UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549



FORM 10-Q



|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2012



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from   
to



Commission File Number: 000-52414



POW! Entertainment, Inc.

(Exact name of Registrant as specified in
its charter)



|Delaware                        |  | 90-0139831            
|------------------------------- |  | ----------------------
|(State or other jurisdiction of |  | (I.R.S. Employer      
|incorporation or organization)  |  | Identification Number)



|9440 Santa Monica Blvd #620  Beverly Hills, CA 90210 |  | 310-275-9933                                      
|---------------------------------------------------- |  | --------------------------------------------------
|(Address of principal executive offices)             |  | Registrant’s telephone number, including area code



N/A

(Former name, former address and former fiscal year, if changed since last report.)



Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.

Yes x                           No   ̈



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 during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files).

YesxNo ̈



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:



|Large accelerated filer ̈                      | Accelerated filer ̈        
|--------------------------------------------- | --------------------------
|Non-accelerated filer ̈                        | Smaller reporting companyx
|(do not check if a smaller reporting company) |                           



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

Yes   ̈                           No  x



The number of common shares outstanding on July 15, 2012
was 133,107,356.













POW! ENTERTAINMENT, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS



|           |                                                                                                             | Page   
|---------- | ----------------------------------------------------------------------------------------------------------- | -------
|PART I.    | Financial Information                                                                                       |        
|           |                                                                                                             |        
|Item 1.    | Financial Statements                                                                                        |        
|           |                                                                                                             |        
|           | Consolidated Balance Sheets at June 30, 2012 (Unaudited) and December 31, 2011 (Audited)                    | 3      
|           |                                                                                                             |        
|           | Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2012 and 2011 | 4      
|           |                                                                                                             |        
|           | Consolidated Statements of Cash Flows (Unaudited) for the Three and Six Months Ended June 31, 2012 and 2011 | 5      
|           |                                                                                                             |        
|           | Notes to Consolidated Unaudited Financial Statements                                                        | 6 – 11 
|           |                                                                                                             |        
|Item 2.    | Management’s Discussion and Analysis of Financial Condition and Results of Operations                       | 12 – 15
|           |                                                                                                             |        
|Item 3.    | Quantitative and Qualitative Disclosures About Market Risk                                                  | 15     
|           |                                                                                                             |        
|Item 4.    | Controls and Procedures                                                                                     | 16     
|           |                                                                                                             |        
|PART II.   | Other Information                                                                                           |        
|           |                                                                                                             |        
|Item 1.    | Legal Proceedings                                                                                           | 16-17  
|           |                                                                                                             |        
|Item 1A.   | Risk Factors                                                                                                | 17     
|           |                                                                                                             |        
|Item 2     | Unregistered Sales of Equity Securities and Use of Proceeds                                                 | 18     
|           |                                                                                                             |        
|Item 5     | Other Information                                                                                           | 18     
|           |                                                                                                             |        
|Item 6.    | Exhibits                                                                                                    | 18     
|           |                                                                                                            
|Signatures | 19                                                                                                         





2







PART I. ITEM 1. FINANCIAL STATEMENTS

POW! ENTERTAINMENT, INC.

CONSOLIDATED BALANCE SHEETS

June 30, 2012



|                                                                                                                                                                                                                                                   |  | June 30,    |             |   | December 31, |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | - | ------------ | -
|                                                                                                                                                                                                                                                   |  | 2012        |             |   | 2011         |  
|                                                                                                                                                                                                                                                   |  | (Unaudited) |             |   | (Audited)    |  
|ASSETS                                                                                                                                                                                                                                             |  |             |             |   |              |  
|CURRENT ASSETS                                                                                                                                                                                                                                     |  |             |             |   |              |  
|Cash and cash equivalents                                                                                                                                                                                                                          |  | $           | 190,551     |   |              | $
|Letter of credit                                                                                                                                                                                                                                   |  |             | 32,544      |   |              |  
|Marketable securities                                                                                                                                                                                                                              |  |             | 807,324     |   |              |  
|Accounts receivable, net of allowance for doubtful accounts                                                                                                                                                                                        |  |             | -           |   |              |  
|Other receivables                                                                                                                                                                                                                                  |  |             | 68,214      |   |              |  
|Prepaid expenses                                                                                                                                                                                                                                   |  |             | 32,949      |   |              |  
|Inventory                                                                                                                                                                                                                                          |  |             | 13,513      |   |              |  
|TOTAL CURRENT ASSETS                                                                                                                                                                                                                               |  |             | 1,145,095   |   |              |  
|                                                                                                                                                                                                                                                   |  |             |             |   |              |  
|Property and Equipment, net                                                                                                                                                                                                                        |  |             | 10,659      |   |              |  
|Intangible and Other Assets                                                                                                                                                                                                                        |  |             |             |   |              |  
|Trademarks, net                                                                                                                                                                                                                                    |  |             | 19,072      |   |              |  
|Development Fees                                                                                                                                                                                                                                   |  |             | 35,000      |   |              |  
|Deposits                                                                                                                                                                                                                                           |  |             | -           |   |              |  
|TOTAL ASSETS                                                                                                                                                                                                                                       |  | $           | 1,209,826   |   |              | $
|                                                                                                                                                                                                                                                   |  |             |             |   |              |  
|LIABILITIES AND SHAREHOLDERS' DEFICIT                                                                                                                                                                                                              |  |             |             |   |              |  
|CURRENT LIABILITIES                                                                                                                                                                                                                                |  |             |             |   |              |  
|Accounts payable and accrued expenses                                                                                                                                                                                                              |  | $           | 362,096     |   |              | $
|Advances payable                                                                                                                                                                                                                                   |  |             | 2,821,667   |   |              |  
|Deferred compensation-current                                                                                                                                                                                                                      |  |             | 300,000     |   |              |  
|Deferred Rent                                                                                                                                                                                                                                      |  |             | 47,638      |   |              |  
|Derivatives Liability                                                                                                                                                                                                                              |  |             | 16,397      |   |              |  
|TOTAL CURRENT LIABILITIES                                                                                                                                                                                                                          |  |             | 3,547,798   |   |              |  
|Deferred compensation-long term                                                                                                                                                                                                                    |  |             | 1,727,917   |   |              |  
|COMMITMENT AND CONTINGENCIES, note 8                                                                                                                                                                                                               |  |             |             |   |              |  
|SHAREHOLDERS' DEFICIT                                                                                                                                                                                                                              |  |             |             |   |              |  
|Common shares, $0.001 par value. 199,000,000 common shares authorized, 1,000,000 preferred shares
    authorized 133,107,356 and     132,607,356 common shares issued and outstanding at June 30, 2012 and     December 31, 2011,
    respectively |  |             | 133,108     |   |              |  
|Additional paid in capital                                                                                                                                                                                                                         |  |             | 9,566,065   |   |              |  
|Subscription receivable, net, note 3                                                                                                                                                                                                               |  |             | (460,633    | ) |              |  
|Accumulated deficit                                                                                                                                                                                                                                |  |             | (13,281,836 | ) |              |  
|Accumulated other comprehensive income                                                                                                                                                                                                             |  |             | (22,593     | ) |              |  
|TOTAL SHAREHOLDERS' DEFICIT                                                                                                                                                                                                                        |  |             | (4,065,889  | ) |              |  
|TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                                                                                                                                                                                        |  | $           | 1,209,826   |   |              | $



See the accompanying notes to consolidated financial statements.



3







POW! ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



|                                                |  | Three  Months Ended |             |   | Six Months Ended |  
|----------------------------------------------- |  | ------------------- | ----------- | - | ---------------- | -
|                                                |  | June 30, 2012       |             |   | June 30, 2011    |  
|                                                |  |                     |             |   |                  |  
|                                                |  |                     |             |   |                  |  
|REVENUES                                        |  | $                   | 502,606     |   |                  | $
|                                                |  |                     |             |   |                  |  
|OPERATING COSTS AND EXPENSES                    |  |                     |             |   |                  |  
|Wages and benefits                              |  |                     | 392,730     |   |                  |  
|Commission                                      |  |                     | 32,030      |   |                  |  
|Stock-based Compensation                        |  |                     | 34,330      |   |                  |  
|Professional fees                               |  |                     | 193,652     |   |                  |  
|Promotional and Marketing                       |  |                     | 9,542       |   |                  |  
|Rent and office                                 |  |                     | 37,882      |   |                  |  
|Other general and administration                |  |                     | 73,373      |   |                  |  
|TOTAL OPERATING COSTS AND EXPENSES              |  |                     | 773,539     |   |                  |  
|                                                |  |                     |             |   |                  |  
|INCOME  (LOSS) FROM OPERATIONS                  |  |                     | (270,933    | ) |                  |  
|OTHER INCOME AND (EXPENSES)                     |  |                     |             |   |                  |  
|Interest and Dividend income, net               |  |                     | 7,236       |   |                  |  
|Income from legal settlement                    |  |                     | -           |   |                  |  
|Write-off Subscription Receivable               |  |                     | (533,408    | ) |                  |  
|Gain on change of derivative value              |  |                     | 6,692       |   |                  |  
|INCOME (LOSS) BEFORE TAXES                      |  |                     | (790,413    | ) |                  |  
|                                                |  |                     |             |   |                  |  
|Income taxes                                    |  |                     | (6,000      | ) |                  |  
|                                                |  |                     |             |   |                  |  
|NET INCOME (LOSS)                               |  | $                   | (796,413    | ) |                  | $
|                                                |  |                     |             |   |                  |  
|Net Income (loss) per share                     |  |                     |             |   |                  |  
|Basic and diluted                               |  | $                   | (0.01       | ) |                  | $
|                                                |  |                     |             |   |                  |  
|Weighted average shares outstanding, basic      |  |                     | 132,774,023 |   |                  |  
|Weighted average shares outstanding, diluted    |  |                     | 132,774,023 |   |                  |  
|                                                |  |                     |             |   |                  |  
|Condensed Statement of Comprehensive Income     |  |                     |             |   |                  |  
|Net Loss                                        |  | $                   | (796,413    | ) |                  | $
|Other comprehensive Income(Loss)                |  |                     |             |   |                  |  
|Unrealized gain (loss) on marketable securities |  |                     | (4,043      | ) |                  | $
|Comprehensive Loss                              |  | $                   | (800,456    | ) |                  | $



See the accompanying notes to consolidated financial statements.





4







POW! ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                                                                   |  | Six Months Ended |           
|-------------------------------------------------------------------------------------------------- |  | ---------------- | ----------
|                                                                                                   |  | June 30, 2012    |           
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |  |                  |           
|Net income (loss)                                                                                  |  | $                | (1,081,662
|Adjustments to reconcile net income (loss) to net cash provided by (used) in operating activities: |  |                  |           
|Depreciation and amortization                                                                      |  |                  | 903       
|Loss on disposal of fixed assets                                                                   |  |                  | 564       
|Write-off subscription receivables                                                                 |  |                  | 533,408   
|Stock based compensation                                                                           |  |                  | 43,661    
|Non-employee warrants and options                                                                  |  |                  | -         
|Changes in valuation of derivatives liability                                                      |  |                  | (12,366   
|Deferred Rent                                                                                      |  |                  | (2,730    
|Change in assets and liabilities:                                                                  |  |                  |           
|Accounts receivable                                                                                |  |                  | 86,183    
|Prepaid expenses                                                                                   |  |                  | (13,944   
|Inventory                                                                                          |  |                  | -         
|Other receivable                                                                                   |  |                  | (250      
|Deposits                                                                                           |  |                  | 2,192     
|Accounts payable and accrued expenses                                                              |  |                  | 128,445   
|Advances payable                                                                                   |  |                  | 275,000   
|Deferred compensation                                                                              |  |                  | (100,000  
|NET CASH PROVIDED BY (USED) IN OPERATING ACTIVITIES                                                |  |                  | (140,596  
|                                                                                                   |  |                  |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |  |                  |           
|Payments for trademarks                                                                            |  |                  | (325      
|Purchase of property and equipment                                                                 |  |                  | (3,488    
|Purchases of marketable securities                                                                 |  |                  | (13,800   
|NET CASH USED IN INVESTING ACTIVITIES                                                              |  |                  | (17,613   
|                                                                                                   |  |                  |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |  |                  |           
|Proceeds from subscriptions receivable                                                             |  |                  | 8,455     
|NET CASH PROVIDED BY IN FINANCING ACTIVITIES                                                       |  |                  | 8,455     
|                                                                                                   |  |                  |           
|NET INCREASE (DECREASE) IN CASH                                                                    |  |                  | (149,754  
|Cash and cash equivalents at beginning of year                                                     |  |                  | 340,305   
|Cash and cash equivalents at end of the year                                                       |  | $                | 190,551   
|                                                                                                   |  |                  |           
|Supplemental disclosures of cash flow information:                                                 |  |                  |           
|Income taxes paid in cash                                                                          |  | $                | 10,800    



See the accompanying notes to consolidated financial statements.





5







POW! ENTERTAINMENT, INC

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL
STATEMENTS



| | 1. | The Company and Basis of Presentation
| | -- | -------------------------------------



Business Activity and Organization--The
Company is a Delaware corporation, incorporated on August 17, 1998.POW! Entertainment, Inc. ("POW", "Company",
“we”) has the following subsidiaries: POW! Entertainment, LLC (the operating company); QED Productions, LLC; PFD, LLC
and an inactive Delaware corporation: Pharmelle, Inc.



We have prepared the Company’s accompanying
consolidated unaudited financial statements in accordance with accounting principles generally accepted in the United States of
America, or GAAP, for interim financial statements and with instructions to Form 10-Q pursuant to the rules and regulations of
Securities Exchange Act of 1934, as amended (the Exchange Act) and Article 8-03 of Regulation S-X promulgated under the Exchange
Act. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of our management, we have included all adjustments considered necessary (consisting of normal
recurring adjustments) for a fair presentation. Operating results for the three and six months ended June 30, 2012 and 2011 are
not indicative of the results that may be expected for the fiscal year ending December 31, 2012. You should read these unaudited
consolidated financial statements in conjunction with the audited financial statements and the notes thereto included in our annual
report on Form 10-K for the year ended December 31, 2011.



The accompanying financial statements have been prepared
assuming the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company's assets
and the satisfaction of its liabilities in the normal course of conducting its business. The Company's ability to continue as a
going concern is dependent upon various factors including, among others, its ability to increase revenues and reduce its operating
losses and negative cash flows. Accordingly, the financial statements do not include any adjustments to reflect the possible future
effects on the recoverability or classification of assets and liabilities that may result should we not be able to continue as
a going concern.



| | 2. | Summary of Significant Accounting Policies
| | -- | ------------------------------------------



Principles of Consolidation--The consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company transactions and
balances have been eliminated in consolidation.



Revenue Recognition --As a creator of intellectual
property, the majority of the Company’s business is derived from contracts with third parties providing for the development
and use of intellectual property developed by the Company.



The Company records revenue from these sources: artist
consulting, film rights, animated television and comic-book royalties. In accounting for these contracts, the Company recognizes
revenue when services have been rendered or when contractual parameters have been satisfied and are measureable.



Our contract with Silver Creek Pictures (“Silver
Creek”), an affiliate of The Walt Disney Company, calls for per annum payments of nonrecoupable overhead allowance of $700,000
and nonrecoupable consulting services for Stan Lee of $1,250,000. The contract expires in December 2014. The $1,250,000 per annum
for Stan Lee’s consulting services cease in the event of his disability or incapacitation. Revenue from Silver Creek is recorded
based on the guidance from ASC 605: revenues are considered to have been earned when the entity has substantially accomplished
what it must do to be entitled to the benefits represented by the revenues.



Advances Payable— The contract with Silver
Creek also contains recoupable advance payments per annum of $550,000.



The Company recorded $275,000 for the six months ended
June 30, 2012 and 2011, respectively, as advances payable pursuant to the contractual clause in which the advances are recoupable
by Silver Creek solely from any fixed and contingent compensation related to future developments, including box office bonuses
and merchandising royalties. The Company has not met the performance measurement of the revenue and accordingly has not recorded
the payments as revenue. In addition, any properties that Silver Creek rejects or accepts and subsequently abandons may be offered
by the Company elsewhere subject to participation by Silver Creek.  Depending on the nature of the project so offered
to a third party and the time when such project was originally offered to Silver Creek, Silver Creek is entitled to receive up
to $100,000 per project, and the assignment of 50% or 25% of the Company’s compensation from the third-party producer.





6







Related Party— From time to time, Stan
Lee has appeared and will continue to appear at certain events or projects for which both he and the Company receive payments.
There were no payments to Mr. Lee during the six months ended June 30, 2012.



Use of Estimates --The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate
application of certain accounting policies, many of which require estimates and assumptions about future events and their impact
on amounts reported in the financial statements and related notes. Since future events and their impact cannot be determined with
certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements.
We have identified the most significant areas of estimation and assumptions as being estimation of the allowance for doubtful
accounts, estimation of stock-based compensation, estimation of derivatives liabilities, and estimation of the net deferred income
tax asset valuation allowance.



Cash, Cash Equivalents and Marketable Securities—Cash,
cash equivalents and marketable securities include cash, certificates of deposit, mutual funds and liquid investments with original
maturities of three months or less.



Concentration of Credit Risk--The Company maintains
cash at financial institutions which may, at times, exceed insured limits.



Accounts Receivable--The Company extends credit
to its customers.  These customers have specific contracts that detail the payments expected under their contract terms.  Accounts
receivable are customer obligations due under these contract terms.  Management reviews accounts receivable on a regular
basis, based on contracted terms and how recently payments have been received, to determine if any such amounts will potentially
be uncollected.  After all attempts to collect a receivable have failed, the receivable is written off.



Property and Equipment--Property and equipment
are stated at cost.  Depreciation and amortization are provided for using the straight-line method over the estimated
useful lives of the assets over five years.Depreciation expense recorded for the three months ended June 30, 2012 and 2011
were $506 and $1,522, respectively. Depreciation expense recorded for the six months ended June 30, 2012 and 2011 were $903 and
$976, respectively.



Inventory--Inventory consists of promotional
items for sale, which are stated at the lower of cost or market using the first-in, first-out method.



Development Costs--The Company capitalizes
costs directly related to the creation and development of intellectual properties that are incurred by non-employees, related to
the development of scripts and stories. The Company periodically reviews the properties in development to determine whether they
will ultimately be used in the production of a film. The costs capitalized are written off if the property has not been set for
production within three years from the time of the first capitalized transaction.



Fair Value Measurements--The Company measures
its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability (i.e. exit price) in an orderly transaction between market participants at the measurement date.
Additionally, the Company is required to provide disclosure and categorize assets and liabilities measured at fair value into one
of three different levels depending on the assumptions (i.e. inputs) used in the valuation. Level 1 provides the most reliable
measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified
in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined
as follows:



| | 1. | Level I – Quoted prices in active markets for identical assets and liabilities.
| | -- | -------------------------------------------------------------------------------

| | 2. | Level II – Other significant observable inputs for assets or liabilities through corroboration with market data at measurement
date,
| | -- | ------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Level III – Significant unobservable inputs that reflect management’s best estimate of what market participants
would use to price assets or liabilities at the measurement date.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table summarizes fair value measurements
by level at December 31, 2011 for assets and liabilities measured at fair value on a recurring basis:



|                      |  | Level I |         |  | Level II |  |  | Level III |  |   | Total  | 
|--------------------- |  | ------- | ------- |  | -------- |  |  | --------- |  | - | ------ | 
|                      |  |         |         |  |          |  |  |           |  |   |        | 
|Cash                  |  | $       | 340,305 |  |          |  |  |           |  |   |        | 
|Letter of credit      |  | $       | 32,544  |  |          |  |  |           |  |   |        | 
|Marketable securities |  | $       | 771,177 |  |          |  |  |           |  |   |        | 
|Derivatives liability |  |         |         |  |          |  |  |           |  | $ | 28,763 | 





7







The following table summarizes fair value measurements
by level at June 30, 2012 for assets and liabilities measured at fair value on a recurring basis:



|                      |  | Level I |         |  | Level II |  |  | Level III |  |   | Total  | 
|--------------------- |  | ------- | ------- |  | -------- |  |  | --------- |  | - | ------ | 
|                      |  |         |         |  |          |  |  |           |  |   |        | 
|Cash                  |  | $       | 190,551 |  |          |  |  |           |  |   |        | 
|Letter of credit      |  | $       | 32,544  |  |          |  |  |           |  |   |        | 
|Marketable securities |  | $       | 807,324 |  |          |  |  |           |  |   |        | 
|Derivatives liability |  |         |         |  |          |  |  |           |  | $ | 16,397 | 



The table below sets forth a summary of changes in
fair value of the Company’s Level III liabilities for the six months ended June 30, 2012.



|Balance as of December 31, 2011 |  | $ | 28,763  |  
|------------------------------- |  | - | ------- | -
|Issuance of warrants            |  |   |         |  
|Change in Value                 |  |   | (12,366 | )
|Balance as of June 30, 2012     |  | $ | 16,397  |  



The Company’s management believes the carrying
amounts of accounts receivable, accounts payable and accrued expense approximate fair value due to their short maturity.



Accounting for Stock-Based Compensation to Employees
--The Company measures and recognizes compensation expense for all share-based payment awards to employees based on estimated
fair values on the grant date. The Company recognizes the expense on a straight-line basis over the requisite service period, which
is the vesting period.



Income Taxes—Income taxes are accounted
for under an asset and liability approach that requires the recognition of deferred income tax assets and liabilities for the expected
future consequences of events that have been recognized in the Company’s financial statements and income tax returns. The
Company provides a valuation allowance for deferred income tax assets when it is considered more likely than not that all or a
portion of such deferred income tax assets will not be realized.



Earnings Per Share--Basic earnings per share
is computed by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding.
Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include
the number of additional common shares that would have been outstanding if the potential common share equivalents had been issued
and if the additional common shares were dilutive. Common equivalent shares are excluded from the computation if their effect is
anti-dilutive. For the three and six months ended June 30, 2012, the diluted earnings per share are the same as basic earnings
per share as the 1,650,000 warrants outstanding would have an anti-dilutive effect.





8







|                                                |  | Three Months Ended |             |  | Six Months Ended |  
|----------------------------------------------- |  | ------------------ | ----------- |  | ---------------- | -
|                                                |  | June 30, 2011      |             |  | June 30, 2011    |  
|Numerator -                                     |  |                    |             |  |                  |  
|Net income attributable to common               |  |                    |             |  |                  |  
|Shareholders                                    |  | $                  | 478,504     |  |                  | $
|Denominator -                                   |  |                    |             |  |                  |  
|Weighted-average number of common               |  |                    |             |  |                  |  
|Shares outstanding during the period            |  |                    | 131,941,070 |  |                  |  
|Dilutive effect of stock options and warrants   |  |                    | 41,764      |  |                  |  
|Common stock and common stock                   |  |                    |             |  |                  |  
|Equivalents used for diluted earnings per share |  |                    | 131,982,834 |  |                  |  



Valuation of Derivative Instruments--ASC 815-40
(formerly SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”) requires that embedded
derivative instruments be bifurcated and assessed, along with free-standing derivative instruments such as warrants, on their issuance
date and in accordance with ASC 815-40-15 (formerly EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company’s Own Stock”) to determine whether they should be considered a derivative liability
and measured at their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes
option pricing formula. At June30, 2012, the Company adjusted its derivative liability to its fair value, and reflected the decrease
of $12,366, which represents the gain on change in derivative.

Other Comprehensive Income--The Company’s
other comprehensive income consists of unrealized losses on marketable securities categorized as available-for-sale, that under
GAAP are recorded as an element of shareholders’ equity but are excluded from net income.



Concentrations--The Company has one major customer
that individually exceeded 10% of total revenue and accounted for 95% and 97% for the three and six months ended June 30, 2012,
respectively.



The Company has two major customers that individually
exceeded 10% of the total revenue and accounted for 92% and 89% revenue for the three and six months ended June 30, 2011, respectively.



Three customers who are not major customers accounted
for 100% of total accounts receivable as of June 30, 2011.



| | 3. | Subscription Receivable
| | -- | -----------------------



On July 22, 2005, a subscription for shares equal
to the principal amount of $1,150,000 was entered into, fully amortized with monthly payments of interest only for 18 months starting
August 30, 2005 and then principal and interest payments of $12,197 monthly for an additional 10 years with the interest rate of
5% per annum. The payments on the indebtedness related to the subscription have defaulted. An allowance of 50% was recorded
in year 2007 to reduce the principal amount. During May 2012, the Company settled with the shareholders under a confidential
agreement pursuant to which the Company wrote off the remaining principal balance of $533,408 and mutual releases were exchanged.



On November 15, 2005, another subscription for shares
equal to the principal amount of $525,000 was entered into, fully amortized over thirty years with the interest rate of 5% per
annum.  The subscription is payable in equal monthly payments of $2,818.  The payments on the subscription were
defaulted during the years 2005 to August 2010. Three payments totaling $8,455 were received for the six months ended June 30,
2012. The subscription is collateralized by a Deed of Trust granting rights to a residential property.



| | 4. | Deferred Compensation
| | -- | ---------------------



Deferred compensation consists of accrued but unpaid
salaries of executives, which will be paid as the Company increases its cash, over time, or by obtaining additional financing.  
The balance at June 30, 2012 reflects payments of $100,000.





9







| | 5. | Receivable—Related Party
| | -- | ------------------------



During March 2011, the Company entered into an agreement
with a minority shareholder, who is also a former employee, to loan the individual an amount totaling $66,667. The loan is non-interest
bearing and collateralized by the stock of the Company already owned by such shareholder. The loan is due in full. At June 30,
2012, the balance of the receivable was $66,667.



| | 6. | Restricted Stock Grant
| | -- | ----------------------



On June 1, 2011, the Company granted restricted stock
to an employee. The agreement called for grants of common stock priced at $0.17 per share, which was the closing market price,
equaling to 0.05% of the company outstanding shares or 658,608 shares to be vested equally each on December 1, 2011, 2012 and 2013.
Future expenses related to this grant are expected to be approximately $35,000 per year for 2012 and 2013. For the six months ended
June 30, 2012, stock-based compensation for this grant was $18,660.



The Company granted additional restricted stock to
the same employee during June 2012. The agreement calls for grants of 500,000 shares of common stock priced at $0.05 per share,
which was the closing market price. The shares vest in full on date of grant. Stock-based compensation recognized by the Company
related to this stock grant amounted to $25,000.



The Company adopted the guidance provided by ASC 718
to measure and records the expense over the requisite service period for the entire award. Stock-based compensation recognized
by the Company for the six months ended June 30, 2012 amounted to $43,660.





| | 7. | Warrants and Options for Non-Employees
| | -- | --------------------------------------



On September 9, 2010, the Company granted options
to purchase 800,000 shares of common stock to its investor relations advisor at strike price of $0.14 per share.  These
options vest quarterly over a 12-month period beginning December 9, 2010, and mature in September 2015.  On November 18, 2010,
the agreement was amended to increase the number of options to 830,000 shares at a strike price of $0.1905. The Company uses the
guidance in FASB ASC 505-50 (formerly EITF 96-18) to scope and measure the stock options for non-employees.



Total expense related to the investor relations’
options during the six months ended June 30, 2011 was $29,403.



On June 1, 2011, the Company terminated the contract
with the investor relations advisor. Pursuant to the contract, the Company reserved the right to cancel one-third vesting of the
options to purchase 830,000 shares. On July 13, 2011, the investor relations advisor exercised all vested shares or 622,500 shares
on a cashless basis. The below illustrates the conversion of 622,500 shares on a cashless basis to derive the 227,214 shares issued:



| | a) | Cash exercise price = 622,500 option shares x $0.1905 (exercise price) = $118,586
| | -- | ---------------------------------------------------------------------------------

| | b) | Shares needed to pay for exercise price = $118,586 cash exercise price/ $0.30 (closing market price on 7/13/11) = 395,286 shares
| | -- | --------------------------------------------------------------------------------------------------------------------------------

| | c) | Shares to issue per option exercise = 622,500 shares - 395,286 shares = 227,214 shares
| | -- | --------------------------------------------------------------------------------------



On December 2, 2010, the Company issued warrants to
purchase 350,000 shares of common stock at $0.1905 per share in lieu of the remaining balance of an accrued commission of $125,000
to a consultant. The contract has an anti-dilutive clause, vests immediately and expires in December 2012. During April 2012, the
Company agreed to extend the term of the warrants to December 2017. Accordingly, the Company uses the guidance in ASC 815-40-15
to scope and measure the warrants for non-employees as a derivative liability.



A gain on change in derivative liability was recorded
to reflect a decrease of $6,692 and $12,366 for the three and six months ended June 30, 2012, respectively.





10







The fair value of stock warrants and options at the
date of grant and derivative liability were estimated using the Black-Scholes option-pricing model, based on the following assumptions
for the six months ended June 30, 2012:



| | Risk-free interest rate | 0.51%  
| | ----------------------- | -------
| | Expected life           | 5 years
| | Expected Volatility     | 189.32%
| | Dividend yield          | 00.0%  



| | 8. | Commitments and Contingencies
| | -- | -----------------------------



From time to time the Company may become involved
in various legal proceedings in the normal conduct of its business.



On February 14, 2011, the Company and its subsidiary,
QED Productions, LLC, were named in a lawsuit citing, among other things, trademark infringement. The Company filed a motion to
dismiss the lawsuit on March 15, 2011. On July 9, 2012, Judge Wilson of the U.S. District Court for the Central District of California
dismissed the case from the bench with a written opinion to follow. As of August 8, 2012, the written opinion has not been filed.





11







ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.



FORWARD-LOOKING STATEMENTS

Some of the statements in the Form 10-Q are forward-looking
statements about what may happen in the future. Forward-looking statements include statements regarding our current beliefs, goals,
and expectations about matters such as our expected financial position and operating results, our business strategy, and our financing
plans. The forward-looking statements in the Form 10-Q are not based on historical facts, but rather reflect the current expectations
of our management concerning future results and events. The forward-looking statements generally can be identified by the use of
terms such as “believe,” “expect,” “anticipate,” “intend,” “plan,”
“foresee,” “likely” or other similar words or phrases. Similarly, statements that describe our objectives,
plans or goals are or may be forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause our actual results, performance or achievements to be different from any future results, performance
and achievements expressed or implied by these statements. We cannot guarantee that our forward-looking statements will turn out
to be correct or that our beliefs and goals will not change. Our actual results could be very different from and worse than our
expectations for various reasons. You should review carefully all information, including the discussion of risk factors under “Item
1A: Risk Factors” and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations”
of the Form 10-K for the year ended December 31, 2011. Any forward-looking statements in the Form 10-Q are made only as of the
date hereof and, except as may be required by law, we do not have any obligation to publicly update any forward-looking statements
contained in this Form 10-Q to reflect subsequent events or circumstances.



Overview



The Company is a multimedia development and licensing company
that creates and licenses animated and live-action fantasy and superhero entertainment content and merchandise, leveraging the
creative output and branded image of Stan Lee.  The Company develops originally created franchises for new media such
as mobile, on-line, and videogames, where content is currently in high demand, and for traditional entertainment media such as
feature length films in both live action and animation, DVD, television programming, merchandising and related ancillary markets.
All of the Company’s intellectual property, which may include characters and stories, is vertically integrated in that each
property is developed into as many products as possible, to create a branded franchise to accelerate global identity from the synergy
created across various media.



Currently, the Company plans to focus on:



| | · | creating project concepts, primarily in the form of story treatments,
| | - | ---------------------------------------------------------------------

| | · | identifying select partners willing to participate in, and/or finance,
the development of the Company’s projects,
| | - | -----------------------------------------------------------------------------------------------------------------

| | · | identifying talented and suitable writers to write scripts for the Company’s
projects, and
| | - | ------------------------------------------------------------------------------------------

| | · | negotiating agreements for the production of the projects (i.e.,
the filming of a movie or television series, the creation of the video game, etc.).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------



Projects in Development



The Company begins with story ideas from Stan Lee and presents
the ideas to Disney pursuant to the “first look” contract (SeeTransactions with Affiliates of The
Walt Disney Company), then third parties (such as writers, directors, producers or studios) to develop the project at
the third party’s expense. The Company considers a project to be “in development” once we have packaged the project
and handed the project off to a third party. At that point, the project has left the control of the Company and is in the purview
of the third party. Since the Company does not control the process once it is in the hands of others it is unable to indicate with
much, if any, certainty when that project will be produced or the cost that such other party may incur to produce it.  We
currently have over 20 projects “in development.” A majority of projects “in development” are never produced,
or are produced only after lengthy delays.



We believe that the odds are against the typical project “in
development” being produced because there are a very large number of people who come up with ideas for movies, television
shows, and other forms of entertainment, but only a limited number of entities with the financial and personnel resources required
to produce and distribute these projects. However, we believe that several factors improve the odds of the Company’s projects
being produced and, if produced, being successful.



| | · | First, Stan Lee’s has co-created a large number of very successful
characters and projects.
| | - | -------------------------------------------------------------------------------------------

| | · | Second, through Stan Lee, we have established relationships with a
variety of well-known writers, directors and producers.
| | - | --------------------------------------------------------------------------------------------------------------------------

| | · | Third, Stan Lee’s natural inclination and focus are on superheroes,
action characters and other characters that have potential to become “franchises” (i.e. that lend themselves to sequels,
to licensing to other media, to merchandising and to other ancillary opportunities).
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





12







Recent Events



During June 2011, the Company sold film rights to a third party
for a superhero story targeting the Asian market. The script for the film was completed during 2012 by an A-list writer. During
the Shanghai Film Festival during June 2012, it was announced by the third party that the project has a production finance commitment
of up to the lesser of 40% and $40 million from another party. The project will continue to be developed by the third party affiliations.
The expected revenue to the Company, if any, related to this project cannot be determined at this time.



The Company recently associated with other third parties to
create digital worlds to develop our media platform. The associations will expand our storytelling into the digital realm more
quickly and effectively to reach a global audience. An outlet for digital content is on the YouTube Channel entitled Stan Lee’s
World of Heroes.The channel was launched during July 2012.The expected revenue to the Company, if any, related to
this project cannot be determined at this time.



The Company has formed an affiliation with a comic book convention
company to headline Stan Lee’s name in its convention. The comic book convention company recently formed a partnership with
a trade show exhibitor to manage and operate the show scheduled for September 15, 2012 to be held in Los Angeles, with possible
other locations worldwide in the year 2013. The expected revenue to the Company, if any, related to this project cannot be determined
at this time.



The Company’s has several comic books published monthly
in Japan and the United States in associations with third parties. These comic books generate royalties on a small scale, but the
goal is to market and license the intellectual properties related to these comic book characters into branded franchises in other
media forms i.e., full length feature films, television, video games, mobile applications and/or merchandising. The expected revenue
to the Company, if any, related to this project cannot be determined at this time.



Transactions with Affiliates of The Walt Disney Company



Silver Creek Pictures, Inc. (“Silver Creek”), an
affiliate of The Walt Disney Company (“Disney”), entered into an agreement with the Company in 2006 and subsequently
amended (the “Silver Creek Agreement”) pursuant to which, among other things, the Company provides Silver Creek with
a “first look” at all of the Company’s creative intellectual property and the right to acquire any such properties,
in Silver Creek’s discretion under prescribed terms, and Silver Creek compensates the Company for all properties that are
developed by Silver Creek into revenue producing works pursuant to complex terms, typical in the film and media industry.



The Silver Creek Agreement provides for Silver Creek to pay
the Company overhead allowance amounts equal to $700,000 per annum from 2010 through 2014, and an additional $550,000 per annum
advance against certain future payments due from Silver Creek.  Silver Creek is entitled to recoup the $550,000 annual
payments from proceeds of Company projects.



In addition to the foregoing $1,250,000 in annual payments,
Silver Creek has agreed to pay us $1,250,000 in annual consideration for our lending Stan Lee’s services to consult on the
exploitation of the assets of Marvel Entertainment, which was acquired by Disney in late 2009.  The payments of $1,250,000
per year relating to Stan Lee’s consulting services cease in the event of, and from the time of, Stan Lee's inability to
perform such services due to disability or other incapacitation.



Furthermore, any properties that Silver Creek rejects or accepts
and subsequently abandons may be offered by the Company elsewhere subject to participation by Silver Creek.  Depending
on the nature of the project so offered to a third party and the time when such project was originally offered to Silver Creek,
Silver Creek is entitled to either up to $100,000 per project, or the assignment of 50% or 25% of the Company’s compensation
from the third-party producer.



At present, in a typical deal for feature films, we believe
we would receive an executive producer fee ranging between $450,000 and $750,000 per feature film project produced, plus a share
of potential “back-end” revenues or profits, as well as a share of licensing and merchandising revenues.  Although
an amount in this range is payable to the Company by Silver Creek for any feature films produced, such amount would be subject
to offsets to permit Silver Creek to recoup a portion of the advances and guaranteed payments that it is and has been paying the
Company on a monthly basis.





13







The Silver Creek Agreement, including all amendments, are exhibits
to the Form 10 filed with the Securities and Exchange Commission on December 10, 2010 and the foregoing summary is subject to the
actual terms provided therein.



Additionally, Catalyst Investments, LLC (“Catalyst Investments”),
another Disney affiliate, purchased on December 31, 2009 ten percent of the then-outstanding shares of common stock of the Company
for $2,500,000 (the “Catalyst Investment”).



Critical Accounting Policies and Estimates



Our Management’s Discussion and Analysis of Financial
Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.



On an on-going basis, management evaluates its estimates and
judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation.
Management bases its estimates and judgments on historical experience 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. The most significant accounting estimates inherent in the preparation of our financial statements include estimates
as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.



We have identified the most significant areas of estimation
and assumptions as being:



| | · | estimation of the allowance for doubtful accounts;
| | - | --------------------------------------------------

| | · | estimation on stock-based compensation;
| | - | ---------------------------------------

| | · | estimation of derivatives liabilities; and
| | - | ------------------------------------------

| | · | estimation of the net deferred income tax asset valuation allowance.
| | - | --------------------------------------------------------------------



Results of Operations



We believe that, due to the complex nature and long term cycle
of our business operations, period-to-period comparisons of our operating results are not necessarily meaningful and should not
be relied on as an indication of future performance. However, it is still important that you review the audited financial statements
filed on the Form 10-K for the year ended December 31, 2011 and the related notes in addition to thoroughly reading our current
plan of operations.



For Three Months Ended June 30, 2012
and 2011



The Company’s revenues for the three months ended June
30, 2012 decreased by $575,526 or 53.4% compared to the three months ended June 30, 2011.  Prior year revenue consists
primarily of the revenue from a third party of $500,000 during the three months ended June 30, 2011 for film rights.



For the three months ended June 30, 2012, net loss was $796,413
compared to a net income of $478,504 for the three months ended June 30, 2011, primarily due to the write off of $533,408 from
the remaining principal balance of subscription receivable.



Total operating costs and expenses for the three months ended
June 30, 2012 increased by $129,674 compared to the three months ended June 30, 2012. The increase in total general and administrative
expenses was primarily attributable to and was also offset by the following:



| | · | Salaries and related employee benefits decreased by $43,891 primarily
due to switching to a less expensive health insurance plan;
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| | · | Stock-based compensation increased by $28, 110 due to restricted stock
grant to an employee; and
| | - | ------------------------------------------------------------------------------------------------



| | · | Professional expenses increased by $148,941 in legal expenses related
to indemnification payments and resolutions of certain legal disputes.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------





14







For Six Months Ended June 30, 2012 and
2011



The Company’s revenues for the six months ended June 30,
2012 decreased by $642,318 or 38.5% compared to the six months ended June 30, 2011. Prior year revenue consists primarily
of the revenue from a third party of $500,000 during the six months ended June 30, 2011 for film rights.



For the six months ended June 30, 2012, net loss was $1,081,662
compared to net income of $284,991 for the six months ended June 30, 2011, primarily due to the write off of $533,408 from the
remaining principal balance of subscription receivable.



Total operating costs and expenses for the six months ended
June 30, 2012 increased by $128,030 compared to the six months ended June 30, 2011. The increase in total general and administrative
expenses was primarily attributable to and was also offset by the following:



| | · | Salaries and related employee benefits decreased by $103,145 primarily
due to switching to a less expensive health insurance plan;
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| | · | Stock-based compensation increased by $37, 441 due to restricted stock
grant to an employee;
| | - | --------------------------------------------------------------------------------------------



| | · | Promotional expense decreased by $55,676 compared to the six months
ended June 30, 2011 from cancellation of investor relations contract; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



| | · | Professional expenses increased by $243,156 in legal expenses related
to indemnification payments and resolutions of certain legal disputes.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



Liquidity and Capital Resources



Our current liquidity and capital resources are provided principally
through our current agreement with Silver Creek Pictures. We have a deficiency in working capital of $2,402,703 and $1,828,759
as of June 30, 2012 and December 31, 2011, respectively. That deficiency results from the classification as current liabilities
of cumulative advances received from Silver Creek which were $2,821,667 and $2,546,667, as of June 30, 2012 and December 31, 2011
respectively. These amounts are recoupable by Silver Creek solely from any fixed and contingent compensation related to future
developments, including box office bonuses and merchandising royalties. The Company has reclassified part of Deferred Compensation
as long-term liabilities.



If Silver Creek stops paying installments of the $1,250,000
per annum for Stan Lee’s consulting services paid to the Company as part of the $2,500,000 obligation per annum as a result
of any future death or disability of Stan Lee, the Company believes that revenues from various projects that it has “in development”
with other parties or that may shortly go into development with other parties will make up all or a portion of the lost revenue.
To the extent that it does not, and to the extent that the Company is unable to raise funds from investments to cover any shortfall,
the Company will have to reduce its expenses, as it has done in the past, by such approaches as deferring portions of its executive
officer’s salaries and reducing staff.



Deferred compensations executives totaled $2,027,917 and $2,127,917
as of June 30, 2012 and December 31, 2011, respectively. For the six months ended June 30, 2012, the Company paid down deferred
compensation totaling $100,000.



Off Balance Sheet Arrangements



We are not party to any material off-balance sheet financing
arrangements.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK



None





15







ITEM 4. CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



Our management is responsible for establishing and maintaining
a system of disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Exchange Act) that is designed to ensure
that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time specified in the Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer
in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including
its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions,
as appropriate to allow timely decisions regarding required disclosure.



As required by Rule 13a-15 under the Securities Exchange Act
of 1934, as of the end of the period covered by this report, we have carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures. Under the direction of our Chief Executive Officer, we evaluated our disclosure
controls and procedures and internal control over financial reporting and concluded that our disclosure controls and procedures
were not effective as of June 30, 2012.We have disclosed to our auditors and the Board of Directors such deficiencies.There were no changes in the Company’s internal controls over financial reporting during the most recently completed
fiscal quarter that have materially affected or are reasonable likely to materially affect the Company’s internal control
over financial reporting.



PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



From time to time the Company may become involved in various
legal proceedings in the normal conduct of its business.



Stan Lee Media, Inc. and Related Litigation



Stan Lee Media, Inc. (“SLM”) was a publicly-traded
entity listed on the NASDAQ during 1999.  SLM operated as a typical dot com company during the dot com bubble, in that
it created and developed new properties and franchises for the internet, in this case under the Stan Lee signature, but without
any sustainable revenue source other than new debt or equity financings.  While Stan Lee was the Chairman of the Board
of Directors and Chief Creative Officer of SLM and Gill Champion was the Chief Operating Officer of SLM, the President and Chief
Executive Officer of SLM was a party who is unrelated to the Company. Stan Lee terminated his employment agreement with SLM in
January 2001 because, among other reasons, SLM had ceased paying him thereunder.



SLM filed for bankruptcy protection in February 2001 and ceased
operations during July 2001. SLM does not have any working relationship, association or dealings with the Company, other than the
Company having acquired the right to distribute some of SLM’s intellectual property, subject to an agreement to pay SLM a
royalty out of any revenues received from such intellectual property.  This SLM intellectual property has only produced
approximately $2,000 of revenues from December 2001 to December 2009 and the Company does not consider it material to its Company’s
business.  SLM’s bankruptcy petition was eventually dismissed as a result of SLM’s failure to pay required
court fees and its corporate charter was revoked by its state of incorporation, Colorado, for failure to pay franchise taxes.



During 2006, the Company learned
that certain individuals, purporting to be acting on behalf of SLM, were claiming that SLM owned various intellectual properties,
including the SLM intellectual property which SLM had assigned to the Company.  To prevent confusion, in January 2007,
the Company, along with QED Productions LLC, a subsidiary of the Company (“QED”), and Stan Lee filed a lawsuit in the
United States District Court for the Central District of California entitled QED Productions LLC, et al v. Nesfield, et al (the
“QED Suit”) .  This suit was filed against three individuals who purported to be acting on behalf of
SLM, alleging claims for copyright infringement, violation of the Lanham Act, cyber squatting, interference with contractual relations
and prospective business advantage, unfair business practices and seeking a declaration regarding certain rights to intellectual
property.  After denying motions for summary judgment by both parties, in January 2009, the court stayed this action
pending resolution of a suit in the state courts of Colorado, regarding the disputed election of a board of directors of SLM, which
could determine whether the defendants legally represent SLM.



This Colorado action, captioned P.F.P. Family Holdings v.
Stan Lee Media Inc. (the “PFP Suit”) was resolved in 2010 with the determination that certain individuals claiming
to be the directors of SLM were validly elected.





16







On July 9, 2007, SLM filed a lawsuit in the United States
District Court for the Central District of California against Stan Lee, QED and the Company entitled Stan Lee Media, Inc.
v. Lee, et al. (the “SLM Suit”).   In this suit, SLM sought declaratory relief and asserted claims
for misappropriation of corporate opportunity, breach of contract, civil conspiracy, an accounting for profit, violation of
the Lanham Act, copyright infringement, cyber squatting, and unfair business practices naming various defendants, including
the Company.  Specifically, SLM petitioned the court for an order declaring that SLM is the rightful owner of
certain intellectual property and, as such, is the only entity that can use and benefit from such property.  As in
the QED Suit, the court stayed the case pending the outcome of the PFP Suit. In January 2011, the U.S. District Court for the
Central District of California directed that SLM file a Consolidated Complaint in that Court, consolidating all the
litigation pending in that Court. On February 14, 2011, SLM filed its Consolidated Complaint seeking substantially the same
relief sought in the initial complaint described above and the complaints filed and dismissed in New York as described below.
On March 15, 2011, the Company filed a motion to dismiss the newest complaint on the grounds that the claims are barred by res
judicata and statutes of limitation, among other grounds, based in part on the New York decisions described below. In the
alternative, the Company’s motion requested that the Court stay the proceedings pending resolution of SLM’s
appeal of Judge Sweet’s decision to the U.S. Court of Appeals for the Second Circuit, described below. On May 6, 2011,
the Court granted the Company’s alternative motion and stayed the action proceedings. On July 9, 2012, Judge Wilson
dismissed the case from the bench with a written opinion to follow. As of August 8, 2012, the written opinion has not been
filed.



In 2009 a $750,000,000 lawsuit was filed on behalf of SLM against
Marvel Entertainment, the Company and other defendants in an action entitled Abadin v. Marvel Entertainment, Inc., et al.
, in the U.S. District Court, Southern District of New York (the “Abadin Suit”), claiming, among other things, that
SLM owned various intellectual property including the intellectual property at issue in the QED Suit and the SLM Suit, and including
all the Marvel characters and the Marvel name.  The various causes of action alleged by plaintiffs in this case were
all dismissed pursuant to an Order of the Court filed on March 31, 2010. The Abadin Court noted first that “the heart of
the alleged wrongdoing is the transfer to Marvel by Stan Lee of what Stan Lee had previously conveyed to and thus belonged to SLMI.  That
occurred in 1998 but Abadin and his co-plaintiff did not acquire their SLMI shares until 1999, more than a year after the purported
illegal conduct. . . . [A]ccordingly they lack . . . standing.”  The Court then noted that the Plaintiffs
were included in a prior class action that was settled.  Therefore the Court found that “Plaintiffs’ claims
against Lee and Lieberman . . . are barred under . . . the Settlement”.  The Court then noted that with regard
to Plaintiffs’ Count I, a copyright claim, that “California law limits personal service contracts to 7 years. . . . .
Lee’s obligations were statutorily terminated in 2005.”  With respect to Plaintiffs’ Count II, Lanham
Act Claims against Lee and Marvel, the Court held that “The pleading of Lanham Act violation is inadequate” and that
any claim would be time barred since any alleged violation would have “occurred no later than October or November, 1998”
and that “The Statute of Limitation is six years”. As to Plaintiffs’ Count III, Breach of Contract, the Court
held “There is absolutely no doubt that Lee terminated the 1998 agreement in writing in 2001.  The statute of limitations
began running at that time.  It is now expired”.  As to Plaintiffs’ Count IV, Tortious Interference
with Contract, the Court held that “Plaintiffs’ claims . . . are insufficient.” The Court also held that “the
three year statute of limitations . . . expired in 2001.” The Court fount Plaintiffs’ Count V, Breach of Fiduciary
Duty to be “redundant to Plaintiffs other claims” which he had dismissed; that the “statute of limitations . . . is
3 years” which had passed; and that this count was “internally inconsistent with other allegations”.  The
Court found that as to Plaintiffs Count VI, Aiding and Abetting Breach of Fiduciary Duty, “with respect to Lee, . . there
is not a sufficient plausible allegation” and that with regard Lieberman “He owed no fiduciary duty to SLMI”.  And
with respect to Plaintiff’s last Counts, Count VII and VIII, Constructive Trust and Accounting, that these are “remedies
for wrongs; and not wrongs themselves.  Since Counts I-VI are dismissed, there is no basis for [such relief].  Further,
substantially all of the alleged wrongs are barred by the statute of limitations.”  The plaintiffs in the Abadin
case filed an appeal of the dismissal of its case, but failed to perfect the appeal, which as a result was dismissed.  Therefore,
the dismissal of this case is now final and binding.



SLM sought to re-file almost identical claims to intellectual
property created or co-created by Stan Lee by moving to become a party in another federal action in New York on July 26, 2010.
On February 4, 2011, U. S. District Judge Robert W. Sweet of the Southern District of New York denied SLM’s application to
file its proposed motion. Among numerous other reasons for denying SLM’s complaint, the court held that SLM’s “proposed
Amended Complaint is barred” because SLM claims had already been dismissed based on the statute of limitations and other
grounds, and that determination barred SLM from asserting the same claims in another action. SLM appealed Judge Sweet’s decision
to the United States Court of Appeals for the Second Circuit. On March 21, 2012, the Court of Appeals for the Second Circuit found
SLM’s arguments to be without merit and affirmed the decision by Judge Sweet.



ITEM 1A—RISK FACTORS



There were no material changes from the risk factors set forth
in the “Risk Factors” section of our Form 10-K filed with the SEC on March 23, 2012. However, as reported in its Form
8-K, dated May 4, 2012, Arthur Lieberman, the Company’s Chief Operating Officer, Chief Legal Officer and a director, passed
away.





17







ITEM 2—UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS



On July 13, 2011, the Company issued 227,214 shares of common
stock to a former investor relations advisor upon conversion of its options to purchase common stock. The Company received no cash
proceeds, but cancelled options to purchase 395,286 shares of common stock. Refer to Note 7in the notes to consolidated
unaudited financial statements for further details therein. The issuance of the shares was made pursuant to Section 4(2) of Securities
Act of 1933.





Item 5—Other
Information



Effective on August 13, 2012, pursuant to Consent in Lieu of
a Shareholders Meeting executed on June 11, 2012, the following actions were taken:

| | 1) | The ratification of the amendment of the Company’s Bylaws to provide that:
| | -- | --------------------------------------------------------------------------

| | · | annual meetings shall be held at such dates and times as set by the Board of Directors, instead of on a fixed date;
| | - | -------------------------------------------------------------------------------------------------------------------

| | · | the minimum number of directors of the Company be one (1) director instead of three (3) directors, and
| | - | ------------------------------------------------------------------------------------------------------

| | · | the requirement that all amendments to the By-Laws be ratified by the shareholders at the next meeting of shareholders occurring
after such amendment is eliminated.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | The election of the two currently serving directors for the ensuing year.
| | -- | -------------------------------------------------------------------------

| | 3) | The ratification and approval of the appointment of Rose Snyder Jacobs, LLP as the Company’s independent registered accounting
firm for the year ending December 31, 2012.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 6—EXHIBITS



|Exhibit No. |  | Description                                                         
|----------- |  | --------------------------------------------------------------------
|            |  |                                                                     
|10.21       |  | Agreement dated June 11, 2012 between POW! Entertainment and Bick Le
|31.1        |  | Certification by Chief Executive Officer                            
|31.2        |  | Certification by Chief Financial Officer                            
|32.1        |  | Section 1350 Certification by Principal Executive Officer           
|32.2        |  | Section 1350 Certification by Principal Financial Officer           





18







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.



|                |  | POW! Entertainment, Inc.
|--------------- |  | ------------------------
|                |  |                         
|August 14, 2012 |  | By:                     
|                |  |                         
|                |  |                         
|                |  |                         
|                |  |                         
|                |  |                         
|                |  |                         
|August 14, 2012 |  | By:                     
|                |  |                         
|                |  |                         
|                |  |                         





19