condensed Consolidated Statements of Operations - (Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PUBLIC MEDIA WORKS, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

May 31, 2011

1. Basis of Presentation

The (a) condensed consolidated balance sheet as of February 28, 2011, which was derived from audited financial statements, and (b) the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

The accompanying consolidated financial statements include the accounts of Public Media Works, Inc. and its wholly-owned subsidiary, EntertainmentXpress, Inc. All intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of the results of operations have been included in the accompanying condensed consolidated financial statements. Operating results for the three months ended May 31, 2011, are not necessarily indicative of the results to be expected for other interim periods or for the year ending February 28, 2012. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes thereto included in the Public Media Works, Inc. (the “Company”) Annual Report on Form 10-K as of and for the year ended February 28, 2011, as filed with the Securities Exchange Commission.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Going Concern and Liquidity Matters

The accompanying consolidated financial statements have been prepared under the assumption that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. Historically, the Company has incurred significant losses, and has not demonstrated the ability to generate sufficient cash flows from operations to satisfy its liabilities and sustain operations.

Inventory

Inventory is mainly comprised of our DVD and Blu-ray rental library and merchandise inventories held for rental and resale. Inventory, which is considered finished goods, is stated at the lower of cost or market. Our DVD and Blu-ray library is capitalized and amortized to estimated salvage value (sales value of used DVDs and Blu-ray discs) on a straight-line basis to direct operating expense over the average estimated high usage periods of the DVDs and Blu-rays which is typically four months. The cost of inventory includes the cost of materials and to a lesser extent, the labor and overhead in stocking the DVD and Blu-ray rental inventory. Inventory also includes a small amount of cases and radio frequency identification devices (RFID tags) to be used on future movies.

Equipment

Equipment is stated at cost, less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred. Included in the cost of the kiosk is the cost to deliver and install the kiosk as well as applicable sales tax. Items of property and equipment with costs greater than $1,000 are capitalized and depreciated on a straight-line basis over the estimated useful lives, as follows:

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Revenue Recognition

The Company recognizes net revenue from DVD and Blu-ray movie rentals on a ratable basis during the term of a consumer’s rental transaction. Revenue from a direct sale out of the kiosk of previously rented movies is recognized at the time of sale. On rental transactions for which the related DVDs and Blu-rays have not yet been returned to the kiosk at month-end, revenue is recognized with a corresponding receivable recorded in the balance sheet, net of a reserve for potentially uncollectible amounts. We record revenue net of refunds and applicable sales taxes collected from consumers.

Share-Based Payment Arrangements

Generally, all forms of share-based payments, including stock option grants, restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on the estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The expenses resulting from share-based payments are recorded in operating expenses in the consolidated statement of operations.

Net Loss per Common Share – Basic and Diluted

Net loss per common share – basic and diluted is computed based on the weighted average number of shares outstanding for the period. Diluted net loss per common share is computed by dividing net loss by the weighted average shares outstanding assuming all dilutive potential common shares were issued. As of May 31, 2011 and February 28, 2011, the Company had 9,863,291 and 8,497,291 warrants outstanding, respectively. As of May 31, 2011 and February 28, 2011, the Company had 6,370,000 and 4,005,000 stock options, respectively. Neither was included in the net loss per common share due to the options and warrants being anti-dilutive. Additionally, there were no adjustments to net loss to determine net loss available to common stockholders. As such, basic and diluted net loss per common share equals net loss, as reported, divided by the weighted average common shares outstanding for the respective periods.

Recent Issued and Adopted Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-19 (“ASU 2010-19”), New and Enhanced Disclosures about Fair Value Measurements. ASU 2010-06 provides amendments to FASB ASC 820-10 that requires new fair value disclosures and clarifies existing fair value disclosures required under FASB ASC 820-10. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for certain disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of the new provisions within ASU 2010-06 did not have a material impact on our consolidated financial position, results of operations, cash flows, or disclosures.

3. Prepaid expenses and Other assets

Prepaid expenses principally consist of deferred costs related to stock compensation to vendors where stock has been issued for services to be rendered in the future. Stock is subject to repurchase if services are not rendered. Assuming all required services are rendered, these capitalized costs will be amortized within twelve months.

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4. Deposits on kiosks

The Company has a four to eight week lead time between when it orders a kiosk and when it is delivered for deployment. Upon order and again prior to shipment, the Company must make partial payment for the cost of the kiosk. As the manufacturer retains ownership until the kiosk is deployed, these up-front payments are treated as deposits until the kiosks are received. As of May 31, 2011, the Company had no kiosks on order compared to 25 at February 28, 2011.

5. Equipment

Equipment consisted of the following as of May 31, 2011.

Kiosk equipment is stated at cost and depreciated on a straight-line basis over an estimated useful life of 5 years. Depreciation expense for the three months ended May 31, 2011 amounted to $19,598. As described above, the Company had no Kiosks in place as of February 28, 2011.

6. Short-term Obligations to Stockholders and Others

The Company has outstanding current liabilities due to stockholders as of May 31, 2011 and February 28, 2011, in the amount of $27,000 and $14,000, respectively. These amounts represent either a short-term loan or operating expenses paid on the Company’s behalf. These liabilities are interest free and due on demand.

The Company also has short-term notes payable and accrued interest of $15,000 and $27,090 as of May 31, 2011 and February 28, 2011, respectively. The May 31, 2011 balance consists of a non-interest bearing note to Niesar Vestal, LLP. At February 28, 2011, the $27,090 was owed to Niesar Vestal, LLP. $25,000 and to Imperial Credit Corp.$2,090 related to financing an insurance policy.

7. Long-term Notes Payable and Accrued Interest to Stockholders and a Related Party

At May 31, 2011, long-term notes payable and accrued interest consists of the following:

On May 23, 2011, the Company entered into an Agreement with George Mainas, Mainas Development Corporation (collectively “Mainas”) and Del Rey Management L.P. (“Del Rey”) whereby Del Rey purchased $250,000 of the Company’s debt due to Mainas. The Company agreed to allow Del Rey the option to convert this debt into 1,000,000 shares of common stock and 1,000,000 warrants to purchase common stock of the Company for $0.40 per share for three years from the date of the Agreement. The conversion agreement allows that, should the Company issue new shares for less than $0.25 per share, the investor who converted debt and still own these shares will have additional shares issued to bring his net cost per share for the remaining shares down to this lessor price. Also, on May 23, 2011, Del Rey notified the Company that it was exercising this option to convert. The shares of Company’s common stock will be issued without restriction under the Act under an exemption provided pursuant to Rule 144 of the Act. The warrants and shares of the Company’s common stock which may be issued upon exercise of the warrants are restricted securities, and may not be sold, transferred or otherwise disposed without registration under Act, or an exemption thereunder. The securities were offered and sold in reliance on the exemption from registration under Section 4(2) of the Act and/or Rule 506 of Regulation D under the Act. The offering was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the individual in connection with the offering.

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The promissory note to Mr. Steve Davis bears interest at 7% per annum. The maturity date under the promissory note is June 30, 2013 (the “Maturity Date”), all principal and accrued interest under the promissory note may be converted into shares of Company common stock at the election of the holder at any time upon written notice to the Company at a price of $4.00 per share, and all principal and accrued interest under the promissory note shall automatically convert into shares of Company common stock in the event that the 10 day trailing VWAP (volume weighted average price) for the Company’s common stock shall exceed $4.00 per share at any time prior to the Maturity Date.

On August 31, 2010, the Company entered into a settlement agreement with Niesar Vestal, LLP for all outstanding obligations. The agreement calls for a series of cash payments totaling $45,000 over 12 months plus a convertible note for $50,000. $10,000 of the short-term note has been paid, with the remainder in short-term debt. The long-term note has a maturity date of June 30, 2012 and accrues interest at 10%. The terms of the debt agreement provide for all principal and accrued interest to be converted into shares of common stock at $1.50 per share at any time within the term of the note. All principal and accrued interest under the note shall automatically convert into shares of common stock in the event that the 30 day trailing volume weighted average price for the stock exceeds $2.00 per share at any time after June 1, 2011 and prior to the maturity date.

8. Common Stock

On March 7, 2011, the board of directors accelerated the vesting on 583,335 shares due Martin W. Greenwald, CEO and Chairman under an employment agreement between Mr. Greenwald and the Company. The Board also authorized an additional 500,000 fully vested shares to be issued to Mr. Greenwald. The Company recorded $695,646 in expense related to these issuances in the three months ended May 31, 2011.

On March 7, 2011, the Company issued 687,500 shares to four consultants for services rendered. The Company recorded $378,125 in consulting expense in the three months ended May 31, 2011 as the grants were for past services and vested immediately to the holder.

On March 7, 2011, the Company executed a common stock and warrant agreement with an accredited investor for $79,000 in cash. The accredited investor received 316,000 common stock and 316,000 warrants to purchase an additional share of the Company at $0.40 within three years. As of May 31, 2011, the accredited investor held 316,000 warrants related to this purchase.

On May 23, 2011, the Company agreed to convert $250,000 of long-term debt and related interest by issuing 1,000,000 common shares and 1,000,000 warrants. The investors were granted piggyback registration rights for the shares of common stock and shares underlying the warrants. The shares of the Company’s common stock are freely trading securities, under SEC Rule 144. The warrants have a life of three years and are convertible at $0.40 per share.

9. Share Based Compensation

The Company has 2007 and 2010 Equity Incentive Plans. The 2007 Equity Incentive Plan, which permits the grant of awards in the form of incentive stock options, nonstatutory stock options, stock appreciation rights, stock awards and stock units to its key employees for up to 1 million shares of common stock. The Company believes that such awards promote the long-term success of the Company and the creation of stockholder value by offering key employees an opportunity to acquire a proprietary interest in the success of the Company, or to increase such interest, and to encourage such key employees to continue to provide services to the Company and to attract new individuals with outstanding qualifications. Awards are generally granted with an exercise price that approximates the market price of the Company’s common stock at the date of grant.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Because the Black-Scholes option valuation model incorporate ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on historical volatilities of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted is derived from estimates and represents the period of time that options granted are expected to be outstanding. The risk-free 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.

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A summary of option activity as of May 31, 2011, and changes during the period then ended is presented below:

There were no options exercised during the three months ended May 31, 2011 or 2010.

The Company has an additional $1,125,400 to expense in future periods for unvested stock options. There was no unvested compensation as of May 31, 2010. During the three months ended May 31, 2011, the Company issued 3,015,000 stock options to eleven employees or consultants at an exercise price of $0.55. As of May 31, 2011, 1,316,000 stock options issued during the first quarter 2011 will cliff vest in the second quarter 2011. The stock options vest over one to two years from the date of grant. The Company has recorded a stock option expense of $548,519 in three months ended May 31, 2011 in general and administrative expenses.

Warrants

The fair value of each warrant is estimated on the date of grant using the Black-Scholes valuation model that uses the assumptions noted in the following table. Because the Black-Scholes valuation model incorporates ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and employee termination and forfeiture rates within the valuation model. The expected term of warrants granted is derived from estimates and represents the period of time that warrants granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve in effect at the time of grant.

A summary of warrant activity for the three months ended May 31, 2011, is presented below:

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There were no warrants exercised during the three months ended May 31, 2011 or 2010. There were no unvested warrants as of May 31, 2010. During the three months ended May 31, 2011, the Company issued 1,366,000 warrants to three investors or consultants at an exercise price of between $0.25 and $0.40. Company has recorded a warrant expense of $11,086 in three months ended May 31, 2011 in general and administrative expenses related to the issuance of 50,000 warrants for services rendered in relation to the debt conversion.

10. Income Taxes

The Company has commenced analyzing filing positions in all of the federal and state jurisdictions (California) where it is required to file income tax returns, as well as all open tax years in these jurisdictions.

Due to the existence of a full valuation allowance against deferred tax assets, future changes in our unrecognized tax benefits will not impact the Company’s effective tax rate.

As a corporation, the Company is primarily subject to U.S. federal and state income tax. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of May 31, 2011 and May 31, 2010, the Company had no accruals for interest or penalties related to income tax matters.

11. Commitments and Contingencies

Effective May 6, 2010, the Company entered into a lease for 3,040 square feet of office space located at 2330 Marinship Way, #300, Sausalito, California 94965. The term of the lease is 23.5 months commencing May 15, 2010 and the monthly rent is $7,448.

On August 31, 2010, the Company entered into a settlement agreement with Niesar Vestal, LLP for all outstanding obligations. The agreement calls for a series of cash payments totaling $45,000 over 12 months plus a convertible note for $50,000. The note has a maturity date of June 30, 2012 and accrues interest at 10%. The terms of the debt agreement provide for all principal and accrued interest to be converted into shares of common stock at $1.50 per share at any time within the term of the note. All principal and accrued interest under the note shall automatically convert into shares of common stock in the event that the 30 day trailing volume weighted average price for the stock exceeds $2.00 per share at any time after June 1, 2011 and prior to the maturity date.

In November 2010, the Company signed an agreement with Spot Ventures, whereby, effective December 1, 2010, it has an interest in the profits from all kiosks under Spot’s control. The Agreement calls for the Company to provide DVDs for inclusion in kiosks and to pay certain operating expenses of the kiosks, excluding the cost of the kiosk itself. In exchange for this, the Company shall be reimbursed for the cost of the DVDs and the operating expenses out of the revenue from the kiosks and also receive 50% of any profits from the kiosks.

12. Subsequent Events

In preparing these condensed consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through July 15, 2011, the date the condensed consolidated financial statements were available to be issued.

On June 7, 2011, the shareholders voted to:

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On June 3, 2011 the Company converted $150,000 of long-term debt and related interest by issuing 600,000 common shares and 600,000 warrants. The conversion agreements allow that, should the Company issue new shares for less than $0.25 per share, the investors who converted debt and still own these shares will have additional shares issued to bring their net cost per share for the remaining shares down to this lessor price. The investors were also granted piggyback registration rights for the shares of common stock and shares underlying the warrants. The shares of the Company’s common stock are freely trading securities, under SEC Rule 144. The warrants have a life of three years and are convertible at $0.40 per share.

During the period commencing June 30, 2011 through the period ending July 13, 2011, the Company agreed to sell 1,270,000 shares of restricted Company common stock at $.10 per share to 4 accredited investors, which resulted in gross proceeds of $127,000 to the Company, and agreed to issue $75,000 in convertible promissory notes to 3 accredited investors. The convertible promissory notes are due and payable on October 31, 2011; do not accrue any interest; and are convertible into shares of Company common stock at the election of the Company or the holder at $.10 per share. The shares of Company common stock, convertible notes and shares of common stock underlying the convertible notes are restricted securities, and may not be sold, transferred or otherwise disposed without registration under the Securities Act of 1933, as amended (the “Securities Act”) or an exemption there under. The shares of common stock and convertible notes were offered and sold in reliance on the exemption from registration under Section 4(2) of the Securities Act and/or Rule 506 of Regulation D under the Securities Act. The issuance of shares of common stock and convertible notes were not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the accredited investors in connection with the transactions.

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The following discussion and analysis should be read in conjunction with its condensed consolidated financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.

Overview

The Company and its wholly-owned subsidiary, EntertainmentXpress, Inc., a California corporation (“EntertainmentXpress”), are engaged in the business of offering self-service Kiosks which deliver DVD and Blu-ray movies and other potentially other products to consumers.

Public Media Works, Inc. has historically been engaged in the development, production, marketing and distribution of film, music and television entertainment titles. The Company has an ownership interest in several film and television projects which are currently in various stages of development. As of May 4, 2010 with the acquisition of Entertainment Xpress, Inc., the Company has focused exclusively on its kiosk business and intends to continue this focus going forward.

In order to maintain clarity in this report, references to the business of the Company’s subsidiary EntertainmentXpress will be indicated as “EntertainmentXpress”; and references to the “Company,” “we,” “us” or “our” refer to the combined businesses of Public Media Works, Inc. and EntertainmentXpress after May 4, 2010.

Going Concern and Liquidity Matters

The accompanying condensed consolidated financial statements of the Company have been prepared under the assumption that we will continue as a going concern. Such assumption contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our independent registered public accounting firm’s report for 2011 and 2010 in our Form 10K filed with the SEC on June 3, 2011 state that our significant net losses, negative cash flows from operations and accumulated deficit through February 28, 2011 create substantial doubt as to the Company’s ability to continue as a going concern.

The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitability. There can be no assurance that the Company will be able to obtain any additional financing, or that any such financing will be available on acceptable terms. The condensed consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.

Results of Operations

Revenue

The Company has been restructured and is in the `start-up phase of operation. In the quarter ended May 31, 2011 it generated $20,236 in revenue as compared to $0 revenue during the three months ended May 31, 2010. Revenue in the current quarter came principally from 25 kiosks placed in operation during the quarter and going through beta testing. The Company is using a newly manufactured kiosk and operating software. Assuming we are able to close a contemplated financing, we expect to go into full production of the kiosks and version two of the software later this summer. The remainder of revenue during this quarter came from its joint venture in Canada. The Company anticipates that this revenue will decrease as a percent of total revenue in the future as it focuses on increasing the number of Company owned kiosks.

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For the three months ended May 31, 2011, the Company’s operating expenses increased to $2,900,858, compared to operating expenses of $1,343,050 for the three months ended May 31, 2010.

The increase in the direct operating expenses is a direct result of placing the kiosks in operations. Direct operating expenses principally include: amortization of our DVD and Blu-Ray movie inventory; commissions or fees to retailers; credit card fees and field operations support, such as loading and cleaning the kiosks and monitoring the kiosks.

Marketing expenses increased 61% the three months ended May 31, 2010 as compared to the three months ended May 31, 2011. In the quarter ended May 31, 2010, we had marketing management but no staff. In the quarter ended May 31, 2011, we have a full-time marketing consultant as well as a marketing firm on retainer.

General and administrative expenses increased $1,399,461 or approximately 114% from the three months ended May 31, 2010 as compared to the three months ended May 31, 2011. General and administrative expenses include $2,325,626 in non-cash items such as stock compensation to officers $859,271, stock option expense $548,519, stock compensation to consultants such as our investor relations consultants $906,750 and warrant expense of $11,086 The warrants were issued to an investment banking firm in conjunction with the Mainas debt sale and subsequent conversion. These increases were a direct result of our decision to enter the DVD and Blu-ray rental business and hiring staff paid partially and in one case fully, through stock grants and stock options. We also hired an investor relations firm to assist in positioning the company to investors.

Professional fees increased approximately 88% to $159,741. The principal components of professional fees were cash fees paid to our investor relations firm of $30,000, investment banking fees related to our debt conversion of $20,000, audit and tax fees and accruals of $41,059 and legal fees of $50,578. There were no investor relations fees or investment banking fees in the three months ended May 31, 2010. In addition, we accrued the estimated costs of preparing and filing our Federal and California tax returns for prior years.

Liquidity and Capital Resources

Our primary requirements for working capital are to fund purchases of kiosks and movies, and to cover our operating expenses. In recent years, we have incurred losses from operations and have undertaken several equity financing transactions to provide us with capital as we worked to grow our business. In March 2011, we installed our first 25 kiosks. We believe can reach breakeven cash flow from operations in late 2011 if we are successful in raising additional cash. However, in the event that our revenue or our margins are lower than anticipated, it will take us longer to reach breakeven cash flows. As our kiosks and their operating software are still in beta testing our revenue levels remain difficult to predict and are substantially less than our operating expenses, and we anticipate that we will continue to sustain losses in the near term, and we cannot assure investors that we will be successful in reaching break-even.

As of May 31, 2011, the Company had a cash balance of $2,623. The Company does not currently have sufficient cash on hand to satisfy its operating costs and continued expansion efforts, and will need to raise additional capital. The Company anticipates raising funds through debt, convertible debt, or through the sale of equity. However, there can be no assurance as to whether, when, or upon what terms the Company will be able to consummate any financing. The Company may also raise capital from third parties to fund the installation of kiosks in specific regions of North America. The Company’s inability to raise additional capital to satisfy its operating costs could result in the Company’s need to reduce the number of its employees and curtail or shut down its operations which would have a material adverse impact on the Company and its ability to continue as a going concern.

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The Company had net cash uses of $293,434. These funds were used primarily to fund the loss from operations of $2,895,713 less non-cash charges of $2,459,365 for a net cash usage of $436,348. We also purchased approximately $76,738 of DVDs and Blu-ray Discs for our kiosks. Offset against these uses was an increase in accounts payable of $235,635.

The Company completed the purchase of its first 25 kiosks capitalizing $199,741 of costs related to these kiosks. These costs included $40,000 in shipping and installation as well as $45,450 of sales tax.

During the three months ended May 31, 2011, the Company raised $79,000 in new equity and received $30,000 due it from shares sold in February 2011.

As previously announced, neither the Company’s teaming agreement with the Asian American Convenience Store Association for the placement of DVD rental kiosks in convenience stores, nor the teaming agreement with Modular Conversions for the placement and financing of DVD rental kiosks in gas station convenience stores, has resulted in the placement or financing of any DVD rental kiosks.

To date, the Company has funded its operations primarily through the issuance of common stock in exchange for cash and services, as well as through unsecured notes payable to stockholders and third parties.

Commitments

Please see Item 1 Notes to Unaudited Condensed Consolidated Financial Statements, Footnotes, 4 and 8 for a summary of the Company’s obligations and commitments.

USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”).

The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during each reporting period. On an ongoing basis, management evaluates its estimates and assumptions, including those related to income taxes, long lived asset valuation, and stock based compensation. Management bases its estimates and judgments on historical experience of operations and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Recent Accounting Pronouncements

Please see Item 1 Notes to Unaudited Condensed Consolidated Financial Statements, Footnote 2, Summary of Significant Accounting Policies for management’s discussion.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

Intentionally omitted pursuant to Item 305(e) of Regulation S-K.

Evaluation of Disclosure Controls and Procedures. We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information

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required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of May 31, 2011, our disclosure controls and procedures were not effective in ensuring that the information required to be filed or submitted under the Exchange Act is recorded, presented, summarized and reported as specified in the Securities and Exchange Commission’s rules and forms, and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We believe, however, that the accompanying condensed consolidated financial statements presented in this Form 10-Q fairly present the financial condition and results of operations for the periods indicated.

The identified material weaknesses in our internal control over financial reporting relate to the following matters:

Our plan to remediate those material weaknesses remaining as of May 31, 2011 is as follows:

CHANGES IN CONTROLS AND PROCEDURES

As required by Rule 13-15(d) of the Exchange Act, the Company, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer (principal financial officer), also evaluated whether any changes have occurred to the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, such control.

During the first quarter, Garrett Cecchini resigned as a director and Bryan Subotnick was appointed to the board of directors.

PART II - OTHER INFORMATION

There are no material pending legal proceedings to which the Company is a party or of which any of the Company’s property is subject as of the date of this report. Further, as of the date of this report, the Company is not aware of any legal proceedings against the Company, or its property contemplated by any governmental authority.

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In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Part II, Item 6— Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2011 which was filed with the SEC on June 3, 2011 (the “Form 10K”). These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results and future prospects. As of the date of this report, we do not believe that there have been any material changes to the risk factors previously disclosed in our Form 10K.

On March 7, 2011, the board of directors accelerated the vesting on 583,335 shares due Martin W. Greenwald, CEO and Chairman under an employment agreement between Mr. Greenwald and the Company. The Board also authorized an additional 500,000 fully vested shares to be issued to Mr. Greenwald. The Company recorded $695,696 in expense related to these issuances in the three months ended May 31, 2011.

On March 7, 2011, issued 687,500 shares to four consultants for services rendered. The Company recorded $378,125 in consulting expense in the three months ended May 31, 2011 as the grants were for past services and vested immediately to the holder.

On March 7, 2011, the Company executed a common stock and warrant agreement with an accredited investor for $79,000 in cash. The accredited investor received 316,000 common stock and 316,000 warrants to purchase an additional share of the Company at $0.40 within three years. As of May 31, 2011, the accredited investor held 316,000 warrants related to this purchase.

In June, 2011, the Company entered into Agreements with George Mainas, Mainas Development Corporation (collectively “Mainas”) and two investors whereby the investors purchased $150,000 of the debt due the Company to Mainas. The Company agreed to allow the investors the option to convert this debt into 600,000 shares of common stock and 600,000 warrants to purchase common stock of the Company for $0.40 per share for three years from the date of the Agreement. Also in June, the investors notified the Company that they were exercising this option to convert. The shares of Company common stock will be issued without restriction under the Act under an exemption provided pursuant to Rule 144 of the Act. The warrants and shares of the Company’s common stock which may be issued upon exercise of the warrants are restricted securities, and may not be sold, transferred or otherwise disposed without registration under Act, or an exemption thereunder. The securities were offered and sold in reliance on the exemption from registration under Section 4(2) of the Act and/or Rule 506 of Regulation D under the Act. The offering was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the individual in connection with the offering.

None

None

During the period commencing June 30, 2011 through the period ending July 13, 2011, the Company agreed to sell 1,270,000 shares of restricted Company common stock at $.10 per share to 4 accredited investors, which resulted in gross proceeds of $127,000 to the Company, and agreed to issue $75,000 in convertible promissory notes to 3 accredited investors. The convertible promissory notes are due and payable on October 31, 2011; do not accrue any interest; and are convertible into shares of Company common stock at the election of the Company or the holder at $.10 per share. The shares of Company common stock, convertible notes and shares of common stock underlying the convertible notes are restricted securities, and may not be sold, transferred or otherwise disposed without registration under the Securities Act of 1933, as amended (the “Securities Act”) or an exemption there under. The shares of common stock and convertible notes were offered and sold in reliance on the exemption from registration under Section 4(2) of the Securities Act and/or Rule 506 of Regulation D under the Securities Act. The issuance of shares of common stock and convertible notes were not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the accredited investors in connection with the transactions.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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