**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **Washington,
D.C. 20549**
  
 **Form
10-KSB**
 
 
  **ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**
 **SECURITIES
EXCHANGE ACT OF 1934**
 
 **For
the fiscal year ended December 31, 2004**
 
 **Commission
File Number 000-50533**
 
 
 
 **DWANGO
NORTH AMERICA CORP.**
 **(Exact
name of small business issuer in its charter)**
 
 
 
 
 **Nevada**
    **84-1407365****(State
      or other jurisdiction of**
      **incorporation
      or organization)**
    **(I.R.S.
      Employer**
      **Identification
      Number)**
 
 **2211
      Elliott, Suite 601, Seattle, WA**
    **98121****(Address
      of principal executive offices)**
    **(Zip
      Code)**
 
 **Registrant’s
telephone number, including area code: (206) 832-0600**
 
 
  **Securities
registered pursuant to Section 12(b) of the Act: None**
 
 **Securities
registered pursuant to Section 12(g) of the Act:**
 
 **Title
      of Each Class**
    **Outstanding
      shares as of March 4, 2005****Common
      Stock, par value $.001 per share**
    **8,625,871**
 
 
 
 Check
whether the issuer (1) has filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act 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 o
 
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. x
 
 State
issuer’s revenues for its most recent fiscal year: $1,645,000
  As of
March 4, 2005 the aggregate market value of the voting and non-voting common
equity held by non affiliates was approximately $11,018,000.
 
  
 
 **PART
I**
 
 Throughout
this annual report on Form 10-KSB, the terms “we,” “us,” “our,” and “our
company” refer to Dwango North America Corp. and, unless the context indicates
otherwise, our wholly-owned subsidiaries, Dwango North America, Inc. and OTA
Acquisition Corp., on a consolidated basis.
 
 INTRODUCTORY
COMMENT - FORWARD-LOOKING STATEMENTS
 
 Statements
contained herein include “forward-looking statements”. Forward-looking
statements involve known and unknown risks, uncertainties and other factors
which could cause the actual results, performance and achievements, whether
expressed or implied by such forward-looking statements, not to occur or be
realized. Such forward-looking statements generally are based upon our best
estimates of future results, performance or achievement, based upon current
conditions and the most recent results of operations. Forward-looking statements
may be identified by the use of forward-looking terminology such as “may,”
“expect,” “believe,” “estimate,” “anticipate,” “continue,” or similar terms,
variations of such terms or the negative of such terms. Potential risks and
uncertainties include, among other things, such factors as:
 
 •  the
market acceptance and amount of sales of our products,
 
 •  our
expansion strategy,
 
 •  the
competitive environment within the wireless industry,
 
 •  our
ability to raise additional capital,
 
 •  our
ability to attract and retain qualified personnel, and
 
 •  the other
factors and information disclosed and discussed under “Risk
Factors”.
 
 Investors
should carefully consider such risks, uncertainties and other information,
disclosures and discussions which contain cautionary statements identifying
important factors that could cause actual results to differ materially from
those provided in the forward-looking statements. We undertake no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
 
 **Item
1. Description of Business**
 
 **General**
 
 Our
company was incorporated in Nevada on May 16, 1997 under the name of Kafco Corp.
On April 11, 2001, we changed our name to Woodland Hatchery, Inc. On September
29, 2003, we acquired Dwango North America, Inc. (formerly Dwango USA, Inc.),
which company was incorporated in Texas on November 20, 2000, by means of an
exchange offer. Upon the closing of such exchange offer, Dwango North America,
Inc. became a majority-owned subsidiary of our company. It has since become a
wholly-owned subsidiary after the final shareholder of Dwango North America,
Inc. elected to convert its securities into securities of our company. In that
the security holders of Dwango North America, Inc. acquired a majority of the
voting securities of our company, Dwango North America, Inc. was deemed to be
the accounting acquiror. Unless the context otherwise requires, references
herein to our company for periods prior to September 29, 2003 are to Dwango
North America, Inc. On February 4, 2004, we acquired Over-the-Air Wireless, Inc.
by means of a merger of such company into OTA Acquisition Corp., a wholly owned
subsidiary of ours formed for such purpose.
 
 Our
principal executive office is located at, 2211 Elliott Avenue, Suite 601,
Seattle, Washington 98121. Our telephone number at such address is (206)
832-0600.
  We are a
mobile media company whose products include ringtones, games, images and
messaging services for mobile devices. We currently sell our products in North
America through distribution agreements with major wireless operators, such as
Cingular and Verizon. Most of our products are sold to consumers via our branded
services with branding from major media companies such as Rolling Stone Magazine
and ESPN Bassmaster. We call our strategy of delivering mobile content under
media brands, the mobile channel strategy. The mobile channel strategy allows
for the distribution of branded services, using content such as ringtones, games
and images, with brands for a specific lifestyle category. For example, our
Rolling Stone brand focuses on the music enthusiast lifestyle, and as such the
products merchandised under the Rolling Stone brand are largely music related.
We publish a mix of content owned by licensed brand owners and original content,
with a focus on original content. We create content for use in the North
American wireless market, through internal development, outsourced development
and strategic alliances. Our research and development expenses were $2,587,000
in 2004 and $181,000 in 2003. We have been pursuing the branded channel strategy
since our June 2004 launch of Rolling Stone related content.
 1
 
 During
2004, we signed agreements and launched branded service applications with
Rolling Stone and ESPN. In the latter part of 2004, we signed agreements with
Playboy.com, Napster LLC, and Beliefnet and we plan to launch branded service
applications for those brands as early as the second quarter 2005. Branded
services we provide for a particular brand may vary, but they will be some
combination of ringtones, images, games, messaging and other content as
cellphone technology capabilities become more advanced. Our strategy is to sign
additional media brands in the future. We believe the consumer recognition of
the brands and the quality content provided are a competitive advantage in the
market.
 
 We have
entered into agreements with several United States wireless carriers. In March
2005, we entered into agreements with two Canadian wireless carriers.
Relationships are also being pursued with other major wireless carriers in the
United States, Canada, Latin America and South America.
 
 We have
exclusive licensing agreements with Dwango Co., Ltd., whom we sometimes refer to
as Dwango Japan, a developer of wireless entertainment and networking technology
in Japan. These agreements permit us to use and exploit Dwango Japan’s wireless
intellectual property (including software, technology, content, and trademarks)
in the United States, Canada and Mexico, which we refer to as North America.
Dwango Japan currently owns 542,624 shares of our common stock, representing
6.6% of our outstanding shares. We are now focused on our branded channel
strategy and we do not anticipate using any further content from Dwango Japan
and we expect, over time, to cease using content that was obtained from Dwango
Japan. This content consists of various games which, since the launch of our
Rolling Stone and ESPN branded services, is a small proportion of our overall
revenue.
 
 On
February 4, 2004, we acquired Over-the-Air Wireless, Inc., a company engaged in
the wireless ringtone business. The acquisition was in the form of a merger of
Over-the-Air Wireless into OTA Acquisition Corp., a wholly-owned subsidiary of
ours that we formed for this transaction. From Over-the-Air Wireless, we
acquired key employees who are leading our company today as well as software
which was integral to our development.
 
 **Products
and Services**
 
 **Branded
Services**
 
 In
January 2004, we entered into an agreement with ESPN pursuant to which we have
launched a game under the Bassmaster mobile name on Nextel, Cingular, Verizon,
Alltel and Boost Mobile. We expect to release this game on additional carriers
in 2005. The first Bassmaster mobile game, Legendary Lunkers, features the Cast
‘n Wait system, which emulates real fishing by surprising the player with a call
back when a fish is biting.
 
 In March
2004, we entered into an agreement with Real Networks and RollingStone Magazine
(Wenner Media) to provide a branded service for “RollingStone Ringtones,”
“RollingStone Sound Clips” and “RollingStone Games”. The Rolling Stone Ringtones
service, which also offers album reviews, searchable by artist and rating, was
launched in June 2004 through AT&T Wireless (now known as Cingular mMode),
Cingular Wireless and Nextel, pursuant to an agreement with Real Networks and
Rolling Stone Magazine. Since the initial launch, we have added these services
to Boost Mobile, T-Mobile and Alltel. These products and services using our
library of ringtones are promoted through the magazine, web and wireless
carriers. As per the agreement, we paid a $750,000 advance royalty fee and are
committed to quarterly minimum royalty payments of $250,000 beginning September
2004, for the five subsequent quarters thereafter. In addition, we agreed to
advertise with Rolling Stone for a minimum of $125,000 per quarter for the
duration of the agreement.
 
 In
September 2004, we entered into an agreement with Beliefnet, Inc., a multi-faith
media company and online community, to bring customers mobile media content
under the Beliefnet Mobile brand. Under the Beliefnet Mobile brand, we expect to
provide premium polyphonic and audio ringtones, alert tones, images,
spiritual-themed mobile games, and subscription-based content from a variety of
faiths. Beliefnet Mobile will feature a ringtone service enabling consumers to
download ringtones of the latest religious and spiritual-themed musical hits
including rock, hip-hop, classical and gospel to their mobile phones. The
agreement duration is one year from the time of the launch of the service. We
have agreed to minimum royalty payments of $162,500 over the contract term.
Additionally, we have agreed to advertise through Beliefnet, a minimum of
$150,000 over the one year term of the contract. The first Beliefnet Mobile
application, Spiritual Trivia, a religious trivia game was released in the first
quarter of 2005. We expect additional components of the Beliefnet channel to
launch later in 2005.
 
 In
October 2004, we entered into an agreement with Flow C.M.M. Inc., a prominent
European gaming company that focuses on providing “girl power” entertainment for
teenage girls, to distribute mobile media content in the North American
marketplace under the MiniFizz brand. Not only will we port and distribute the
MiniFizz branded games, but we also expect to provide premium polyphonic and
audio ringtones and images. The agreement duration is three years from the
initial launch of the service. We anticipate launching the first MiniFizz
application as early as the second quarter of 2005.
   2
 
 In
November 2004, we entered into an agreement with Napster, LLC to distribute
mobile media content under the Napster brand. Our first launch is expected to
include polyphonic ringtones, audiotones, and images; the images are provided by
Napster and prominently feature the Napster Kitty. We are required to pay a
brand licensing fee of $360,000 over the term of the contract. Additionally, we
agreed to pay up to $200,000 within the term of the contract to sponsor certain
events promoting the Napster brand subject to certain conditions. The agreement
duration is one year. We anticipate launching the first Napster application in
second quarter of 2005.
 
 In
November, 2004, we entered into an agreement with Playboy.com, Inc. to
distribute mobile media content under the Playboy brand. Our first launch is
expected in the second quarter of 2005 and is anticipated to include polyphonic
ringtones, audiotones, and images; the images are provided by Playboy and the
first launch primarily features non-nude images of women along with other
lifestyle images. Future phases are expected to include expansion outside of the
United States, sale of video clips, and streaming video, in addition to game
development expected to launch as early as the second quarter or 2005. The term
of the agreement is three years. We have delivered a revolving irrevocable
stand-by letter of credit in the amount of $125,000 in favor of Playboy which
Playboy has the right to draw upon if we fail to make any payment when due under
the agreement. We have agreed to pay minimum royalties of $250,000 during the
first year of the contract, of which $125,000 has been paid, $250,000 during the
second year of the contract and $350,000 during the third year of the contract.
Additionally, we have agreed to spend a minimum of $100,000 each contract year
to market and promote the content to be distributed by us pursuant to the
agreement.
 
 **Ringtones**
 We hire
professional musicians who create unique, high quality ringtones. Our catalog
consists of approximately 3,000 polyphonic ringtones, over 350 Master Tones and
over 200 custom audiotones, with ongoing production and licensing of more than
200 new ringtones every month. Our polyphonic and audio ringtone catalog covers
every major musical genre from Hip Hop to Rock/Pop, Country to Classical, and
R&B to World Music. We also offer sound clips featuring voice greetings,
sound effects, and song clips from popular artists. We currently hold
non-exclusive licenses from Sony, EMI, Warner/Chappel Hill, ASCAP, Harry Fox,
BMI, Universal and BMG as well as several independent labels for the
distribution of ringtones. We are in discussion with the major record labels for
the distribution of master tones as well.
 Distribution
of ringtones occurs through our proprietary delivery platform which allows users
to browse, search, sample and download from our extensive content catalog. The
catalog is easily accessible, sorted by title, artist and category (genre).
Ringtone downloads are initiated either through our branded web portals or
through a mobile handset using a WAP browser or downloadable BREW ringtone
client.
 
 **Games**
 
 The games
we distribute or will distribute fall into one of several categories:
stand-alone games, turn-based network games, massively multiplayer games,
browser-based network games, and SMS or MMS games. Stand-alone games are
one-player games. Turn-based network games are games where the player competes
against other players on the network and the game involves taking turns by the
players. Massively multiplayer games are games where the player may compete with
thousands of other players with an ongoing play experience and evolving story
line. Browser-based network games are multiplayer games where the players each
play simultaneously, and game play is performed through the use of the phone’s
browser, rather than an application running on the phone itself. SMS or MMS
games are played by sending short “messages” in response to prompts from the
“game.” SMS or Short Message Service is available on digital GSM networks and
allows text messages of up to 160 characters to be sent and received via the
network operator's message center to or from capable mobile phones or from the
Internet. MMS or Multimedia Messaging Service is the ability to send messages
comprising a combination of text, sounds, images and video to MMS capable
handsets.
 
 The
following is a brief description of the games currently being distributed by us
that we have developed internally:
 
 Bassmaster
Legendary Lunkers is a bass fishing simulation game where players can either
fish in real-time or more completely simulate the fishing experience by
employing the “Cast ‘n Wait” system where, after the player casts his line, the
application shuts itself down and will call the player back to continue play
when a “bite” is received. The networked version of the game also features
actual weather pulled from the National Weather Service, with accompanying art,
and global high score tracking where players can simulate actual Bassmaster
tournaments by posting their highest weight totals during the tournament
period.
 
 Rolling
Stone 20 Questions is a trivia game featuring questions geared towards fans of
music and pop culture. Over 600 questions are available for download every
month.
   3
 
 Beliefnet
Spiritual Trivia is a trivia game featuring religious-based
questions.
 
 AquaX is
a stand-alone game where players race through the water doing barrel rolls and
double flips on a personal watercraft. Players earn points for speed, difficulty
of tricks or a combination of both in eighteen challenges set in six different
locations.
 
 The
following is a brief description of the games currently being distributed that
have been developed by third parties:
 
 STAR
EXCEEDTM is a standalone top down vertical scrolling shooting game. Players shoot
enemy craft by using rapid-fire lasers or homing missiles. The game has a total
of five stages, each getting progressively more difficult. A follow-up game to
STAR EXCEEDTM, Star Diversion, is also a standalone top down vertical scrolling
shooting game and is available for use on more robust handsets. The game play is
similar to that of STAR EXCEEDTM.
 
 Dwango
RacingTM is a standalone top down vertical scrolling racing game. The player
competes against one of eight rival cars to win the race and post the fastest
lap time. The player can choose which car to use for the race, each of which has
different handling, acceleration, top speed and grip. If the player wins the
race, he or she is advanced to the next stage. There are a total of eight stages
in the game.
 
 
 Black
Jack, Roulette and Slots are stand-alone games. They are based on the classic
casino games. Players can accumulate and lose credits just like in the real
games. Best Backgammon is an authentic replication of the classic game of
backgammon. Game play allows for single or two player play. Burnrate is a puzzle
game where the player must connect the fire hoses within a 2 minute time limit
to save each burning building.
 
 
 In
addition to the games already released, we have two games in various stages of
development and both are being developed by us internally.
 
 **Ringbacks**
 
 Our
entire catalog of high quality polyphonic and audio ringtones will be available
as caller ringback tones through Dwango’s relationship with Preferred Voice.
Ringbacks are MP3-quality songs that callers hear, in lieu of a buzzing tone,
while they wait for the recipient to pick up the phone. Customers can purchase
multiple ringbacks and assign them to different callers. We expect Preferred
Voice to launch this product as early as the second quarter of
2005.
 
 **Images**
 
 **** We now
offer images for download. Images can be downloaded to mobile phones to be used
as wallpapers, screensavers, calling identifier icons, and picture messages,
which can be sent to friends along with text. We have an extensive content
library, augmented through relationships with image providers such as Corbis and
can offer the perfect images for any of our diverse brand partners. We support a
large and growing number of phone types and support a large percentage of the
different screen sizes.
 
 **Distribution**
 
 In 2002,
we entered into an agreement with AT&T Wireless (now known as Cingular
mMode) which provides the terms and conditions under which our applications may
be made available to AT&T Wireless subscribers. We are currently selling our
Rolling Stone Ringtone service on mMode.
 
 In 2002,
we executed an agreement to become a certified BREW developer with Qualcomm.
This agreement enables us to create and publish content on the BREW platform.
BREW is the platform being used by Verizon, USCellular and Alltel for its data
applications, including entertainment offerings. In October of 2002, we executed
a BREW application license agreement with Verizon. The agreement gives us access
to post for distribution BREW software applications to the online BREW catalog
maintained by Qualcomm. These combined agreements give us a channel to publish
content on Verizon’s, Alltel’s, and USCellular’s networks. Our game, Bassmaster
Legendary Lunkers is released with Verizon’s Get-It-Now deck. Get-It-Now is
Verizon’s entertainment service and is available on BREW handsets. Alltel has
released both Rolling Stone Ringtones and BassMaster.
 
 During
the second and third quarter of 2004, we launched our Rolling Stone Ringtone
service and eight of our games, STAR EXCEEDTM, Bassmaster Legendary Lunkers, Rays
of Aten, Burnrate, AquaX, Roulette by dwango, Black Jack by dwango and dwango
RacingTM, with Nextel Operations.
 
 In the
second quarter of 2004, we launched our Rolling Stone Ringtone service with
Nextel and Cingular Wireless LLC.
   4
 
 In
addition to these agreements, we have entered into a carrier agreement with
T-Mobile USA, Inc. and launched services. Through our Qualcomm agreement, we
have launched services on Alltel Communications, Inc. In total, we have
agreements to provide services on eight (8) major United States wireless
carriers. In March 2005, we entered into an agreement with Wmode which allows us
to provide services to two Canadian Carriers, Microcell/Fido and
Rogers.
 
 Our
carrier agreements provide the specification and requirements under which our
applications may be made available to the subscribers of such respective
wireless carriers. These agreements set forth the compensation methodology and
processes to be utilized in connection with the release of games. The wireless
carriers are not required to make available to their subscribers any minimum
number of games.
 
 We are
also seeking to enter into agreements similar to those described above to make
our content available to subscribers of other wireless carriers in the United
States, Canada, Latin America and South America. Examples of such carriers are:
Sprint PCS, Bell Canada, Telus, Virgin Mobile and Amp’d.
 
 Our
content is initially being sold for a download fee. Under this model, a download
fee is charged for each download of an application or bundle of applications.
Some applications use a subscription model, where the customer is charged a
recurring fee on a monthly basis for use of the service.
 
 
 The fees
for downloading content may be collected by the carriers and then forwarded to
us in what is known as a billing-on-behalf-of system, which is the current
system employed by us. A billing-on-behalf-of system allows the fees for our
applications to appear on a customer’s regular monthly cell phone bill. When
games are sold through a carrier, the carrier is entitled to retain a fee. The
development and implementation of billing-on-behalf-of systems enables wireless
carriers to collect revenues for subsequent remittance to content providers.
This model is critical to attract users who are comfortable paying for content
as part of their regular wireless phone bill but who may be hesitant paying for
content in an over-the-air credit card transaction.
 
 **Markets**
 
 We
believe that in the United States, a number of changes in the wireless market
are driving the evolution to the next generation. These changes include the
development of new handsets with higher resolution color screens, longer battery
life and the ability to download and execute applications on the handset, the
upgrade of wireless networks, the ability of wireless carriers to bill on behalf
of application developers such as our company, and the development by companies
such as our company of new wireless applications.
 
 The
United States wireless market is growing rapidly with data and content services
driving revenue growth. US mobile data revenues today are over $3 billion with
the expectation that they will exceed $16 billion by 2008 according to the
research firm The Yankee Group. The US mobile market is one of the fastest
growing data consuming markets in the world with a mobile subscriber growth rate
of over 60% from 109 million in 2000 to over 180 million to date.  The US
ringtone and game revenues have more than doubled from $115 million in 2003 to
$289 million in 2004 and forecasted by JuniperResearch to exceed $1.1 billion
million 2009 with ringtones driving over 75% of current
sales.
 
 Our
target market is youth, which is typically defined as consumers between the ages
of 14 and 24 years old, and sometimes includes consumers through their late
20’s. Wireless carriers, particularly in North America, are increasingly
focusing on this segment, as it is the most rapidly adopting segment with
respect to the wireless content and new account sales in the
marketplace.
 
 Currently,
we intend to seek to expand the scope of our geographical operations to include
Europe and South America. We plan to accomplish this via either acquisition,
agreements with carriers operating in the region or partnering with companies
currently transacting business in the region.
 
 **Marketing
and Sales**
 
 Our
success in marketing and selling our applications will rely on product
innovation (including freshness), placement in the upper tiers of the handset
menus (making the applications easy to find), and distribution (the number of
carriers that offer our products). In addition to marketing our products to
wireless carriers, we engage the end-user consumers with offers and promotions.
Marketing of the applications to consumers is performed through a combination of
direct marketing through traditional, online, and wireless distribution
channels, including marketing by the wireless carriers of wireless content to
their subscribers and through public relations efforts. We also seek to gain
exposure through industry trade shows, industry conference attendance, our
website, and general industry exposure. We seek to consistently create new
mobile trends that include building branded mobile channels through exclusive
long-term relationships with the world’s top lifestyle brands, major and
independent record labels and artists. Our expertise and relationships with
publishers throughout all media channels allows for strong distribution
services.
   5
  We have
committed to a minimum $1,000,000 over the 2 year life of the contract with
RollingStone and a minimum of $100,000 per year over the 3 year life of the
contract with Playboy. We have promoted our brands, such as RollingStone, in
print ads in RollingStone Magazine, web advertising on RollingStone.com,
sweepstakes and events such as Voodoo Festival sponsored by RollingStone and
Southern Comfort. Playboy is another brand that we plan to advertise extensively
using the Playboy website, Playboy Magazine, e-mail blasts, direct mailings,
giveaway incentives and events.
 **Dwango
Japan Licenses**
 
 We
entered into a Technology License Agreement and a Trademark License Agreement
with Dwango Japan effective August 14, 2002. The Technology License Agreement
allows us to use exclusively all wireless technology of Dwango Japan (including
all wireless technology developed by Dwango Japan during the term of the
license) in North America for a period of eight years. To maintain the right to
use such technology we must pay to Dwango Japan a royalty equal to the greater
of $50,000 per year or 2% of our annual gross revenue arising from wireless
technology directly licensed from Dwango Japan. Gross revenue not arising from
wireless technology is not subject to this royalty.
 
 The
Trademark License Agreement allows us to use exclusively the Dwango Japan
trademarks, including the name “dwango,” in North America for a period of 25
years. To maintain the right to use such trademarks, we must pay to Dwango Japan
a royalty equal to the greater of $50,000 per year or 1⁄2 of 1% of our annual
gross revenue arising from wireless technology. Gross revenue not arising from
wireless technology is not subject to this royalty.
 
 The
parties have recognized that Dwango Japan has previously entered into and may in
the future enter into certain global transactions with independent third parties
for the development of wireless technology. To account for this business reality
(the possible use of Dwango Japan wireless technology, not content, in North
America when distributed as part of a global distribution agreement) and
recognizing that we have a license to the Dwango Japan wireless technology
within North America, the parties have agreed that we will have the right in
certain circumstances to share with Dwango Japan in the revenues generated from
these global transactions to the extent that they result in revenue arising from
and/or business opportunities within North America, on terms to be agreed
between us and Dwango Japan.
 
 **Competition**
 
 The
market for wireless content is highly competitive. We expect that the
competition will increase as the market grows. We believe that our primary
competitors in our two main product categories are as follows: Games: Jamdat,
THQ, Mforma and Sorrent. Media/Music: Zingy, Moviso, Ztango, Blingtones, Yamaha,
Tutch, Yahoo, and Fatih. Many of these competitors have released significantly
more content to date than us. Many of our competitors have substantially greater
financial resources than us, which may allow them to identify emerging trends
more quickly and develop technology at a faster pace. We believe that the
principal competitive factors are exclusive brand relationships, ability to
provide a complete mobile channel solution (games and media), quality of the
content, including its freshness and innovative differentiation, relationships
with wireless carriers, the ability to have the content placed in the upper
tiers of the handset menus, and the number of carriers who offer the content. We
believe that we compete, or will compete, favorably in these categories. We
believe we have a unique competitive advantage in our ability to leverage our
branded services and provide a more comprehensive product and distribution
approach for our branded channels.
 
 **Government
Regulation**
 
 We are
not currently subject to direct federal, state, or local government regulation,
other than regulations applicable to businesses generally. The
telecommunications industry is subject to regulation by federal and state
agencies, including the Federal Communications Commission, and various state
public utility and service commissions. While such regulation does not
necessarily affect us directly, the effects of these regulations on the wireless
carriers that provide ours applications to their subscribers may, in turn,
adversely affect our business, by, for example, increasing our costs or reducing
our ability to continue selling our products.
 
 **Intellectual
Property**
 
 We regard
our patents, copyrights, service marks, trademarks, trade secrets, proprietary
technology and similar intellectual property, as critical to our success, and we
rely on trademark and copyright law, trade secret protection and confidentiality
and license agreements with our employees, customers, independent contractors,
partners and others to protect our intellectual property rights. There can be no
assurance that the steps we have taken to protect our proprietary rights will be
adequate to prevent third parties from infringing or misappropriating our
proprietary rights.
 
 **Intellectual
Property and Proprietary Rights**
 
 We
require our employees, developers and licensees to enter into agreements
requiring them to keep confidential all trade secrets and other confidential
information. Our employees enter into agreements which recognize that all
inventions, trade secrets, works of authorship, developments and other processes
made by them in the course of their work for us are our property. These
agreements establish that we have the exclusive right to those works and
transfer any residual ownership in those works to us. There can be no assurance
that the steps we have taken to protect our proprietary rights will be adequate
to prevent third parties from infringing or misappropriating our proprietary
rights.
   6
 
 **Dwango
Japan License Agreements**
 
 Through
our subsidiary, Dwango North America, Inc., we have an exclusive eight (8) year
license to Dwango Japan’s wireless technology for use within North America,
which we refer to as the Technology License and an exclusive twenty-five (25)
year license to Dwango Japan’s trademarks for use within North America, which we
refer to as the Trademark License. These licenses commenced on August 14,
2002.
 
 Pursuant
to the terms of the Trademark License, we have both a license to the registered
trademark Dwango ® and the
right to register any unregistered marks associated with Dwango Japan’s
technology. Upon termination of the Trademark License, we must: cease use of the
Dwango trademark; convey to Dwango Japan all right to any Dwango Japan
technology trademarks, which we may have registered; and, convey to Dwango Japan
all our right to the domain name www.dwango.com.
 
 **Patent
Protection**
 
 We
currently have on file U.S. Patent Application serial # 10/744865 - A method and
apparatus for a one click upgrade for mobile applications. We perform periodic
reviews of our ongoing technology developments and intend to pursue additional
patents as appropriate. We may not be able to successfully defend or claim any
legal rights in the invention for which an application has been made but for
which the Patent and Trademark Office has not issued a patent.
 
 **Trademarks**
 
 We have a
license to the Dwango ® trademark. We have a pending U.S. Trademark Application for Star
Diversion TM , the
title of a wireless game we licensed from Dwango Japan. In addition, we have
applied for three other trademarks relating to our company and our services.
Those three trademarks are: DWANGO WIRELESS, JAMZ!, and JAMZMOBILE. We may not
be able to successfully defend or claim any legal rights in those trademarks for
which applications have been made but for which the Patent and Trademark Office
has not issued a registered certificate.
 
 **Properties**
 
 We
currently maintain our executive office at 2211 Elliott Avenue Suite 601,
Seattle, Washington 98121 and our lease expires in February 2007. We have office
space that was our executive office through February of 2005 at 200 West Mercer
Street, Suite 501, Seattle, Washington 98119 pursuant to a lease that expires in
April 2005. On March 18, 2005, the company announced the closing of the game
studio located at 150 Spear Street Suite 1175 San Francisco, California 94104.
The majority of the 10 employees will be made offers to relocate to our Seattle
office. The reason for the closure and relocation were to improve our
development efficiencies. Our lease expires in December 2005. In addition, we
have office space at 5847 San Felipe Street, Houston, Texas, which space was our
executive offices until January 2004. Our lease for such space expires in
September 2006. We have sublet our Houston offices.
 
 **Employees**
 
 As of
March 4, 2005, had a total of 64 employees, all of whom work full-time. Ten are
located at our San Francisco office and 54 are located at our Seattle,
Washington office. None of our employees are represented by unions and we are
not aware of any activities seeking such organization. We consider our relations
with our employees to be good.
 
 **Legal
Proceedings**
 
 We are
currently not a party to any material legal proceedings.
   7
 
 **RISK
FACTORS**
 
 In
evaluating our business, you should carefully consider the risks and
uncertainties described below, as well as the discussion of risks and other
information contained in this Annual Report and in our other public filings. If
any of the following risks actually occur, our business, financial condition or
operating results could be materially adversely affected. In such case, the
trading price of our common stock could decline.
 
 
 **Risks
Relating to Our Business**
 
 **We
have a limited operating history, have incurred losses to date, and cannot give
any assurance that we can ever attain profitability.**
 
 We have a
limited operating history in the wireless content market. We cannot give any
assurance that we will be able to generate or sustain meaningful revenues in the
future. For the years ended December 31, 2003 and 2004, we incurred net
losses attributable to common stockholders of  $4,650,000 and $10,343,000,
respectively. We expect to continue to incur losses for at least the next twelve
months. We cannot give you any assurance that we will ever achieve
profitability. To achieve profitability, we must, among other things, develop,
market and sell substantially more of our products, hire and retain qualified
and experienced employees, and be able to manage our expected growth. We may not
be successful in these efforts.
  We have a
limited operating history in the wireless content market. We cannot give any
assurance that we will be able to generate or sustain meaningful revenues in the
future. For the years ended December 31, 2003 and 2004, we incurred net losses
attributable to common stockholders of $4,650,000 and $10,343,000, respectively.
We expect to continue to incur losses for at least the next twelve months. We
cannot give you any assurance that we will ever achieve profitability. To
achieve profitability, we must, among other things, develop, market and sell
substantially more of our products, hire and retain qualified and experienced
employees, and be able to manage our expected growth. We may not be successful
in these efforts.
 **In
the event that our projections regarding our revenue growth are inaccurate, our
losses will be greater than projected, which will put additional pressure on our
limited cash resources.**
 
 We
anticipate that our financial results in the near term will be principally
driven by our ability to properly allocate our cash resources. The allocation of
these resources must be coordinated with and take into account the projected
rate of growth of revenue and the pricing assumptions in our business model. Our
management has made significant estimates regarding the anticipated growth of
our customer base, taking into account many variables, certain of which are
outside our control. Our business model requires expanding and improving our
technological and other capabilities necessary in order to properly service
anticipated increased usage by cell phone users. If our revenue does not grow at
projected rates, or our pricing assumptions are incorrect, then our up front
expenses will exceed our revenues by amounts greater than currently anticipated,
exacerbating projected losses and putting additional pressure on cash
resources.
 
 **If
we are unable to enter into distribution arrangements with major wireless
carriers and develop and maintain strategic relationships with such wireless
carriers, we will be unable to distribute our products effectively or generate
significant revenue.**
 
 Our
strategy for pursuing a significant share of the emerging wireless content
market in North America is dependent upon entering into distribution
arrangements with major wireless carriers. We need to develop and maintain
strategic relationships with these wireless carriers so that, among other
things, we can obtain favorable treatment with respect to the timing and
placement of our applications on the wireless handset download menus. In this
respect, we have entered into agreements with Verizon, T-Mobile USA, Cingular
Wireless, Alltel Communications and Nextel Operations which provide for the
terms and conditions under which our applications may be made available to
end-users of such carriers. These agreements are not exclusive and generally do
not obligate the carriers to market or distribute any of our applications.
Distribution agreements are also being pursued with Sprint PCS and US Cellular.
We are dependent upon the subsequent success of these wireless carriers in
performing their responsibilities and sufficiently marketing our applications.
We cannot give you any assurance that we will be able to negotiate, execute and
maintain favorable agreements and relationships with wireless carriers, that the
carriers with whom we have a contractual relationship will choose to utilize our
applications or that such wireless carriers will be successful and/or will not
pursue alternative technologies.
 
 **If
we are unsuccessful in entering into and maintaining branded service agreements,
our revenues will be negatively affected.**
 
 An
important aspect of our business strategy is to have branding relationships with
third parties that have brand names known to the general public. For example, we
currently have branded service agreements with ESPN, Real Networks (Rolling
Stone Magazine), Beliefnet, Napster and Playboy.com. Branded service agreements
generally have a set term, may or may not include provisions for exclusivity and
may require us to make significant minimum payments. There is no assurance that
we will enter into a sufficient number of branded service agreements or that the
ones that we enter into will be profitable and will not be terminated
early.
 
 **We
may be unable to implement our acquisition growth strategy, and failure to
manage our acquisition strategy properly may result in added expenses to our
company without a commensurate increase in revenues and divert our management’s
attention.**
 
 In order
for us to grow our business, we anticipate making strategic acquisitions of
other companies. Our continued growth may depend on our ability to identify and
acquire, on acceptable terms, companies that complement or enhance our business.
After our acquisition of any such companies, we will need to properly integrate
them into our company. The competition for acquisition candidates is intense and
we expect this competition to increase. We cannot give you any assurance that we
will identify and successfully compete for appropriate acquisition candidates or
complete acquisitions at reasonable purchase prices, in a timely manner or at
all. Further, we may not be able to properly integrate such companies into our
company. In implementing our acquisition growth strategy, we may
encounter:
 
 • costs
associated with incomplete or poorly implemented acquisitions;
 
 •
expenses, delays and difficulties of integrating acquired companies into our
existing organization;
   8
 
 •
dilution of the interest of existing stockholders; and
 
 •
diversion of management’s attention.
 
 If we are
not successful in implementing our acquisition growth strategy, it could have an
adverse impact on our results of operations.
 
 **We
have only recently commenced generating revenues and may not be prepared for the
demands of growth.**
 
 We have
generated increased revenues in each of our quarters in 2004 as follows: $60,000
(first quarter), $176,000 (second quarter), $545,000 (third quarter) and
$864,000 (fourth quarter). The growth process places significant demands on our
management and operational infrastructure. Continued growth may adversely affect
our ability to hire and maintain skilled employees, maintain high quality
standards, have appropriate operational, financial and management controls and
achieve continued positive relationships with wireless carriers, branded service
partners and customers. To achieve these ends, significant expenditures and
allocation of personnel resources will be required.
 
 
 **If
our product development fails to keep up with that of our competitors, our
revenues and potential future profitability could be adversely
affected.**
 
 The
market for wireless applications is extremely competitive. We expect our
competition to intensify as competitors incorporate new features and expand and
accelerate the release of new products and service offerings, and new
competitors enter the market. The evolution of technology in the wireless market
is rapid and we must adapt to remain competitive. We are aware of other
companies that provide mobile applications. Some of these companies have
substantially greater financial resources than us which could allow them to
identify emerging trends more quickly and develop technology at a faster pace.
We may not be able to compete successfully against current or future competitors
and such competitive pressures could have an adverse effect on our revenues and
potential profitability. Some of our competitors have already made significant
progress in the market.
 
 **If
we are unable to maintain a prominent position on application download menus,
our revenues could be adversely affected.**
 
 We will
need to continually develop new products in order to maintain a prominent
position on the application download menus maintained and controlled by wireless
carriers. Consumers are more likely to download newer applications that are
higher up in the download menu. New applications are generally introduced onto
the application download menus on a weekly basis, and older applications are
pushed toward the bottom of the menu. In addition, it is of great importance to
correspond the delivery of our applications with the introduction of new cell
phone models, as many customers initially install games upon their purchase of
the device. If we are unable to maintain a prominent position on the download
menus, our revenues could be adversely affected.
 
 **If
we fail to protect our intellectual property rights, we may lose any competitive
edge that we have and our sales and profitability may be adversely
affected.**
 
 Our
business depends to a significant degree on licensed and internally developed
content and technology. To protect our proprietary products we rely on a
combination of patent, copyright, trademark and trade secret laws, as well as
contractual provisions relating to confidentiality and related matters. If our
proprietary rights in such content or technology, or any other of our
proprietary rights, are divulged to the public, or our competitors obtain access
to our confidential information, we may lose any competitive edge that we have.
We cannot assure you that our means of protecting our proprietary rights will be
adequate or that competitors will not independently develop similar or superior
technology.
 
 **If
third parties claim that our products violate their intellectual property
rights, we may be forced to take costly actions or pay significant damage awards
that could adversely affect our business.**
 
 Third
parties may make claims against us alleging infringement of patents, copyrights,
trademarks, trade secrets or other proprietary rights. If we were to find that
our products violated or potentially violated third-party proprietary rights, we
might be required to obtain licenses that are costly or contain terms
unfavorable to us, or expend substantial resources to reengineer those products
so that they would not violate third party rights. Any reengineering effort may
not be successful, and we cannot be certain that any such licenses would be
available on commercially reasonable terms. Any third-party infringement claims
against us could result in costly litigation and be time consuming to defend,
divert management’s attention and resources, cause product and service delays,
require us to enter into royalty and licensing agreements or result in
significant damage awards.
   9
 
 **Our
strategy to expand into international markets may be unsuccessful and could
result in increased costs.**
 
 Currently,
we intend to seek to expand the scope of our geographical operations to include
Europe and South America. We have no experience in operating in overseas markets
and we may not be successful in understanding and achieving success in these
markets.
 
 
 We expect
competition in international markets to increase. In addition, companies located
in the areas in which we may seek to do business may have a substantial
competitive advantage over us because of their greater understanding of and
focus on the local markets. International expansion may also require significant
financial investment including, among other things, the expense of developing
localized products, expenditure of resources in developing customer and
distribution relationships and the increased costs of supporting remote
operations.
 
 Other
risks of doing business in international markets include the increased risks and
burdens of complying with different legal and regulatory standards, difficulties
in enforcing intellectual property rights, difficulties in managing and staffing
foreign operations, limitations on the repatriation of funds and fluctuations of
foreign exchange rates, and political, economic and social instability. In
addition, our success in international expansion could be limited by barriers to
international expansion such as tariffs, adverse tax consequences and technology
export controls. If we cannot manage these risks effectively, the costs of doing
business in some international markets may be prohibitive and we may suffer
significant losses.
 
 
 **The
loss of certain key management employees could cause us to be unable to
implement our business plan.**
 
 Our
success depends in large part upon the experience, abilities and continued
services and contributions of a small number of key management employees. These
employees provide us with needed experience in the wireless industry and
relationships with carriers, content providers and other third parties necessary
to our business. The loss of the services of one or more of our key employees
could cause us to be unable to implement our business plan.
 
 **If
we are unable to attract and retain qualified management and other personnel,
our ability to implement our business plan may be adversely
affected.**
 
 As of
March 4, 2005, we had 64 full-time employees. Most of our present management has
limited experience in managing a business as large as that currently
contemplated by us. In order to meet our business objectives, we must hire
appropriate management personnel, as well as additional technical personnel. We
compete for such persons with other companies, some of which may have
substantially greater capital resources and facilities than we do. We cannot
give you any assurance that we will be successful in recruiting and retaining
such personnel of the requisite caliber or in adequate numbers to enable us to
conduct our business as proposed.
 
 **Contemplated
changes in the accounting treatment for stock options will make it expensive to
maintain our current practice with respect to the granting stock
options.**
 
 The
granting of stock options is used by us as a significant compensation tool. The
Financial Accounting Standards Board has changed the accounting treatment of
stock options which will require the recording of an expense upon each grant of
options. Given our current compensation practices, this will result in a
significant increase in compensation charges. If we change our compensation
practices and reduce or eliminate stock option grants, we may find it more
difficult to attract, retain and motivate employees, which could adversely
affect our operations.
 
 **We
may need additional financing in the future and may have to significantly
curtail or cease operations if we are unable to secure such
financing.**
 
 At
December 31, 2004, we had working capital of $667,000 and a capital deficit of
$1,333,000. Since December 31, 2004, we have raised gross proceeds of
$15,700,000 from private placements of our convertible preferred stock and
warrants. At February 28, 2005, we had a cash position of $13,092,000. In the
future, we may require substantial additional financing to fund the cost of
continued operating activities, to make acquisitions, to provide cash for the
payment of prepaid and ongoing royalties, to buy advertising required pursuant
to our agreements and to finance the growth of our business. We believe that our
current cash resources are sufficient to fund operations through December 31,
2005. If required, we may not be able to obtain the needed funds on terms
acceptable to us or at all. If we are unable to secure financing when needed, we
may have to significantly curtail or cease operations. Further, if additional
funds are raised by issuing equity securities, the antidilution provisions from
previous financings may be triggered and significant dilution to our current
shareholders may occur and new investors may get rights that are preferential to
current shareholders.
   10
 
 **Risks
Relating to Our Industry**
 
 **The
market for wireless applications is a developing market that requires further
development to support meaningful revenues for our company, without which we
will not be able to achieve profitability.**
 
 The
market for wireless applications is an emerging market that is relatively new.
Further development of this market is necessary to support meaningful levels of
revenues for our company. The success of the applications we offer will depend
upon, among other things, a high level of market acceptance of the current
generation of advanced wireless handsets. We cannot give you any assurance that
the market will develop as we anticipate. In addition, in view of the battery
drain caused by the use of certain advanced wireless applications, the success
of these applications may also depend upon the development of new technology
and/or cost effective products or accessories that extend the battery life of
current wireless devices, for which there can be no assurance.
 
 We will
incur operating expenses based largely on anticipated revenue trends that are
difficult to predict. We plan to invest a significant amount of our resources to
develop, market and support our products and services in advance of generating
substantial revenues. We anticipate incurring substantial losses until such
time, if ever, that substantial revenues are generated. Our success will depend
on the market for our products developing sufficiently to support profitable
operations, and our ability to commercialize our products and services in order
to generate sufficient revenue from sales of these products and services to
offset the expenses associated with developing, marketing and supporting
them.
 
 **Wireless
carriers have significant control over the contract terms, including, pricing of
applications and revenue share percentages, which could adversely affect market
acceptance of applications and revenues of content
providers.**
 
 Agreements
with wireless carriers require content providers to obtain approval from these
carriers for the pricing of the applications that they propose to offer to their
subscribers. Such approvals may not be granted or the carriers may decide to set
a price, higher or lower, than what content providers proposed. Content
providers ability to change prices may also be restricted. Market acceptance of
applications or the level of revenues that content providers can generate could
be adversely affected by not obtaining pricing of applications sought by content
providers.
 
 Agreements
with wireless carriers provide for a revenue share percentage that dictates the
percentage of the retail price remitted by consumers to the wireless carriers
which is provided to the content providers. This revenue share percentage can be
changed by the wireless carrier, in some cases, during the term of the contract.
Content providers ability to control that revenue share percentage is very
limited. Revenues that content providers can generate could be adversely
affected by reductions in their revenue share percentage.
 
 Wireless
carriers agreements are typically about one year in length and content providers
cannot assure that wireless carriers will continue to rely on their content and
renew their contracts.
 
 **If
we do not develop wireless content and respond to changes in technology on a
timely basis, we will be unable to grow our business and may never achieve
profitability.**
 
 Our
ability to design, develop, test and support, or obtain from third parties, new
or enhanced content for wireless network technology on a timely basis to meet
the changing needs of wireless phone users and respond to technological
developments and evolving industry standards is critical to our future growth
and our ability to achieve profitability. We cannot give you any assurance that
we will be able to identify emerging technologies which will gain widespread
acceptance. If we invest substantial resources in acquiring, developing or
implementing wireless content that does not become widely accepted or which is
delayed in introduction, we may be unable to recoup our investment. We cannot
give you any assurance that others will not develop technologies that achieve a
greater market acceptance than ours, that render our services obsolete or that
otherwise adversely affect our competitive position.
 
 **The
life cycle of our products may be short, which could limit the level of revenues
achieved from the sale of new products.**
 
 The
market for wireless content is an emerging market that is changing rapidly. The
emergence of new wireless products and technologies, changes in consumer
preferences and other factors may limit the life cycle of our technologies and
any future products and services that we develop. This may limit the amount of
revenue we are able to achieve from the products we develop. If we incur
significant costs to develop a product and are unable to sell such product other
than for a short period of time, our results of operations may be adversely
affected. Our future performance will depend on our ability to identify emerging
technological trends in the wireless content market, identify changing consumer
needs, desires or tastes, develop and maintain competitive technology, including
new product and service offerings, improve the performance, features and
reliability of our products and services, particularly in response to
technological changes and competitive offerings, and bring technology to the
market quickly at cost-effective prices.
  11
 
 **The
complexities and incompatibilities among advanced mobile phones and wireless
technologies, as well as the continuous introduction of new models, require use
to utilize substantial funds for development of a multitude of applications,
each with short life cycles.**
 
 To
achieve significant revenue levels, we must develop applications suitable for
numerous phone models and technologies. To keep pace with rapid innovation and
the continuous introduction of new, and often incompatible, mobile phone models
require us to expend significant funds for development activities. We expect
these circumstances to continue and our ability to achieve profitability will
depend not only in our development success, but also the ability to generate
sufficient revenues from applications before their generally short life cycle is
over.
 
 **In
the event that there is a significant shift in the source of downloading
applications away from the wireless carriers to other sources, we may have to
incur significant expense to alter our sales and marketing approach, which
approach may not be successful.**
 
 Our
applications are primarily sold through the wireless carriers with whom we have
contractual relationships. There are currently available, however, a small
number of cell phone models which have operating systems that allow users to
browse the Internet and, in some cases, download applications from sources other
than the wireless carrier’s branded service. In the event that the situation
evolves such that a substantial portion of application downloads occurs away
from the wireless carriers, we would have to incur substantial expense to market
to the alternative sources. There can also be a substantial expense in changing
our billing model. No assurance can be given that marketing efforts involving
alternative sales channels would be successful.
 
 **Increases
or changes in government regulation may have an adverse effect on our
operations.**
 
 We
anticipate that regulation of the industry in which we participate to increase.
Our business operations may be adversely affected in the event that new laws and
regulations are adopted that have a restrictive effect on our operations. Areas
affected may include privacy, taxation, suitability of content, copyright and
distribution. The adoption of new rules and regulations would result in
increased legal and other expenses to address the new rules and may potentially
circumvent our operations.
 
 **We
rely on the wireless communications infrastructure, over which we have no
control.**
 
 Our
business operations depend upon the maintenance and growth of the wireless
communications infrastructure. Accordingly, our future success will depend upon
the deployment and maintenance of reliable next-generation digital networks with
the requisite speed, capacity and security for providing reliable wireless
communication services. Further, wireless communication may be adversely
affected by viruses, worms and other break-ins and disruptions. Wireless
services could also be disrupted by outages and infrastructure and equipment
failures.
 
 **Risks
Relating to Our Common Stock**
 
 **A
significant number of shares of our common stock are eligible for sale pursuant
to two effective registration statements and a significant number of additional
shares of our common stock will become eligible for sale upon the effectiveness
of another registration statement which we plan to file in the near future,
which could have an adverse effect on the market price for our common stock and
could adversely affect our ability to raise needed capital when
needed.**
 
 There are
8,625,851 shares of our common stock issued and outstanding as of March 4, 2005
and 40,001,027 additional shares potentially issuable under outstanding
convertible preferred stock and notes, warrants and option as of that date.
There are currently two effective registration statements pursuant to which
selling shareholders may sell up to an aggregate of 23,984,363 shares of our
common stock. In addition, we intend to file a registration statement in the
near future pursuant to which selling shareholders may sell up to an additional
approximate 14,582,000 shares of our common stock. In the event of significant
sales of common stock pursuant to these registration statements, the market
price for our common stock could decrease significantly and our ability to raise
capital could be adversely affected.
 
 **The
conversion of our notes or preferred stock to common stock will result in a
significant charge to our earnings, which may negatively impact our share price
and our ability to raise capital.**
 
 If the
holders of our notes or preferred stock convert into common stock, we will incur
a significant charge to our earnings in the form of a write-off of deferred
financing costs and deferred acquisition costs. This would result in decreased
earnings for **** our
company, which could have a negative impact on our share price and our ability
to raise capital.
  12
  **Robert
E. Huntley, the founder and a former officer and director of our company,
beneficially owns approximately 31% of the issued and outstanding shares of our
common stock and accordingly has significant influence over the outcome of all
matters submitted to the shareholders for approval, which influence may be
exercised to the detriment of other shareholders.**
 
 Robert E.
Huntley, the founder and a former officer and director of our company, presently
owns 2,378,480 shares of our common stock and holds warrants to purchase an
additional 421,841 shares of our common stock. Together, these holdings
represent approximately 31% of our issued and outstanding shares of common
stock. Accordingly, Mr. Huntley has significant influence over the outcome of
all matters submitted to the shareholders for approval, including the election
of directors.
 
 **Certain
of our shareholders beneficially own a significant number of shares of our
common stock and accordingly may have significant influence over our company and
upon the price of our common stock, which may be to the detriment of other
shareholders.**
 
 Three
entities beneficially own significant positions in our common stock as follows:
(a) Alexandra Global Master Fund Ltd. holds 790,900 shares of our common stock
and holds notes, preferred stock and warrants convertible into or exercisable
for an aggregate of 12,114,462 additional shares of our common stock; (b) Weiss
Peck & Greer Investments, a division of Robeco, L.L.C., which we refer to as
WPG Investments, is the investment manager for five separate funds that own
preferred stock and warrants which are convertible into or exercisable for an
aggregate of 6,451,610 shares of our common stock; and (c) Trafelet &
Company, LLC is the investment manager for four separate funds that own
preferred stock and warrants convertible into or exercisable for an aggregate of
8,357,141 shares of our common stock. All of these shares have either been
registered for resale in two registration statements that are currently
effective or are intended to be included for resale in a registration statement
which we intend to file in the near future. As there is currently a very limited
amount of shares in the public float, and the number of shares registered or to
be registered on behalf of these beneficial owners is significant, the market
price of our common stock could be adversely affected in the event of sales of
these shares. The notes, preferred stock and warrants described in this
paragraph provide that the number of shares of common stock that may be acquired
at any one time by each of Alexandra, the funds managed by WPG Investments or
the funds managed by Trafelet shall not exceed a number that, when added to the
total number of shares of common stock beneficially owned by it, would result in
beneficial ownership by it of more than 9.9% of our common stock. But for that
provision, on a fully diluted basis, Alexandra, WPG Investments and Trafelet
could be deemed to beneficially own, on a fully diluted basis, 29%, 15% and 19%,
respectively, of our common stock, as of February 8, 2005. Alexandra has the
right to nominate two directors to our board of directors and has exercised its
right with respect to one director. WPG Select Technology Fund, L.P., one of the
funds managed by WPG Investments, has the right to nominate one director to our
board of directors; to date it has not nominated a director. Each of Alexandra,
WPG Investments and Trafelet may have significant influence over our company and
the price of our common stock, which may be to the detriment of other
shareholders.
 
 **The
possible issuance of substantial amounts of additional shares of our authorized
capital stock without shareholder approval may dilute the percentage ownership
of our shareholders.**
 
 As of
March 4, 2005, there are 8,625,851 shares of our common stock outstanding and
40,001,027 shares of common stock issuable upon exercise or conversion of
outstanding options, warrants, convertible preferred stock and convertible
notes. There are 50,000,000 shares of our common stock and 10,000,000 shares of
our preferred stock authorized for issuance. All of our authorized shares in
excess of those currently outstanding may be issued without any action or
approval by our shareholders and could significantly dilute the percentage
ownership of our current shareholders.
 
 **If
we are unable to obtain shareholder approval to increase the number of
authorized shares of our common stock, we may be unable to undertake additional
financings and acquisitions, which could adversely affect the growth of our
business.**
 
 We intend
to seek, at our next meeting of shareholders, approval of a resolution to
increase in the number of authorized shares of our common stock. In the event
that the proposal is not successful, we will not have sufficient shares to
undertake additional financings and acquisitions utilizing equity, which could
have a substantial adverse effect on our company.
 
 **Because
the public market for shares of our common stock is limited, you may be unable
to resell your shares of common stock.**
 
 There is
currently only a limited public market for our common stock on the
Over-the-Counter Bulletin Board, and you may be unable to resell your shares of
common stock. The development of an active public trading market depends upon
the existence of willing buyers and sellers that are able to sell their shares
and market makers that are willing to make a market in the shares. Under these
circumstances, the market bid and ask prices for the shares may be significantly
influenced by the decisions of the market makers to buy or sell the shares for
their own account, which may be critical for the establishment and maintenance
of a liquid public market in our common stock. Market makers are not required to
maintain a continuous two-sided market and are free to withdraw firm quotations
at any time. We cannot give you any assurance that an active public trading
market for the shares will develop or be sustained.
  13
 
 
 **The
price of our common stock is volatile, which may cause investment losses for our
shareholders.**
 
 The
market for our common stock is highly volatile. The trading price of our common
stock is subject to wide fluctuations in response to, among other things,
quarterly variations in operating and financial results, announcements of
technological innovations or new products by us or our competitors, changes in
our revenues and revenue growth rate and general market conditions. In addition,
statements or changes in opinions, ratings, or earnings estimates made by
brokerage firms or industry analysts relating to our market or relating to our
company could result in an immediate and adverse effect on the market price of
our common stock. The highly volatile nature of our stock price may cause
investment losses for our shareholders.
 
 **Our
common stock is considered to be a “penny stock,” which may make it more
difficult for investors to sell their shares.**
 
 Our
common stock is considered to be a “penny stock.” The Securities and Exchange
Commission has adopted rules that regulate broker-dealer practices in connection
with transactions in “penny stocks.” Penny stocks generally are equity
securities with a price of less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on Nasdaq, provided that current
price and volume information with respect to transactions in such securities is
provided by the exchange or system). Prior to a transaction in a penny stock, a
broker-dealer is required to:
 
 • deliver
a standardized risk disclosure document prepared by the Securities and Exchange
Commission that provides information about penny stocks and the nature and level
of risks in the penny stock market;
 
 • provide
the customer with current bid and offer quotations for the penny
stock;
 
 • explain
the compensation of the broker-dealer and its salesperson in the
transaction;
 
 • provide
monthly account statements showing the market value of each penny stock held in
the customer’s account; and
 
 • make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser’s written agreement to the
transaction.
 
 These
requirements may have the effect of reducing the level of trading activity in
the secondary market for our stock and investors may find it more difficult to
sell their shares.
   **Item
2. Description of Property**
 
 We lease
office space at the following locations:
  **Location**
    
    **Purpose**
    
    **Space**
    
    **Average**
      **Annual
      Rental**
    
    **Expiration**2211
      Elliott Avenue
      Seattle,
      Washington
    
    
    Executive,
      development, and operations office
    
    
    15,000
      squarefeet
    
    $
    283,000
    
    
    Feb.
      2007200
      West Mercer Street
      Seattle,
      Washington
    
    
    Prior
      Executive, development and operations office
    
    
    2,238
      squarefeet
    
    $
    54,000
    
    
    April
      20055847
      San Felipe Street
      Houston,
      Texas
    
    
    Prior
      Executive Office
    
    
    1,459
      squarefeet
    
    $
    69,000
    
    
    Sept.
      2006150
      Spear Street
      San
      Francisco, California
    
    
    Development
      Office
    
    
    2,718
      squarefeet
    
    $
    76,000
    
    
    Dec.
      2005
 
 In
February 2004, we relocated our corporate office from Houston, Texas to Seattle,
Washington. The decision to re-locate the corporate office was based in part on
the benefits of cost efficiency and enhanced operating effectiveness that are
expected to result from locating the company’s operating and corporate functions
in a single location. We have sublet our Houston office space for the duration
of the lease term annually for $57,000.
 
 In
February 2005, we relocated our corporate office to 2211 Elliott Avenue in
Seattle, WA. We did this to accommodate our larger number of employees than
could be accommodated at our prior office.
 
 In March
of 2005, we decided to relocate most of our staff from our San Francisco game
development office to our Seattle office and to close the office in San
Francisco. The decision to re-locate the development office was based in part on
the benefits of enhanced development effectiveness that is expected to result
from locating all the company’s development staff in the same office. We do not
expect to be able to sublease the San Francisco office.
   14
 
 **Item
3. Legal Proceedings**
 
 None.
 
 **Item
4. Submission of Matters to a Vote of Security Holders**
 
 None.
  15
 ****
 **Part
II**
 
 **Item
5. Market for Registrant’s Common Equity and Related Stockholder
Matters**
 
 Our
common stock has been quoted on the Over-the-Counter Bulletin Board under the
symbol “DWGN” since September 30, 2003. Prior to that time, beginning May 28,
2002 when our company was first listed on the Over-the-Counter Bulletin Board,
our trading symbol was “WLDH” and the shares traded represented an interest in
the former business of Woodland Hatchery, Inc. The volume of trading in our
common stock has been limited during the period presented and the quotations
provided reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions. The information provided
below was obtained from otcbb.com.
 
 The
following table sets forth the high and low closing bid prices for our common
stock for the periods indicated as adjusted for the 1 for 4.5 reverse stock
split effected September 30, 2003:
 
 **Quarter
      Ended**
    
    **High**
    
    **Low**March
      31, 2003
    
    
    2.30
    
    
    .90June
      30, 2003
    
    
    .90
    
    
    .90September
      30, 2003
    
    
    1.15
    
    
    .90December
      31, 2003
    
    
    1.77
    
    
    1.10March
      31, 2004
    
    
    1.60
    
    
    .90June
      30, 2004
    
    
    1.40
    
    
    .86September
      30, 2004
    
    
    1.52
    
    
    .65December
      31, 2004
    
    
    1.81
    
    
    1.07
 
 As of
March 10, 2005, we have approximately 97 record holders of our common
stock.
 
 We have
never paid dividends on our common stock and do not anticipate paying dividends
in the foreseeable future.
 
 **Equity
Compensation Plan Information** ****
 
 The
following table sets forth information relating to our compensation plan
as of December 31, 2004.
 
 **Plan
      Category**
    
    **Number
      of securities to****be
      issued upon exercise of outstanding options**
    
    **Weighted-average
      exercise price of outstanding options**
    
    **Number
      of securities****remaining
      available for****future
      issuance under****equity
      compensation plans (excluding securities reflected in****column
      (a)****(a)**
    
    **(b)**
    
    **(c)**Equity
      compensation plans approved by security holders
    
    
    2,951,717
    
    $
    1.29
    
    
    48,283Equity
      compensation plans not approved by security holders
    
    
    876,610
    
    $
    1.50
    
    
    2,123,390Total
    
    
    3,828,327
    
    $
    1.34
    
    
    2,171,673
 
 
 **Item
6. Management's Discussion and Analysis or Plan of
Operation**
 
 **Overview**
 
 We
provide content, network technology and application publishing through North
American wireless carriers. We earn revenue by distributing our content through
major wireless carriers in North America. Our revenue model is driven by fees
paid by consumers for wireless entertainment products and services. These fees
may be collected by carriers, collected directly by our company, or some
combination thereof. Currently, our revenue model is through collection by
carriers. The revenue model does not rely on advertising or any other revenue
source not directly related to the downloading of wireless entertainment content
by consumers. A percentage of revenue is shared with the wireless carrier and
the percentages vary for each carrier, depending upon the specific carrier
agreement.
 
 Currently,
our content is sold for a download fee. The download fee model is based on a
single fee per downloaded application or bundle of applications. Download fees
are assessed on a per download basis for each game or bundle of games,
ringtones, images and other features. Some of the download features will have
expirations based on time.
   16
 
 We are a
mobile media company whose products include ringtones, games, images and
messaging services for mobile devices. We currently sell our products in North
America through distribution agreements with major wireless operators, such as
Cingular and Verizon. Most of our products are sold to consumers via our branded
services with branding from major media companies such as Rolling Stone Magazine
and ESPN Bassmaster. We call our strategy of delivering mobile content under
media brands, the mobile channel strategy. The mobile channel strategy allows
for the distribution of branded services, using content such as ringtones, games
and images, with brands for a specific lifestyle category. For example, our
Rolling Stone brand focuses on the music enthusiast lifestyle, and as such the
products merchandised under the Rolling Stone brand are largely music related.
We publish a mix of content owned by licensed brand owners and original content,
with a focus on original content. We create content for use in the North
American wireless market, through internal development, outsourced development
and strategic alliances. We have been pursuing the branded channel strategy
since our June 2004 launch of Rolling Stone.
 
 During
2004, we signed agreements and launched branded service applications with
Rolling Stone and ESPN. In the latter part of 2004, we signed agreements with
Playboy.com, Napster LLC, and Beliefnet and we plan to launch branded service
applications for those brands as early as the second quarter 2005. Branded
services we provide for a particular brand may vary, but they will be some
combination of ringtones, images, games, messaging and other content as
cellphone technology capabilities become more advanced. We expect to sign
additional media brands in the future. We believe the consumer recognition of
the brands and the quality content provided are a competitive advantage in the
market.
 
 We have
entered into agreements to distribute our applications on Verizon, USCellular,
Alltel, Cingular mMode (formerly AT&T Wireless), Nextel, T-Mobile, Cingular
Wireless MEdiaNet and Boost Mobile; which provide the terms and conditions under
which our applications may be made available to end-users of these United States
wireless carriers. In March 2005, we entered into agreements with two Canadian
wireless carriers Microcell/Fido and Rogers. Relationships are also being
pursued with other major wireless carriers in the United States, Canada, Latin
America and South America.
 
 Effective
in August 2002, we entered into exclusive license agreements with Dwango Co.,
Ltd., which we refer to as Dwango Japan, which allow us to use Dwango Japan’s
current and future wireless intellectual property and trademarks, subject to
certain conditions and limitations. We are now focused on our mobile channel
strategy and we do not anticipate using any further content from Dwango Japan
and we expect, over time, to cease using content that was obtained from Dwango
Japan. This content consists of various games which, since the launch of our
Rolling Stone and ESPN branded services, is a small proportion of our overall
revenue.
 In 2004,
we acquired Over-the-Air Wireless, Inc., (“OTA”) and we obtained: (i) software
for the downloading of our games and ringtones and the billing of these
downloads, (ii) the services of and employment agreements with three
individuals, two of whom who currently hold the positions of chief executive
officer and president, respectively, in our company, and (iii) two-year
non-compete agreements all of which was valued at approximately $530,000. These
individuals were formerly employed by OTA and are proficient with the software
acquired and have experience and contacts in the wireless industry. By the end
of 2004, we had substantially re-written and upgraded the software we acquired
from OTA and judged the asset as impaired and fully expensed the unamortized
value of that asset. The consideration for the transaction was the issuance of
681,000 shares of our common stock.  In addition, pursuant to the
employment agreements with the three individuals referred to above, we issued
options to purchase an aggregate of 964,913 shares of our common stock. One such
individual is no longer employed by us.
 As of
March 4, 2005 we had 64 full-time employees. In connection with the expansion of
our business, we may hire an additional 35 to 45 employees during
2005.
  Our
company achieved $1,645,000 in revenues in 2004 and is not profitable. We
anticipate that we will continue to incur net losses for the foreseeable future.
The extent of these losses will depend, in part, on the amount of growth in our
revenues from consumer acceptance of our branded service approach and the number
of wireless mobile carriers who agree to carry our applications. As of December
31, 2004, we had an accumulated deficit of $15,810,000. Our operating expenses
are approximately $800,000 per month, approximately 50% of which is for payroll,
15% of which is for marketing, and 35% of which is for our general operations.
In January and February 2005, we have raised $15,700,000 and as a result we
believe we can satisfy our cash requirements through December 31, 2005. As we
hire additional employees to help in the launching of our branded service
applications, we expect that our operating expenses will increase by
approximately 5-10% per month over the next several months. We anticipate adding
employees in the areas of product development and testing, business development,
and marketing. Additional investments in operational infrastructure are expected
to continue to be made. These expanded teams would focus on increased product
development and promotional activities for existing brands licensed by us, as
well as on acquisition of new licenses for consumer brands appropriate for the
mobile marketplace. Acquisitions and partnerships are also planned. We plan to
identify companies that offer complementary mobile entertainment infrastructure
services. Additionally, acquisition of other game studios and/or media
development studios is anticipated to boost production capabilities. We will
need to generate a significant amount of increased revenues to achieve
profitability. We cannot give you any assurance that we can accomplish any of
the foregoing or achieve or sustain profitability or that our operating losses
will not increase in the future.
 17
 
 **Application
Development**
 
 At this
juncture, we typically build our applications (ringtones, games and images)
internally. During 2004, we did have relationships with several companies, as
described below, with respect to their development of game content on our
behalf.
 
 1464251
Ontario Inc. has produced two titles for us to date, BurnRate and Blink.
 
 During
2004, we produced the Bassmaster Legendary Lunkers game internally. In 2005, we
have launched two additional games developed internally, Rolling Stone 20
Questions and Beliefnet Spiritual Trivia. We currently have two new original
games being produced internally.
 
 In
addition to games, we have developed our ringtone and media service, which
allows consumers to download ringtones and images to their phones. We have our
own catalog of over 2,700 polyphonic ringtones, 300 mastertones with ongoing
production and licensing of new ringtones every month. We have an agreement with
Rolling Stone and Real Networks to develop mobile content (games, ringtones and
other media offerings and applications) using the Rolling Stone brand. Our first
product launched under the agreement was a ringtone browser, which was launched
in June 2004. Our primary target market for ringtones and media is broader than
for games in North America. Ringtones and images for phones are attractive to
older consumers as well as the targeted youth market. The resulting demographic
includes youth, but expands beyond to encapsulate those between the ages of 14
to 35, although the heaviest users are still expected to be in the 14 to 24 age
segment.
 
 Our
delivery platform incorporates a mobile ringtone catalog application that allows
users to browse, search, sample and download the newest as well as the most
popular ringtones, sorted by title, artist and category. Ringtone downloads are
initiated through either a WAP browser or a downloadable BREW ringtone client,
allowing for customers to purchase new ringtones directly from their
phones.
 
 **Results
of Operations**
 
 **Revenue.** During
the year ended December 31, 2004, revenues were $1,645,000. During the
comparable period in 2003, revenues were $22,000.
 
 Increased
revenues in 2004 resulted from sales of Rolling Stone Ringtones, ESPN
Bassmaster, as well as a variety of other games available on Cingular, Nextel,
Boost Mobile, Verizon Wireless, Alltel and AT&T Wireless and purchased by
end users. In the near future we expect the number of applications available to
end users to increase substantially due to our agreements with Playboy.com,
Napster and Beliefnet.
  Increased
revenues in 2003 resulted from the games released by our company, available on
Verizon Wireless and AT&T Wireless, and purchased by end-users. For the year
ended December 31, 2003, a total of two applications, Star ExceedTM, and dwango
RacingTM, were published on Verizon Wireless and three applications, Star
ExceedTM, Star DiversionTM and dwango RacingTM, were published on AT&T
Wireless. All of our revenues for 2003 were derived from games licensed by us
from Dwango Japan.
 
 **Research
and Development Expense.** During
the year ended December 31, 2004, we incurred research and development expenses
of $2,587,000. During the year ended December 31, 2003, we incurred research and
development expenses of $181,000. These expenses consist principally of salaries
and related expenses.
 
 The
increase in research and development expenses was related to the development of
products associated with branded content. R&D expenses are expected to
continue to increase as we establish additional agreements requiring additional
branded content. In addition, we expect to incur additional R&D expenses as
we enter into distribution arrangements with new carriers.
  **Sales
and Marketing Expense.** During
the year ended December 31, 2004, we incurred sales and marketing expenses of
$1,161,000. For the year ended December 31, 2003, sales and marketing expenses
were $32,000. These expenses consist principally of salaries, advertising and
related expenses.
 
 The
increase in sales and marketing was related to an increase in payroll related
expenses of approximately $480,000 due to the hiring of personal to promote our
new channels of branded content. In addition, advertising related expenses
increased to $411,000 due to promotion of our branded content.
 
 **General
and Administrative Expense.** During
the year ended December 31, 2004, we incurred general and administrative
expenses of $3,700,000. For the year ended December 31, 2003, general and
administrative expenses were $3,895,000.
 
 The
decrease in general and administrative expenses is due to our decreased payroll
related expenses as the bulk of payroll in 2003 was related to general and
administrative activities. In 2003, research and development and sales and
marketing functions were immaterial. In 2004, sales and marketing and research
and development activities increased substantially necessitating both the
movement of personnel out of general and administrative and into sales and
marketing and research and development and the hiring of new employees for these
areas.
 18
 **Interest
Expense.** During
the year ended December 31, 2004, we incurred interest expense of $2,588,000.
For the year ended December 31, 2003, interest expense was $564,000.
 
 The
increase in interest expense is directly attributable to the accrual of interest
and amortization of debt discount related to the 2003 8% senior convertible
notes, the issuance and related accrual of interest and amortization of debt
discount in 2004 of 9% senior convertible notes and the accretion attributable
to our Series A and B convertible preferred stock.
 
 **Net
Loss.** Our net
loss for the year ended December 31, 2004 was $9,683,000. Our net loss for the
year ended December 31, 2003 was $4,650,000.
 
 The
increase in our net loss was primarily due to increased expenses to develop our
branded content as well as interest expense related to our financings in
2004.
  **Liquidity
and Capital Resources**
 
 As of
December 31, 2004, we had a cash position of $82,000 and working capital of
$667,000. At February 28, 2005, we had a cash position of $13,092,000. The
increase in cash was due to the consummation in January and February 2005 of the
financings described below. We anticipate that such funds will finance our
operations through December 31, 2005.
  We have
historically funded our operations primarily through the sale of our securities,
including sales of common stock, convertible notes, preferred stock and
warrants. In January 2004, we completed a $1,700,000 financing of a Senior
Convertible Note and warrants. In March 2004, we completed a $2,300,000
financing of a Senior Convertible Note and warrants. In June through August
2004, we raised an additional $1,250,000 through the issuance of 1,250 shares of
Series A preferred stock and $3,000,000 through the issuance of 3,000 shares of
Series B preferred stock. In January of 2005 we raised $700,000 in a Series C
preferred stock financing which was later exchanged and included as part of our
$15,000,000 Series D preferred stock financing in February 2005.
  We
anticipate that we will continue to issue equity and/or debt securities as the
primary source of liquidity, when needed, until we generate positive cash flow
from operations. We cannot give you any assurance that the necessary capital
will be raised or that, if funds are raised, that it will be on favorable terms.
Any future sales of securities to finance our company will dilute existing
shareholders’ ownership.
  During
the year ended December 31, 2004, net cash used in operating activities totaled
$7,829,000. During the year ended December 31, 2003, net cash used in operating
activities totaled $2,883,000. This 179% increase is due to expansion of our
business during 2004, and is primarily driven by our hiring of additional
employees.
 
 During
the year ended December 31, 2004, cash outflows from investing activities
totaled $59,000. During the year ended December 31, 2003, cash outflows from
investing activities totaled $188,000. This decrease in investing activities is
primarily due to the use of lease financing to acquire computer workstations and
servers during 2003.
 
 During
the year ended December 31, 2004, net cash provided by financing activities
totaled $7,970,000. During year ended December 31, 2003, net cash provided by
financing activities totaled $2,778,000. This 187% increase is due to additional
financings consummated by us that were necessary to fund our ongoing
operations.
  The
success and growth of our business is dependent in large part on our ability to
partner and develop relationships within the wireless industry. In order for us
to execute on our business plan, which anticipates a significant expansion of
operations, we expect that this will continue to require substantial capital to
complete the expansion of our operations
 
 The
following table summarizes, as of December 31, 2004, our obligations and
commitments to make future payments under debt and operating leases and pursuant
to our agreements with Rolling Stone, Playboy, Napster and Beliefnet (for
royalty and advertising):
   19
  
  **Payments
      Due By Period****Total**
    
    **Less
      Than**
      **1
      Year**
    
    **1-3
      Years**
    
    **After**
      **3-Years**Long-Term
      Debt
    
    $
    5,915,000
    
    $
    —
    
    $
    5,915,000
    
    $
    —Capital
      Leases
    
    
    133,000
    
    
    58,000
    
    
    75,000
    
    
    —Operating
      Leases*
    
    
    774,000
    
    
    339,000
    
    
    435,000
    
    
    —Series
      A
    
    
    1,250,000
    
    
    —
    
    
    1,250,000
    
    
    —Series
      B
    
    
    3,000,000
    
    
    —
    
    
    3,000,000
    
    
    —Royalty
      Expense
    
    
    1,163,000
    
    
    1,118,000
    
    
    45,000
    
    
    —Advertising
      Expense
    
    
    1,000,000
    
    
    726,000
    
    
    274,000
    
    
    —Total
    
    $
    13,235,000
    
    $
    2,241,000
    
    $
    10,994,000
    
    $
    —
 
 *Houston
office is currently subleased for the duration of the lease term relieving
$57,000 from Less Than 1 Year and $43,000 from 1 - 3 Years.
  
 Our
outstanding long-term debt as of December 31, 2004 consists of:
 
 1.
    $1,915,000
      Senior Subordinated Convertible Promissory Notes bearing interest at the
      rate of 8% per annum. The principal balance of these notes, together with
      all interest accrued thereon, is due and payable on September 15, 2006.
  2.
    $1,700,000
      Senior Convertible Promissory Note bearing interest at the rate of 9% per
      annum. The principal balance of this note, together with all interest
      accrued thereon, is due and payable on January 8, 2007.
  3.
    $2,300,000
      Senior Convertible Promissory Note bearing interest at the rate of 9% per
      annum. The principal balance of this note, together with all interest
      accrued thereon, is due and payable on March 19, 2007.
 **Critical
Accounting Policies**
 
 **Software
Development Costs**
 
 We
account for software development costs in accordance with Statement of Financial
Accounting Standards No. 86, “Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed”. SFAS No. 86 specifies that costs
incurred internally in creating a software product should be charged to expense
when incurred as research and development costs until technological feasibility
has been established for the product. Once technological feasibility is
established, all development costs should be capitalized until the product is
available for general release to customers. Judgment is required in determining
when the technological feasibility of a product is established, in estimating
the life of the product for which the capitalized costs will be amortized and in
estimating if the carrying value of capitalized software costs is equal to or
less than future operating profits from the associated products. To date, we
have not capitalized any software development costs.
 
 **Revenue
Recognition**
 
 We
recognize revenues in accordance with SEC Staff Accounting Bulletins
Nos. 101 and 104 "Revenue Recognition." Revenue
from wireless applications is recognized in the month in which delivery and
acceptance of a purchase by the end-user occurs providing there is persuasive
evidence of an arrangement, pricing is fixed and determinable and collectibility
is probable. We recognize delivery and acceptance upon the occurrence of a
download of an application to the end user. Persuasive evidence of an
arrangement occurs when the carrier is notified of the end-user transaction and
they place a charge on the end-user’s bill. The carrier reports to our company
the product and dollar amount of revenue earned by our company which establishes
that delivery and performance have occurred. The carriers report to our company
provides evidence of collectibility and subsequent to the issuance of the
carrier reports, the carrier remits the agreed upon price for each download
which substantiates fixed and determinable pricing.
 
 In
accordance with Emerging Issues Task Force (EITF) No. 99-19, "Reporting
Revenue Gross as a Principal Versus Net as an Agent," we recognize as revenues
the net amount the wireless carrier or distributor pays to us upon the sale of
our applications, net of any service or other fees earned and deducted by the
wireless carrier or distributor. We have evaluated our wireless carrier
agreements and have determined that we are not the principal when selling our
applications through wireless carriers.
 
 **Impairment
of Long-Lived Assets**
 
 We assess
impairment of our intangible and long-lived assets in accordance with the
provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-lived Assets." The
carrying value of intangible assets with definite lives and other long-lived
assets is reviewed on a regular basis for the existence of facts that may
indicate that the assets are impaired. Such an asset is considered impaired when
its estimated future cash flows are less than the amount of its carrying value.
If the carrying value of this asset is deemed not recoverable, it is adjusted
downwards to the asset’s estimated fair value.
   20
  **Income
Taxes**
  We
periodically review the likelihood that we will realize the value of our
deferred tax assets and liabilities to determine if a valuation allowance is
necessary. We have recorded a full valuation allowance against our net deferred
tax assets. We have maintained a full valuation allowance because we concluded
that it was not likely we would realize the value of our deferred tax assets, in
light of our history of net operating losses and limited operating history and
potential limitations on the utilization of net operating loss
carryovers .
  **Share-Based
Payment**
  We
currently account for share-based payment in accordance with APB No.
25. In December 2004, the FASB issued SFAS No. 123 (revised), “Share-Based
Payment” (FAS 123R) which replaces FAS 123 and supersedes APB No. 25. FAS 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values beginning with the first interim or annual period after December 15, 2005
for small business filers, with early adoption encouraged. The pro forma
disclosures previously permitted under FAS 123 no longer will be an alternative
to financial statement recognition. We are required to adopt FAS 123R beginning
January 1, 2006. Under FAS 123R, we must determine the appropriate fair value
model to be used for valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at date of adoption. The
transition methods include prospective and retroactive adoptions. We are
evaluating the requirements of FAS 123R and expect that the adoption of FAS 123R
will have a material impact on our consolidated results of operations and
earnings per share. We have not yet determined the method of adoption or the
effect of adopting FAS 123R and we have not yet determined whether the adoption
will result in amounts that are similar to the current pro forma disclosures
under FAS 123. We have not yet determined the impact of FAS 123R on our policies
or plans, if any.
  **Principles
of Consolidation**
 
 The
accompanying consolidated financial statements include the accounts of Dwango
North America Corp. and its wholly owned subsidiaries Dwango North America, Inc.
and OTA Acquisition Corp. All significant inter-company transactions and
balances have been eliminated in consolidation.
 
 **Item
7. Financial Statements**
 
 The
financial statements begin on page F-1 of this Form 10-KSB.
 
 **Item
8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure**
 
 None.
 
 **Item
8A. Controls and Procedures**
 
 **Evaluation
of Disclosure Controls and Procedures**
 
 Disclosure
controls and procedures are designed to ensure that information required to be
disclosed in the reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in the reports filed under the Exchange Act is accumulated and
communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Our management has carried out an evaluation, with the participation
of our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures as of
December 31, 2004. Based upon and as of the date of that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports we file under the Exchange Act are
recorded, processed, summarized and reported as and when required.
 
 **Changes
in Internal Controls**
 
 There
were no changes in our internal control over financial reporting that occurred
during our fourth fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
 
 **Limitations
on Effectiveness of Controls**
 
 We
believe that a control system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the control system are met,
and no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been
detected.
   21
 
 **Item
8B.  Other Information**
 ****
 None.
 
 
 **Part
III**
 
 **Item
9. Directors and Executive Officers of the Registrant**
 
 The
following sets forth certain information regarding the directors and executive
officers of our company. Each director holds office until the next annual
meeting of the stockholders and until his successor has been duly elected and
qualified. Each executive officer serves at the discretion of the board of
directors of our company.
 
 
 **Name**
    **Age**
    **Position**Rick
      J. Hennessey
    38
    Director
      and Chief Executive OfficerAlexander
      U. Conrad
    35
    Director,
      President, Chief Operating Officerand
      SecretaryJ.
      Paul Quinn
    45
    Chief
      Financial Officer and TreasurerVictor
      A. Cohn
    54
    Director
      and Chairman of the BoardL.
      Derrick Ashcroft
    76
    DirectorVishal
      Bhutani
    30
    DirectorPaul
      Eibeler
    50
    Director
 
 
 *Rick
J. Hennessey* joined
our company in April 2003 as Vice President of Business Development of our
wireless division. We no longer identify ourselves by divisions. Mr. Hennessey
served as Vice President of Business Development of our wireless division from
April 2003 until July 2003, at which time he became Executive Vice President of
our company. In February 2004, Mr. Hennessey was elected a director of our
company and was promoted to Chief Executive Officer and President of our
company. Mr. Hennessey relinquished his title as President in March 2004. Mr.
Hennessey co-founded Over-the-Air Wireless, Inc. in June 2001 and served as its
Chief Executive Officer until our acquisition of such company in February 2004.
Prior to that, from January 1996 to December 2002, Mr. Hennessey was Chief
Executive Officer of Eversio Technologies, a mobile enterprise solutions
provider. From January 1996 to the present, Mr. Hennessey has served as Chairman
of Eversio Technologies.
 
 *Alexander
U. Conrad* has been
employed by our company since May 2003. In March 2004, Mr. Conrad was elected a
director of our company. He was also elected as President, Chief Operating
Officer and Secretary of our company in March 2004. Mr. Conrad was the Vice
President of Business Development of Over-the-Air Wireless, Inc. from June 2002
until our acquisition of such company in February 2004. Prior to such time, from
January 2001 through June 2002, Mr. Conrad was Senior Product Manager, New
Initiatives, for eFunds Corporation, a company that provides transaction
processing, risk management and outsourcing services. From April 2000 through
January 2001, Mr. Conrad was Director of Product Management for DocuTouch
Corporation, a provider of document management, authentication, secure
repository and digital signature services. Mr. Conrad received his MBA from
Seattle University, Albers School of Business and Economics in March
2000.
 
 *J.
Paul Quinn* joined
our company in March 2004 as our Chief Financial Officer. From November 2000
through October 2003, Mr. Quinn was the Chief Financial Officer of N2H2, Inc., a
software development company. From August 1999 through October 2000, Mr. Quinn
was the Senior Vice President of Finance and Administration for The Closeout
Company, a discount retailer. From December 1993 through August 1999, he was
Vice President and Controller of Fleming Retail Group, a retailer and
wholesaler.
 
 *Victor
A. Cohn* has been
the Chairman of our Board of Directors since March 2005. Since 2001, Mr. Cohn
has served as the Chief Executive Officer of Focal Point Partners, a New York
based business management firm that he founded. From 2000 to 2001, Mr. Cohn was
the Chairman and co-founder of Alley Capital Partners, a provider of financing
for early stage companies. Mr. Cohn was Senior Managing Director, Global Head of
Equity Capital Markets at Bear, Stearns & Co. from 1996 through 2000, where
Mr. Cohn also served as a member of the Commitment Committee and President's
Council. Prior to such time, from 1992 to 1995, Mr. Cohn was Managing Director,
Co-Head of Investment Banking and Head of Capital Markets at Union Bank of
Switzerland. From 1978 to 1992, Mr. Cohn held various positions at Salomon
Brothers, where he became Managing Director in 1985 and served as a member of
the four-person Equity Operating Committee responsible for Salomon’s worldwide
equity business. For much of his career at Salomon, he held the position of
Global Head of Equity Capital Markets. Mr. Cohn is a member of the Board of
Directors at Verity, Inc., an SEC reporting company that provides intellectual
capital management software, where he is chairman of the nominating and
governance committee, and at Peregrine Systems, an SEC reporting company that
provides enterprise software, where he is chairman of the governance committee
and a member of the audit committee.
   22
 
 *L.
Derrick Ashcroft* has been
a director of our company since November 2000. Mr. Ashcroft is currently the
owner of the Flying X Ranch, a company engaged in the breeding of cattle. Since
March 2005, Mr. Ashcroft has been a director of ICOP Digital, Inc., an SEC
reporting company that delivers security, surveillance, and communications
solutions, where he serves as chairman of the audit committee. From 1990 through
the present, Mr. Ashcroft has been a director of Tata Technologies, Inc., a
company engaged in providing consulting services to manufacturing and
distribution companies on the strategic use of information technology and a
member of the Tata group of companies. Mr. Ashcroft previously served on the
board of directors of the following public and private companies in the United
States and abroad: Leasing Edge Corporation, Access West, Inc., Publistix, Inc.,
Boreham Services, Ltd. (UK), Premier Laser Systems, and Westergaard.com, Inc.
Mr. Ashcroft has served as President of AARK Enterprise, Inc., Senior Vice
President of the Carteret Financial Group, Chairman of Ashcroft Rubin, Inc. and
Chairman of Cardiopet, Inc.
 
 *Vishal
Bhutani* has been
a director of our company since January 2004. From August 2002 through the
present, Mr. Bhutani has been the Head of Research for Alexandra Investment
Management, LLC, and the investment advisor for Alexandra Global Master Fund
Ltd, an investor in our company. From March 2002 to August 2002, Mr. Bhutani was
Vice President of Magten Asset Management, a company engaged in asset
management. From August 2000 through March 2002, Mr. Bhutani was a Corporate
Finance Specialist for McKinsey & Company, a management consulting firm. In
2000, Mr. Bhutani received his MBA in Finance from the NYU Stern School of
Business.
 
 *Paul
Eibeler* has been
a director of our company since August 2003. Since April 2004, Mr. Eibeler has
been the President and a director of Take-Two Interactive Software, Inc., an SEC
reporting company that develops, publishes and distributes interactive game
software. Mr. Eibeler was also President of Take-Two Interactive Software, Inc.
from July 2000 through July 2003 and a director of Take-Two Interactive from
January 2001 through April 2003. From June 1997 through March 2000, Mr. Eibeler
was Executive Vice President and General Manager of Acclaim North America, part
of Acclaim Entertainment, Inc., which at the time was an SEC reporting company
engaged in the development, publication, marketing and distribution of
interactive entertainment software. Mr. Eibeler also was a consultant to
Microsoft in connection with the development and launch of Microsoft’s
Xbox.
 
 In
connection with their investment in our company, Alexandra Global Master Fund
Ltd. is entitled to nominate two directors for election to the board of
directors of our company. We have the right to approve their nominees, which
approval may not unreasonably be withheld. Alexandra has currently nominated
Vishal Bhutani to our board of directors.
 
 In
addition, in connection with our sale of Series B, we granted WPG Select
Technology Fund, L.P., one of the investors in such financing, the right to
nominate one director for election to the board of directors of our company. We
have the right to approve their nominee, which approval may not be unreasonably
withheld. To date, WPG Select Technology Fund, L.P. has not nominated a
director.
 
 Paul
Eibeler and L. Derrick Ashcroft serve on the Audit Committee of the Board of
Directors of our company. Mr. Ashcroft is the Chairman of such committee. The
Audit Committee is responsible for overseeing management’s conduct in the
financial reporting process, including reviews of our company’s annual,
quarterly and other financial reports and its systems of internal accounting,
bookkeeping, and financial controls. The Audit Committee is responsible for
reviewing any non-audit services and special engagements to be performed by the
independent registered public accounting firm and considering the effect of such
performance on the their independence. The Audit Committee is also responsible
for engaging and dismissing our company’s independent registered public
accounting firm. In discharging its oversight role, the Audit Committee is
empowered to meet and discuss with our company’s management and independent
registered public accounting firm the quality and accuracy of our accounting
principles, the completeness and clarity of our financial disclosures and other
significant decisions made by management in the preparation of financial
reports. Our Audit Committee does have an “audit committee financial expert” and
it is Mr. Ashcroft, due to his extensive business experiences throughout his
career.
 
 Paul
Eibeler, L. Derrick Ashcroft and Vishal Bhutani serve on the Compensation
Committee of the Board of Directors of our company. Mr. Eibeler is the Chairman
of such committee. The Compensation Committee of the Board of Directors is
responsible for review and approval of our company’s executive compensation and
administering our stock option plan.
   23
 
 **Section
16(a) Beneficial Ownership Reporting Compliance**
 
 Section
16(a) of the Securities Exchange Act of 1934 requires our executive officers,
directors and persons who own more than ten percent of a registered class of our
equity securities to file reports of ownership and changes in ownership on Forms
3, 4 and 5 with the Securities and Exchange Commission. These persons are
required by SEC regulation to furnish us with copies of all Forms 3, 4 and 5
they file with the SEC. Based solely upon our review of the copies of the forms
and written representations we have received, we believe that all such persons
complied on a timely basis with all filing requirements applicable to them with
respect to transactions during fiscal 2004.
 
 **Code
of Ethics**
 We have
adopted a Code of Ethics applicable to our principal executive officer,
principal financial officer, principal accounting officer and controller, a copy
of which was filed as an exhibit to our Form 10-KSB for the fiscal year ended
December 31, 2003 and which is incorporated herein by reference. Employees
conform to ethical business practices which are monitored by
management.
  **Item
10. Executive Compensation.**
 
 The
following table provides information concerning the annual and long-term
compensation awarded, earned or paid to our chief executive officer and
executive officers whose cash compensation exceeded $100,000 in 2004 (the “named
executive officers”). For the period prior to September 29, 2003, the date of
the acquisition by us of Dwango North America, Inc., the following table
includes compensation earned at Dwango North America, Inc.
 
 **Long-Term
      Compensation****Annual
      Compensation****Name
      and Principal Position**
    
    **Year**
    
    **Salary**
    
    **Bonus**
    
    **Restricted**
      **Stock
      Award**
    
    **Number
      of Securities****Underlying
      Options**
    
    **All
      Other****Compensation
      (1)**Rick
      J. Hennessey
    
    
    2004
    
    $
    128,542
    
    
    —
    
    
    —
    
    
    836,088
    
    $
    960Chief
      Executive Officer
    
    
    2003
    
    $
    53,125
    
    
    —
    
    
    —
    
    
    —
    
    
    —2002
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Robert
      E. Huntley
    
    
    2004
    
    $
    96,667
    
    
    —
    
    
    —
    
    
    —
    
    
    —*Formerly
      Chief Executive Officer (resigned Feb.*
    
    
    2003
    
    $
    86,000
    
    
    —
    
    
    —
    
    
    1,030,074
    
    
    —*2004)
      & Chairman of the Board (resigned*
    
    
    2002
    
    $
    78,000
    
    
    —
    
    
    —
    
    
    —
    
    
    —*June
      2004)*Alexander
      Conrad
    
    
    2004
    
    $
    108,750
    
    
    —
    
    
    —
    
    
    570,737
    
    $
    960President
      & Chief Operating Officer
    
    
    2003
    
    $
    51,250
    
    
    —
    
    
    —
    
    
    —
    
    
    —2002
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —J.
      Paul Quinn
    
    
    2004
    
    $
    95,538
    
    $
    14,250
    
    
    —
    
    
    351,000
    
    $
    960Chief
      Financial Officer
    
    
    2003
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —2002
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
 
 (1)
Includes stipend for broadband and cell phone use for business
purposes.
  **Director
Compensation**
 
 As
compensation for services on our board of directors, Messrs. Bhutani, Eibeler
and Ashcroft were each granted a non-qualified stock option to purchase 44,000
shares of common stock. Messrs. Eibeler and Ashcroft were each granted a
non-qualified stock option to purchase 12,000 shares of common stock for serving
as Chairmen of the Compensation Committee and Audit Committee, respectively.
Each grant was at an exercise price of $1.30 per share. Each option is for a
term of ten years commencing as of October 5, 2004 and is currently
exercisable.
 
 Effective
March 8, 2005, we elected Victor Cohn to the Board of Directors of our company
and appointed him as Chairman of the Board of Directors. In connection with the
election of Mr. Cohn, we entered into a Director Agreement providing for a fee
to Mr. Cohn for his services of $6,000 per month. Mr. Cohn is also entitled to
normal attendance fees for meetings of the Board of Directors. We also granted
Mr. Cohn options to purchase 300,000 shares of our common stock pursuant to our
2003 Equity Incentive Plan at an exercise price of $1.99 per share. One-twelfth
of such options vested immediately and an additional one-twelfth will vest every
three months until vested in full.
 
 24
 
 Each of
our directors is entitled to an annual grant of options to purchase 24,000
shares of our common stock at an exercise price equal to the fair market value
of our common stock on the day of grant, which options vest in full after one
year. Each chairman of a committee of our board of directors is entitled to an
annual grant of options to purchase 12,000 shares of common stock at an exercise
price equal to the fair market value of our common stock on the day of grant,
which options vest immediately. New directors that join our board of directors
are entitled to an initial grant of options to purchase 44,000 shares of our
common stock at an exercise price equal to the fair market value of our common
stock on the day of grant, which options vest in full after one
year.
 
 Each
director is reimbursed for his expenses incurred in connection with the
performance of his duties as a director. In addition, each director is entitled
to $500 per in-person meeting and $250 per telephonic meeting of the board of
directors or any committee thereof in which he participates.
  **Option
Grants in Last Fiscal Year**
 
 The
following table provides information concerning individual grants of stock
options made during 2004 to our named executive officers.
 
 **Name**
    
    **Number
      of****Securities
      Underlying****Options****(b)**
    
    **Percent
      of****Total
      Options****Granted
      to****Employees**
      **In
      2004**
    
    **Exercise
      Price**
      **(in
      $ per share)**
    
    **Expiration****Date**Rick
      J. Hennessey
    
    
    410,088
      300,000
      25,000
      1,000
      100,000
    (a)
    
    10
      7
      1
      —
      2
    %%
      %
      %
      
      %
    $
      $
      $
      $
      $
    1.45
      1.25
      1.25
      1.25
      1.30
    
    
    4/14/13
      3/30/14
      3/30/14
      3/30/14
      10/4/14Alexander
      Conrad
    
    
    144,737(a)
      300,000
      25,000
      1,000
      100,000
    
    
    4
      7
      1
      —
      2
    %%
      %
      %
      
      %
    $
      $
      $
      $
      $
    1.45
      1.25
      1.25
      1.25
      1.30
    
    
    4/14/13
      3/30/14
      3/30/14
      3/30/14
      10/4/14J.
      Paul Quinn
    
    
    300,000
      1,000
      50,000
    
    
    7
      0
      1
    %
      %
      %
    $
      $
      $
    1.25
      1.25
      1.30
    
    
    3/30/14
      3/30/14
      10/4/14
 
 (a)
    Options
      were received in connection with our acquisition of Over-the-Air Wireless,
      Inc.
 (b)
    Mr.
      Huntley received no options in 2004.
  Options Exercised in 2004 and Year End Values
  The
following table provides information concerning the exercise of stock options
during 2004, and the value of unexercised options owned, by our named executive
officers.
  **Number
      of Securities**
      **Underlying****Unexercised
      Options (1)**
    
    
    **Value
      of Unexercised**
      **In-the-Money****Options
      (2)****Name(3)**
    
    
    **Shares****Acquired**
      **On****Exercise**
    
    
    **Value**
      **Realized**
    
    
    **Exercisable**
    
    
    **UnExercisable**
    
    
    **Exercisable**
    
    
    **UnExercisable**Rick
      J. Hennessey
    
    
    —
    
    
    —
    
    
    367,740
    
    
    468,348
    
    $
    152,296
    
    $
    262,339Alexander
      Conrad
    
    
    —
    
    
    —
    
    
    146,614
    
    
    424,123
    
    $
    63,846
    
    $
    244,649J.
      Paul Quinn
    
    
    —
    
    
    —
    
    
    1,000
    
    
    350,000
    
    $
    600
    
    $
    207,500
 (1)
    Includes
      ownership of options as of December 31, 2004.
 (2)
    Based
      on closing price of our common stock as reported on the Over-the-Counter
      Bulletin Board on December 31, 2004.
 (3)
    Mr.
      Huntley’s options, pursuant to the terms of our 2003 Equity Incentive
      Plan, terminated 90 days after his resignation in June 2004 as Chairman of
      the Board.
 
 **Employment
Agreements**
 
 On March
1, 2005, we entered into new Employment Agreements (the “Agreements”) with each
of Rick J. Hennessey, our Chief Executive Officer, and Alexander U. Conrad, our
President, Chief Operating Officer and Secretary. The Agreements are for a term
of three years unless sooner terminated pursuant to the provisions thereof. The
Agreements provide for an annual base salary of $190,000 for Mr. Hennessey and
$170,000 for Mr. Conrad. The Agreements also provide for the payment of an
amount equal to 100% of such base salary upon achieving certain annual
performance targets. The employment of Mr. Hennessey or Mr. Conrad may be
terminated by our company at any time with or without cause. Mr. Hennessey and
Mr. Conrad may also terminate their employment at any time with or without good
reason. (as defined in the Agreements). If the employment of Mr. Hennessey or
Mr. Conrad is terminated by our company without cause or by either of Mr.
Hennessey or Mr. Conrad for good reason, they shall be entitled to continue to
receive their base salary for a period of twelve months and a pro rata
percentage of any bonus amount to which they would have otherwise been entitled.
The Agreements contain confidentiality, noncompete, and nonsolicitation
covenants for Messrs. Hennessey and Conrad.
   25
  In
accordance with the Agreements, on March 1, 2005 we granted under our 2003
Equity Incentive Plan ten year options to purchase an aggregate of (i) 100,000
shares of our common stock to Mr. Hennessey and (ii) 75,000 shares of our common
stock to Mr. Conrad. Such options are exercisable at $1.94 per share and will
vest as to 1/3 of such shares on each of the first, second and third
anniversaries of the date of grant. Such options will vest in full in the event
of termination of employment without cause or for good reason.
  **Provisions
of our Charter and Bylaws**
 
 Our
articles of incorporation provide that our company will indemnify any person who
is or was a director, officer, employee, agent or fiduciary of our company to
the fullest extent permitted by applicable law. Nevada law permits a Nevada
corporation to indemnify its directors, officers, employees and agents against
liabilities and expenses they may incur in such capacities in connection with
any proceeding in which they may be involved, if (i) such director or officer is
not liable to the corporation or its stockholders due to the fact that his or
her acts or omissions constituted a breach of his or her fiduciary duties as a
director or officer and the breach of those duties involved intentional
misconduct, fraud or a knowing violation of law, or (ii) he or she acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the company, or that with respect to any criminal action or
proceeding, he or she had reasonable cause to believe that his or her conduct
was unlawful.
 
 In
addition, our company’s bylaws include provisions to indemnify our officers and
directors and other persons against expenses, judgments, fines and amounts
incurred or paid in settlement in connection with civil or criminal claims,
actions, suits or proceedings against such persons by reason of serving or
having served as officers, directors, or in other capacities, except in any
action, suit or proceeding in which it is adjudged that such person was liable
for negligence or misconduct in the performance of his duty. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent will not, of itself, create a
presumption that the person is liable for negligence or misconduct on the
performance of his or her duties.
 
 
 **Item
11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters**
 
 The
following table shows as of February 8, 2005 the common stock owned by our
directors and “named executive officers”, by persons known by us to beneficially
own, individually, or as a group, more than 5% of our outstanding common stock
and all of our directors and executive officers as a group.
 
 **Name
      and Address****of
      Beneficial Owner (1)**
    
    **Beneficial****Ownership
      of****Capital
      Stock (2)**
    
    **Percent
      of**
      **Common****Stock**Robert
      E. Huntley (3)
    
    
    2,800,322(4
    )
    
    32.2
    %Rick
      J. Hennessey
    
    
    811,917(5
    )
    
    9.2
    %Alexander
      U. Conrad
    
    
    278,330(6
    )
    
    3.3
    %J.
      Paul Quinn
    
    
    101,000(7
    )
    
    1.2
    %L.
      Derrick Ashcroft
    
    
    142,707(8
    )
    
    1.7
    %Vishal
      Bhutani (9)
    
    
    44,000(10
    )
    
    *Paul
      Eibeler (11)
    
    
    495,783(12
    )
    
    5.7
    %James
      Scibelli (13)
    
    
    798,443(14
    )
    
    8.9
    %David
      Adams (15)
    
    
    292,916
    
    
    3.5
    %James
      Scoroposki (16)
    
    
    502,573(17
    )
    
    5.8
    %Silverman
      Partners(18)
    
    
    566,114(19
    )
    
    6.4
    %Alexandra
      Global Master Fund Ltd. (20)
    
    
    821,973(21
    )
    
    9.9
    %Dwango
      Co., Ltd. (22)
    
    
    542,624
    
    
    6.6
    %HCFP/Brenner
      Securities, LLC (23)
    
    
    526,296(24
    )
    
    6.0
    %RG
      Securities, LLC (25)
    
    
    526,296(26
    )
    
    6.0
    %Weiss,
      Peck & Greer Investments, a division of Robeco U.S.A., LLC
      (27)
    
    
    900,272(28
    )
    
    9.9
    %Trafelet
      & Company, LLC (29)
    
    
    900,272(30
    )
    
    9.9
    %Meruelo
      Capital Partners (31)
    
    
    900,272(32
    )
    
    9.9
    %Van
      L. Brady (33)
    
    
    900,272(34
    )
    
    9.9
    %All
      directors and executive officers as a group(6
      persons)
    
    
    1,874,621(35
    )
    
    19.1
    %
 
 
 26
 ________________
 *
    Less than 1%
 (1)
    The
      address of each person, except as otherwise noted, is c/o Dwango North
      America Corp., 2211 Elliott Avenue, Suite 601, Seattle, WA
      98121.
 (2)
    Except
      as otherwise noted, each individual or entity has sole voting and
      investment power over the securities listed. Pursuant to the rules and
      regulations of the Securities and Exchange Commission, shares of common
      stock that an individual or group has a right to acquire within 60 days
      pursuant to the exercise of options or warrants are deemed to be
      outstanding for the purposes of computing the percentage ownership of such
      individual or group, but are not deemed to be outstanding for the purpose
      of computing the percentage ownership of any other person shown in the
      table.
 (3)
    The
      address of Mr. Huntley is 222 Vanderpool Lane, Houston, Texas,
      77024.
 (4)
    Includes
      421,841 shares of common stock issuable upon the exercise of warrants held
      by Mr. Huntley.
 (5)
    Includes
      519,001 shares of common stock issuable upon exercise of options held by
      Mr. Hennessey.
 (6)
    Includes
      264,706 shares of common stock issuable upon exercise of options held by
      Mr. Conrad.
 (7)
    Consists
      of shares of common stock issuable upon exercise of options held by Mr.
      Quinn.
 (8)
    Consists
      of 142,707 shares of common stock issuable upon exercise of options held
      by Mr. Ashcroft.
 (9)
    The
      address of Mr. Bhutani is c/o Alexandra Investment Management, LLC, 767
      Third Avenue, 39thFloor, New York, New York 10017.
 (10)
    Consists
      of shares of common stock issuable upon exercise of options held by Mr.
      Bhutani. Mr. Bhutani is the Head of Research for Alexandra Investment
      Management, LLC, the investment advisor for Alexandra Global Master Fund
      Ltd., one of the investors in our company. No shares owned by Alexandra
      are attributed to Mr. Bhutani.
 (11)
    The
      address of Mr. Eibeler is c/o Take-Two Interactive Software, Inc., 622
      Broadway, New York, New York 10012.
 (12)
    Includes
      52,632 shares of common stock issuable upon conversion of senior
      convertible promissory notes, 95,485 shares of common stock issuable upon
      exercise of warrants, and 306,000 shares of common stock issuable upon
      exercise of options held by Mr. Eibeler.
 (13)
    The
      address of Mr. Scibelli is c/o RG Securities, LLC, 900 Merchants
      Concourse, Suite 400, Westbury,
      NY 11590.
 (14)
    Includes
      105,263 shares of common stock issuable upon conversion of senior
      convertible notes and 83,442 shares of common stock issuable upon exercise
      of warrants held by Mr. Scibelli, and 526,296 shares of common stock
      issuable upon exercise of warrants held by RG Securities, LLC, of which
      Mr. Scibelli may be deemed to be the beneficial
owner.
 (15)
    The
      address of Mr. Adams is 1221 1stAve. #1507, Seattle, WA 98101.
 (16)
    The
      address of Mr. Scoroposki is c/o Jaymar 189 South St. Oyster Bay, N.Y.
      11771.
 (17)
    Includes
      210,526 shares of common stock issuable upon conversion of senior
      convertible promissory notes and 166,883 shares of common stock issuable
      upon exercise of warrants held by Mr.
Scoroposki.
 (18)
    The
      address of Silverman Partners is c/o Harvey Silverman, Spear, Leeds &
      Kellogg, 120 Broadway, 6thFloor, New York, NY 10271. Harvey Silverman has sole voting and investment
      power over these securities.
 (19)
    Consists
      of 315,789 shares of common stock issuable upon conversion of senior
      convertible promissory notes and 250,325 shares of common stock issuable
      upon exercise of warrants held by Silverman
Partners.
 (20)
    The
      address of Alexandra Global Master Fund Ltd. is c/o Alexandra Investment
      Management, LLC, 767 Third Avenue, 39thFloor, New York, NY 10017.Alexandra
      Investment Management, LLC, a Delaware limited liability company (“AIM”),
      serves as investment adviser to Alexandra Global Master Fund Ltd., a
      British Virgin Islands company (“Alexandra”). By reason of such
      relationship, AIM may be deemed to share dispositive power over the shares
      of common stock stated as beneficially owned by Alexandra. AIM disclaims
      beneficial ownership of such shares of common stock. Messrs. Mikhail A.
      Filimonov (“Filimonov”) and Dimitri Sogoloff (“Sogoloff”) are managing
      members of AIM. By reason of such relationships, Filimonov and Sogoloff
      may be deemed to share dispositive power over the shares of common stock
      stated as beneficially owned by Alexandra. Mr. Vishal Bhutani (“Bhutani”)
      is a director of our company and employed by AIM.
 (21)
    The
      shares of common stock reported as beneficially owned by Alexandra
      includes 790,900 shares of outstanding common stock. Certain of the shares
      of common stock reported as beneficially owned are shares that Alexandra
      has the right to acquire upon conversion of notes and preferred stock and
      exercise of common stock purchase warrants. The notes, preferred stock and
      common stock purchase warrants held by Alexandra contain limitations on
      the conversion or exercise thereof which make such notes and shares of
      preferred stock inconvertible and such common stock purchase warrants
      unexercisable to the extent the holder would, upon conversion or exercise,
      beneficially own more than 9.9% of the common stock. The amount reported
      as beneficially owned is based on such limitations. In the absence of such
      limitations, Alexandra’s notes, preferred stock and common stock purchase
      warrants would be convertible into or exercisable for an aggregate of
      12,114,462 shares of our common stock.
 (22)
    The
      address of Dwango Co., Ltd. is Hamacho Center Bldg., 2-31-1,
      Nihonbashi-Hamacho, Chuo-Ku, Tokyo, Japan 103-0007. Dwango Co., Ltd. is a
      public company in Japan, whose securities are traded on the Tokyo Stock
      Exchange.
 (23)
    The
      address of HCFP/Brenner Securities, LLC is 888 7thAvenue, 17thFloor, New York, New York 10106. Steven Shaffer has sole voting and
      investment power over these securities.
 27
  
 (24)
    Consists
      of shares of common stock issuable upon exercise of warrants held by
      HCFP/Brenner Securities, LLC.
 (25)
    The
      address of RG Securities, LLC is 900 Merchants Concourse, Suite 400,
      Westbury, New York 11590.
      James Scibelli and Robert Scibelli have shared voting and investment power
      over these securities.
 (26)
    Consists
      of shares of common stock issuable upon exercise of warrants held by RG
      Securities, LLC.
 (27)
    The
      address of Weiss, Peck & Greer Investments, a division of Robeco USA,
      L.L.C. (“WPG Investments”), is Robeco USA, L.L.C., One New York Plaza,
      30thFloor, New York 10004. WPG Investments is the investment manager for the
      following funds: WPG Select Technology Fund, L.P., a Delaware limited
      partnership (“WPG Select”); WPG Select Technology Overseas, Ltd., a Cayman
      Islands corporation (“WPG Overseas”); WPG Select Technology QP Fund, L.P.,
      a Delaware limited partnership (“WPG QP”); WPG Software Fund, L.P., a
      Delaware limited partnership (“WPG Software”, and together with WPG
      Select, WPG Overseas, and WPG QP, the “WPG Funds”). By reason of such
      relationship, WPG Investments and the WPG Funds may be deemed to share
      dispositive power over the shares of common stock stated as beneficially
      owned by WPG Investments. Mr. George Boyd (“Boyd”) is the Head of Equity
      of WPG Investments and each of the WPG Funds and Mr. Ben Taylor (“Taylor”)
      is a Managing Director of WPG Investments and each of the WPG Funds as
      well as portfolio manager of each of the WPG Funds. By reason of such
      relationships, Boyd and Taylor may be deemed to share dispositive power
      over the shares of common stock stated as beneficially owned by WPG
      Investments. WPG Investments has a broker-dealer
  affiliate.
 (28)
    The
      shares of common stock reported as beneficially owned by WPG Investments
      are shares that such holder has the right to acquire upon conversion of
      preferred stock and exercise of common stock purchase warrants held by the
      WPG Funds. Such preferred stock and common stock purchase warrants contain
      limitations on the conversion or exercise thereof which make such shares
      of preferred stock inconvertible and such common stock purchase warrants
      unexercisable to the extent that either WPG Investments or the holder
      would, upon conversion or exercise, beneficially own more than 9.9% of the
      common stock. The amount reported as beneficially owned is based on such
      limitations. In the absence of such limitations, such preferred stock and
      common stock purchase warrants would be convertible into or exercisable
      for an aggregate of 6,451,610 shares of our common stock. Furthermore, in
      the absence of such limitations, the preferred stock and common stock
      purchase warrants held by each of the WPG Funds would be convertible into
      or exercisable for an aggregate of the following number of shares of our
      common stock: WPG Select - 489,064 shares; WPG Overseas - 1,940,130
      shares; WPG QP - 2,009,902 shares; and WPG Software - 2,012,514
      shares.
 (29)
    The
      address of Trafelet & Company, LLC (“Trafelet”), is 900 Third Avenue,
      5thFloor, New York, NY 10022. Trafelet is the investment manager for the
      following funds: Delta Pleiades, LP, (“Delta Pleiades”); Delta Offshore,
      Ltd, (“Delta Offshore”); Delta Institutional, LP, (“Delta Institutional”);
      and Delta Onshore, LP, (“Delta Onshore”, and together with Delta Pleiades,
      Delta Offshore and Delta Institutional, the “Delta Funds”). By reason of
      such relationship, Trafelet and the Delta Funds may be deemed to share
      dispositive power over the shares of common stock stated as beneficially
      owned by Trafelet. Peter J. Hofbauer (“Hofbauer”) is the Chief Operating
      Officer of Trafelet and Remy W. Trafelet (“RWT”) is managing member of
      Trafelet. By reason of such relationships, Hofbauer and RWT may be deemed
      to share dispositive power over the shares of common stock stated as
      beneficially owned by Trafelet.
 (30)
    The
      shares of common stock reported as beneficially owned by Trafelet are
      shares that such holder has the right to acquire upon conversion of
      preferred stock and exercise of common stock purchase warrants held by the
      Delta Funds. Such preferred stock and common stock purchase warrants
      contain limitations on the conversion or exercise thereof which make such
      shares of preferred stock inconvertible and such common stock purchase
      warrants unexercisable to the extent that either WPG Investments or the
      holder would, upon conversion or exercise, beneficially own more than 9.9%
      of the common stock. The amount reported as beneficially owned is based on
      such limitations. In the absence of such limitations, such preferred stock
      and common stock purchase warrants would be convertible into or
      exercisable for an aggregate of 8,357,141 shares of our common stock.
      Furthermore, in the absence of such limitations, the preferred stock and
      common stock purchase warrants held by each of the Delta Funds would be
      convertible into or exercisable for an aggregate of the following number
      of shares of our common stock: Delta Pleiades - 556,231 shares; Delta
      Offshore - 3,903,640 shares; Delta Institutional - 3,309,410 shares; and
      Delta Onshore - 587,860 shares.
 (31)
    The
      address of Meruelo Capital Partners (“Meruelo”) is 9550 Firestone Blvd.
      Suite 105, Downey, California 90241. Alex Meruelo has voting and
      investment power over these securities.
 (32)
    The
      shares of common stock reported as beneficially owned by Meruelo are
      shares that such holder has the right to acquire upon conversion of
      preferred stock and exercise of common stock purchase warrants. Such
      preferred stock and common stock purchase warrants contain limitations on
      the conversion or exercise thereof which make such shares of preferred
      stock inconvertible and such common stock purchase warrants unexercisable
      to the extent that the holder would, upon conversion or exercise,
      beneficially own more than 9.9% of the common stock. The amount reported
      as beneficially owned is based on such limitations. In the absence of such
      limitations, such preferred stock and common stock purchase warrants would
      be convertible into or exercisable for an aggregate of 2,321,428 shares of
      our common stock.
 (33)
    The
      address of Van L. Brady (“Brady”) is 44 Montgomery Street, Suite 2110, San
      Francisco, CA 94194. Brady is the general partner of Presidio Partners,
      (“Presidio”), Geary Partners, (“Geary”), and Brady Retirement Fund, LP,
      (“Brady Retirement Fund”, and together with Presidio and Geary, the “Brady
      Funds”). By reason of such relationship, Brady and the Brady Funds may be
      deemed to share dispositive power over the shares of common stock stated
      as beneficially owned by Brady.
 (34)
    The
      shares of common stock reported as beneficially owned by Brady are shares
      that such holder has the right to acquire upon conversion of preferred
      stock and exercise of common stock purchase warrants held by the Brady
      Funds. Such preferred stock and common stock purchase warrants contain
      limitations on the conversion or exercise thereof which make such shares
      of preferred stock inconvertible and such common stock purchase warrants
      unexercisable to the extent that either Brady or the holder would, upon
      conversion or exercise, beneficially own more than 9.9% of the common
      stock. The amount reported as beneficially owned is based on such
      limitations. In the absence of such limitations, such preferred stock and
      common stock purchase warrants would be convertible into or exercisable
      for an aggregate of 928,571 shares of our common stock. Furthermore, in
      the absence of such limitations, the preferred stock and common stock
      purchase warrants held by each of the Brady Funds would be convertible
      into or exercisable for an aggregate of the following number of shares of
      our common stock: Presidio - 473,571 shares; Geary - 351,910 shares; and
      Brady Retirement Fund - 103,090.
 (35)
    Includes1,548,625shares of common stock issuable upon conversion of senior convertible
      notes and exercise of options and warrants held by the directors and
      executive officers. Does not include options to purchase 300,000 shares of
      common stock issued to Victor Cohn who was elected to our board of
      directors effective March 8, 2005.
 
 28
 
 **Item
12. Certain Relationships and Related Transactions**
 
 In
connection with the founding of our company, Robert E. Huntley received
2,887,642 shares of our common stock. Mr. Huntley provided services to our
company in consideration for the receipt of such stock in our company. He
subsequently transferred 696,741 shares of such common stock to Huntley Family
Trust and 139,348 shares of such common stock to Huntley Trust No.2. Such trusts
have recently distributed such shares to the respective beneficiaries thereof.
In connection with his serving as an officer and director of our company, Mr.
Huntley also received options to purchase 1,030,074 shares of our common stock,
which options expired in 2004 in view of his termination of services with our
company.
 
 In April
2001, Marilyn Miller, the wife of Robert E. Huntley, loaned our company $50,000
as evidenced by a promissory note dated April 27, 2001 bearing interest at a
rate of 10% per annum. Such note was modified, renewed, and extended by
agreement between our company and Marilyn Miller dated April 23, 2002. Such note
was contributed to the capital of our company on August 30, 2002. In addition,
on April 23, 2002, Ms. Miller loaned to our company another $50,000, as
evidenced by a promissory note dated April 23, 2002, bearing interest at a rate
of 10% per annum. This note was repaid in full as of August 30,
2002.
 
 In May
2003, Mr. James Scibelli purchased $100,000 of our senior convertible promissory
notes, convertible into 105,263 shares of common stock, and warrants to purchase
83,442 shares of common stock pursuant to an offering, completed in September
2003, in which RG Securities, LLC and HCFP/Brenner Securities, LLC acted as
co-placement agents. RG Securities and HCFP/Brenner Securities received an
aggregate cash fee of $272,500 and warrants to purchase an aggregate 417,208
shares of our common stock for acting as co-placement agents for such offering.
Mr. Scibelli is currently the beneficial owner of 8.9% of our common stock and
in March 2004 became a director of our company. Mr. Scibelli subsequently
resigned as a director of our company in October 2004. RG Securities, LLC and
HCFP/Brenner Securities, LLC are each currently the beneficial owner of 6.0% of
our common stock. All of the cash fees paid and warrants issued to RG
Securities, LLC and HCFP/Brenner Securities, LLC describe in this section,
“Certain Transactions,” were divided by these two firms.
 
 On
November 19, 2003, Paul Eibeler was granted a non-qualified stock option to
purchase 250,000 shares of common stock at an exercise price of $1.50 per share.
The option is for a term of ten years and is immediately exercisable. The option
was issued in consideration of his services to our company as a director and, in
addition to his services as a director, the provision by Mr. Eibeler of business
and consulting services to our company, consisting primarily of advice regarding
the strategic direction of the company.
 
 RG
Securities, LLC and HCFP/Brenner Securities, LLC received placement compensation
in connection with our sale of 250,000 shares of common stock and warrants to
purchase 315,790 shares of common stock to Alexandra Global Master Fund Ltd. for
an aggregate purchase price of $300,000 in December 2003. RG Securities and
HCFP/Brenner Securities received an aggregate cash fee of $24,000 and warrants
to purchase an aggregate of 50,000 shares of our common stock.
 
 RG
Securities, LLC, and HCFP/Brenner Securities, LLC received placement
compensation in connection with our sale of $1,700,000 aggregate principal
amount of 9% senior convertible notes due January 2007, convertible into
1,827,957 shares of common stock, and 913,978 common stock purchase warrants to
Alexandra Global Master Fund Ltd. in January 2004. RG Securities and
HCFP/Brenner Securities received an aggregate cash fee of $136,000 and warrants
to purchase an aggregate of 212,500 shares of our common stock.
 
 In
January 2004, we issued to HCFP/Brenner Securities, LLC and RG Securities, LLC
warrants to purchase an aggregate of 10,284 shares of our common stock, valued
at $13,000, in consideration of their deferment of cash fees owing to
them.
 
 From
October through December 2003, Robert E. Huntley, a former officer and director
of our company, and Paul Eibeler, one of our outside directors, advanced an
aggregate of $392,000 and $50,000, respectively to our company. In January 2004,
such individuals elected to apply such amounts toward the purchase of an
aggregate of 326,667 and 41,667 shares of our common stock ($1.20 per share),
respectively, and warrants to purchase 421,841 and 53,764 shares of our common
stock at an exercise price of $.93 per share, respectively, in full satisfaction
of the amounts previously advanced.
   29
 
 On
February 4, 2004, we entered into a transaction with Over-the-Air Wireless,
Inc., a company engaged in the wireless ringtone business. Rick J. Hennessey,
Alexander U. Conrad, David Adams and Mark Sanders were the sole shareholders of
Over-the Air Wireless, Inc. Mr. Hennessey was the chief executive officer, Mr.
Conrad was the director of marketing and finance and David Adams was the
President and Chief Technology Officer for Over-the-Air Wireless, Inc. At the
time of the transaction, Rick J. Hennessey was our executive vice president and
Alexander U. Conrad and David Adams were employees of ours. Rick J. Hennessey
has become our chief executive officer and Alexander U. Conrad has become our
president, chief operating officer and secretary. David Adams became our vice
president of development. David Adams is no longer employed by us. In connection
with the transaction, we issued (i) to Rick J. Hennessey and David Adams,
292,916 shares of our common stock each, (ii) to Alexander U. Conrad, 13,624
shares of our common stock, and (iii) to Mark Sanders, 81,744 shares of our
common stock. We granted the former Over-the-Air Wireless, Inc. shareholders
customary piggyback registration rights and agreed that we would include their
shares of common stock in a registration statement filed within six months of
our acquisition of Over-the-Air Wireless, which six-month filing requirement has
been waived by Messrs. Hennessey and Conrad, the only such persons whose shares
have not yet been registered. In addition, we entered into employment agreements
with each of Messrs. Hennessey, Conrad and Adams, and issued options to purchase
410,088 shares of common stock to each of Mr. Hennessey and Mr. Adams and
options to purchase 144,737 shares of common stock to Mr. Conrad. The value of
the shares of common stock issued to the former shareholders of Over-the-Air
Wireless, Inc. was $1,000,000 and the value of the options issued was $1,217,000
(of which $517,000 is attributable to Mr. Hennessey’s options and $183,000 is
attributable to Mr. Conrad’s options) based upon the Black-Scholes option
pricing model, with the following assumptions: 94% volatility, 6 year expected
life, risk free interest rate of 3.41% and a dividend yield of 0%.
 
 RG
Securities, LLC and HCFP/Brenner Securities, LLC received placement compensation
in connection with our sale of $2,300,000 aggregate principal amount of 9%
senior convertible notes due March 2007, convertible into 2,473,118 shares of
common stock, and 1,236,559 common stock purchase warrants to Alexandra Global
Master Fund Ltd. in March 2004. RG Securities and HCFP/Brenner Securities
received an aggregate cash fee of $184,000 and warrants to purchase an aggregate
of 287,500 shares of our common stock.
 
 RG
Securities, LLC and HCFP/Brenner Securities, LLC may receive placement
compensation in connection with our sale of an aggregate of 1,250 shares of
Series A and 1,345,087 common stock purchase warrants to Alexandra Global Master
Fund Ltd. in June, July and August 2004. The amount of such compensation has not
yet been determined, although we anticipate that the amount will not exceed
$100,000 in the aggregate and warrants to purchase an aggregate of 208,333
shares of our common stock.
 
 In
connection with their investments in our company, Alexandra Global Master Fund
Ltd. is entitled to nominate two directors for election to the board of
directors of our company. We have the right to approve their nominees, which
approval may not be unreasonably withheld. Alexandra has currently nominated
Vishal Bhutani to our board of directors.
 
 The
conversion and exercise prices, and number of shares of common stock underlying
the notes, warrants and preferred stock referred to above, have been adjusted
based upon anti-dilution provisions triggered by the sale of our Series B and
series D convertible preferred stock.
 
 **Item
13. Exhibits, Financial Statements Schedules and Reports on Form
8-K.**
 
 Number
    Description
 
 2
    Agreement
      and Plan of Reorganization, dated September 19, 2003, among Woodland
      Hatchery, Inc., Dwango North America, Inc. and the securityholders of
      Dwango listed therein (incorporated by reference to Exhibit 2.1 to the
      Registrant’s Current Report on Form 8-K (Date of Report: September 29,
      2003) filed with the Securities and Exchange Commission on October 7,
      2003)
 3.1
    Articles
      of Incorporation, as amended to date (incorporated by reference to
      Exhibits 3.1 to the Registration Statement on Form SB-2 filed with the
      Securities and Exchange Commission on September 6, 2001 and Exhibit 3.1 to
      the Registrant’s Current Report on Form 8-K (Date of Report: September 29,
      2003) filed with the Securities and Exchange Commission on October 7,
      2003)
 3.2
    Certificate
      of Designations of Series A (incorporated by reference to Exhibit 3.1 to
      the Registrant’s Current Report on Form 8-K (Date of Report: June 14,
      2004) filed with the Securities and Exchange Commission on June 21,
      2004)
 3.3
    Amendment
      to Certificate of Designations of Series A (incorporated by reference to
      Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (Date of
      Report: August 25, 2004) filed with the Securities and Exchange Commission
      on August 31, 2004
 3.4
    Certificate
      of Designations of Series B (incorporated by reference to Exhibit 3.2 to
      the Registrant’s Current Report on Form 8-K (Date of Report: August 25,
      2004) filed with the Securities and Exchange Commission on August 31,
      2004
 30
  
 3.5
    Certificate
      of Designations of Series C Convertible Preferred Stock (incorporated by
      reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K
      (Date of Report: January 12, 2005) filed with the Securities and Exchange
      Commission on January 18, 2005
 3.6
    Certificate
      of Designations of Series D Convertible Preferred Stock (incorporated by
      reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K
      (Date of Report: February 1, 2005) filed with the Securities and Exchange
      Commission on February 3, 2005
 3.7
    Amended
      and Restated Bylaws of the Registrant (incorporated by reference to
      Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (Date of
      Report: June 1, 2004) filed with the Securities and Exchange Commission on
      June 3, 2004)
 4.1
    Specimen
      Common Stock Certificate (incorporated by reference to Exhibit 3 the Form
      8-A filed with the Securities and Exchange Commission on June 3,
      2004)
 4.2
    Form
      of 8% Senior Convertible Promissory Note due 2006 (incorporated by
      reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
      (Date of Report: September 29, 2003) filed with the Securities and
      Exchange Commission on October 7, 2003)
 4.3
    9%
      Senior Convertible Note due 2007 issued to Alexandra Global Master Fund
      Ltd. dated January 8, 2004 (incorporated by reference to Exhibit 4.4 to
      the Registrant’s Current Report on Form 8-K (Date of Report: December 12,
      2003) filed with the Securities and Exchange Commission on January 16,
      2004)
 4.4
    Form
      of Warrants to purchase 41,722 shares of common stock issued in August
      2002 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current
      Report on Form 8-K (Date of Report: September 29, 2003) filed with the
      Securities and Exchange Commission on October 7,
2003)
 4.5
    Form
      of Warrants to purchase an aggregate of 83,444 shares of common stock
      (incorporated by reference to Exhibit 4.3 to the Registrant’s Current
      Report on Form 8-K (Date of Report: September 29, 2003) filed with the
      Securities and Exchange Commission on October 7,
2003)
 4.6
    Form
      of Warrants to purchase an aggregate of 2,086,037 shares of common stock
      (incorporated by reference to Exhibit 4.4 to the Registrant’s Current
      Report on Form 8-K (Date of Report September 29, 2003) filed with the
      Securities and Exchange Commission on October 7,
2003)
 4.7
    Form
      of Warrants to purchase an aggregate of 417,208 shares of common stock
      issued to HCFP/Brenner Securities, LLC and RG Securities, LLC for acting
      as placement agent in connection with the September 2003 private placement
      (incorporated by reference to Exhibit 4.7 to the Registrant’s Annual
      Report on Form 10-KSB for the year ended December 31, 2003 filed with the
      Securities and Exchange Commission on April 15,
2004)
 4.8
    Form
      of Bridge Warrants issued to Alexandra Global Master Fund (incorporated by
      reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K
      (Date of Report: December 12, 2003) filed with the Securities and Exchange
      Commission on January 16, 2004)
 4.9
    Form
      of Warrants to purchase an aggregate of 272,784 shares of common stock
      issued to HCFP Brenner Securities and RG Securities, LLC (incorporated by
      reference to Exhibit 4.9 to the Registrant’s Annual Report on Form 10-KSB
      for the year ended December 31, 2003 filed with the Securities and
      Exchange Commission on April 15, 2004)
 4.10
    Warrant
      issued to Alexandra Global Master Fund Ltd. dated January 8, 2004
      (incorporated by reference to Exhibit 4.5 to the Registrant’s Current
      Report on Form 8-K (Date of Report: December 12, 2003) filed with the
      Securities and Exchange Commission on January 16,
2004)
 4.11
    Form
      of Registration Rights Agreement relating to 834,465 shares of common
      stock and 83,444 shares of common stock underlying warrants issued by the
      registrant in October 2002 (incorporated by reference to Exhibit 4.11 to
      the Registrant’s Annual Report on Form 10-KSB for the year ended December
      31, 2003 filed with the Securities and Exchange Commission on April 15,
      2004)
 4.12
    Form
      of Registration Rights Agreement relating to shares of common stock
      underlying 8% senior convertible notes due 2006 and related warrants
      issued by the registrant in offering completed in September 2003
      (incorporated by reference to Exhibit 4.12 to the Registrant’s Annual
      Report on Form 10-KSB for the year ended December 31, 2003 filed with the
      Securities and Exchange Commission on April 15,
2004)
 4.13
    Registration
      Rights Agreement, dated February 4, 2004, among Dwango North America Corp.
      and the former shareholders of Over-the-Air Wireless, Inc. (incorporated
      by reference to Exhibit 10.2 to the Registrant’s Current Report Form 8-K
      (Date of Report: February 4, 2004) filed with the Securities and Exchange
      Commission on February 19, 2004)
 4.14
    9%
      Senior Convertible Note due 2007 issued to Alexandra Global Master Fund
      Ltd. dated March 19, 2004 (incorporated by reference to Exhibit 4.2 to the
      Registrant’s Current Report on Form 8-K (Date of Report: March 19, 2004)
      filed with the Securities and Exchange Commission on March 29,
      2004)
 4.15
    Warrant
      issued to Alexandra Global Master Fund Ltd., dated March 19, 2004
      (incorporated by reference to Exhibit 4.3 to the Registrant’s Current
      Report on Form 8-K (Date of Report: March 19, 2004) filed with the
      Securities and Exchange Commission on March 29,
2004)
 4.16
    Subscription
      Agreement, dated June 14, 2004, between Dwango North America Corp. and
      Alexandra Global Master Fund Ltd. (incorporated by reference to Exhibit
      4.1 to the Registrant’s Current Report on Form 8-K (Date of Report: June
      14, 2004) filed with the Securities and Exchange Commission on June 21,
      2004)
 31
  
 4.17
    Warrant
      issued to Alexandra Global Master Fund Ltd. dated June 14, 2004
      (incorporated by reference to Exhibit 4.2 to the Registrant’s Current
      Report on Form 8-K (Date of Report: June 14, 2004) filed with the
      Securities and Exchange Commission on June 21,
2004)
 4.18
    Subscription
      Agreement, dated July 2, 2004, between Dwango North America Corp. and
      Alexandra Global Master Fund Ltd. (incorporated by reference to Exhibit
      4.1 to the Registrant’s Current Report on Form 8-K (Date of Report: July
      2, 2004) filed with the Securities and Exchange Commission on July 8,
      2004)
 4.19
    Warrant
      issued to Alexandra Global Master Fund Ltd. dated July 2, 2004
      (incorporated by reference to Exhibit 4.2 to the Registrant’s Current
      Report on Form 8-K (Date of Report: July 2, 2004) filed with the
      Securities and Exchange Commission on July 8,
2004)
 4.20
    Subscription
      Agreement, dated August 2, 2004, between Dwango North America Corp. and
      Alexandra Global Master Fund Ltd. (incorporated by reference to Exhibit
      4.1 to the Registrant’s Current Report on Form 8-K (Date of Report: August
      2, 2004) filed with the Securities and Exchange Commission on August 5,
      2004)
 4.21
    Warrant
      issued to Alexandra Global Master Fund Ltd. dated August 2, 2004
      (incorporated by reference to Exhibit 4.2 to the Registrant’s Current
      Report on Form 8-K (Date of Report: August 2, 2004) filed with the
      Securities and Exchange Commission on August 5,
2004)
 4.22
    Subscription
      Agreement, dated August 26, 2004, between Dwango North America Corp. and
      the investors named therein (incorporated by reference to Exhibit 4.1 to
      the Registrant’s Current Report on Form 8-K (Date of Report: August 25,
      2004) filed with the Securities and Exchange Commission on August 31,
      2004)
 4.23
    Form
      of Warrant issued to investors in August 2004 Series B financing
      (incorporated by reference to Exhibit 4.2 to the Registrant’s Current
      Report on Form 8-K (Date of Report: August 25, 2004) filed with the
      Securities and Exchange Commission on August 31,
2004)
 4.24
    Subscription
      Agreement, dated January 12, 2005, between Dwango North America Corp. and
      Alexandra Global Master Fund Ltd. (incorporated by reference to Exhibit
      4.1 to the Registrant’s Current Report on Form 8-K (Date of Report:
      January 12, 2005) filed with the Securities and Exchange Commission on
      January 18, 2005)
 4.25
    Warrant
      issued to Alexandra Global Master Fund Ltd. dated January 12, 2005
      (incorporated by reference to Exhibit 4.2 to the Registrant’s Current
      Report on Form 8-K (Date of Report: January 12, 2005) filed with the
      Securities and Exchange Commission on January 18,
2005)
 4.26
    Subscription
      Agreement, dated February 1, 2005, between Dwango North America Corp. and
      the investors named therein (incorporated by reference to Exhibit 4.1 to
      the Registrant’s Current Report on Form 8-K (Date of Report: February 1,
      2005) filed with the Securities and Exchange Commission on February 3,
      2005)
 4.27
    Form
      of Warrant to purchase an aggregate of 3,365,035 shares of common stock
      (incorporated by reference to Exhibit 4.2 to the Registrant’s Current
      Report on Form 8-K (Date of Report: February 1, 2005) filed with the
      Securities and Exchange Commission on February 3,
2005)
 10.1
    2003
      Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the
      Registrant’s Annual Report on Form 10-KSB for the year ended December 31,
      2003 filed with the Securities and Exchange Commission on April 15,
      2004)
 10.2
    Office
      Lease Agreement, dated April 25, 2002, by and between Queen Anne Square,
      LLC and Dwango North America Inc. (incorporated by reference to Exhibit
      10.2 to the Registrant’s Annual Report on Form 10-KSB for the year ended
      December 31, 2003 filed with the Securities and Exchange Commission on
      April 15, 2004)
 10.3
    Office
      Lease Agreement, dated November 2002, between San Felipe Plaza, Ltd. and
      Dwango North America, Inc., as amended (incorporated by reference to
      Exhibit 10.3 to the Registrant’s Annual Report on Form 10-KSB for the year
      ended December 31, 2003 filed with the Securities and Exchange Commission
      on April 15, 2004)
 10.4
    Bridge
      Agreement, dated December 12, 2003, between Dwango North America Corp. and
      Alexandra Global Master Fund Ltd. (incorporated by reference to Exhibit
      4.1 to the Registrant’s Current Report on Form 8-K (Date of Report:
      December 12, 2003) filed with the Securities and Exchange Commission on
      January 16, 2004)
 10.5
    Note
      Purchase Agreement, dated January 8, 2004, between Dwango North America
      Corp. and Alexandra Global Master Fund Ltd. (incorporated by reference to
      Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (Date of
      Report: December 12, 2003) filed with the Securities and Exchange
      Commission on January 16, 2004)
 10.6
    Conversion
      Agreement, dated January 28, 2004, between Dwango North America Corp. and
      Robert E. Huntley (incorporated by reference to Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K (Date of Report: January 14, 2004)
      filed with the Securities and Exchange Commission on January 30,
      2004)
 10.7
    Conversion
      Agreement, dated January 28, 2004, between Dwango North America Corp. and
      Paul Eibeler (incorporated by reference to Exhibit 10.2 to the
      Registrant’s Current Report on Form 8-K (Date of Report: January 14, 2004)
      filed with the Securities and Exchange Commission on January 30,
      2004)
 10.8
    Agreement
      and Plan of Merger, dated as of February 4, 2004, among Dwango North
      America Corp., OTA Acquisition Corp., Over-the-Air Wireless, Inc., and the
      stockholders of Over-the-Air Wireless, Inc. (incorporated by reference to
      Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Date of
      Report: February 4, 2004) filed with the Securities and Exchange
      Commission on February 19, 2004)
 10.9
    Note
      Purchase Agreement, dated March 19, 2004, between Dwango North America
      Corp. and Alexandra Global Master Fund Ltd. (incorporated by reference to
      Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (Date of
      Report: March 19, 2004) filed with the Securities and Exchange Commission
      on March 29, 2004)
 10.10
    Form
      of Employment Agreement between Dwango North America Corp. and each of
      Rick J. Hennessey, David Adams, and Alexander U. Conrad (incorporated by
      reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K
      (Date of Report: February 4, 2004) filed with the Securities and Exchange
      Commission on February 19, 2004)
 10.11
    Form
      of Assignment of Inventions Agreement between Dwango North America Corp.
      and each of the former shareholders of Over-the-Air Wireless, Inc.
      (incorporated by reference to Exhibit 10.4 to the Registrant’s Current
      Report on Form 8-K (Date of Report: February 4, 2004) filed with the
      Securities and Exchange Commission on February 19,
2004)
 10.12
    Software
      License Agreement between ALLTEL Communications Inc. and Dwango North
      America Inc. executed December 19, 2003 (incorporated by reference to
      Exhibit 10.11 to the Registrant’s Annual Report on Form 10-KSB for the
      year ended December 31, 2003 filed with the Securities and Exchange
      Commission on April 15, 2004)
 10.13
      *
    Direct
      Bill Services Agreement between Cingular Wireless LLC and Dwango North
      America, Inc. executed on January 9, 2004 (incorporated by reference to
      Exhibit 10.12 to the Registrant’s Annual Report on Form 10-KSB for the
      year ended December 31, 2003 filed with the Securities and Exchange
      Commission on April 15, 2004)
 10.14
      *
    Software
      Distribution Agreement between Motorola, Inc. and Dwango North America,
      Inc. executed September 24, 2003 (incorporated by reference to Exhibit
      10.13 to the Registrant’s Annual Report on Form 10-KSB for the year ended
      December 31, 2003 filed with the Securities and Exchange Commission on
      April 15, 2004)
 10.15
      *
    License
      and Revenue Sharing Agreement between NEC America, Inc. and Dwango North
      America, Inc. effective January 1, 2003 (incorporated by reference to
      Exhibit 10.14 to the Registrant’s Annual Report on Form 10-KSB for the
      year ended December 31, 2003 filed with the Securities and Exchange
      Commission on April 15, 2004)
 10.16
      *
    Java
      Wireless Applications Agreement between T-Mobile USA, Inc. and Dwango
      North America, Inc. effective as of September 3, 2003 (incorporated by
      reference to Exhibit 10.15 to the Registrant’s Annual Report on Form
      10-KSB for the year ended December 31, 2003 filed with the Securities and
      Exchange Commission on April 15, 2004)
 10.17
    Brew
      Application License Agreement between Cellco Partnership d/b/a Verizon
      Wireless and Dwango North America Inc. Submitted via click through web
      interface on October 11, 2002 (incorporated by reference to Exhibit 10.16
      to the Registrant’s Annual Report on Form 10-KSB for the year ended
      December 31, 2003 filed with the Securities and Exchange Commission on
      April 15, 2004)
 10.18
    Brew
      Pricing Terms and Carrier Agreement between Qualcomm Incorporated and
      Dwango North America, Inc. Submitted via click through on May 21, 2002
      (incorporated by reference to Exhibit 10.17 to the Registrant’s Annual
      Report on Form 10-KSB for the year ended December 31, 2003 filed with the
      Securities and Exchange Commission on April 15,
2004)
 10.19
    Amendment
      No. 1 to Brew Developer Agreement between Qualcomm Incorporated and Dwango
      North America, Inc. effective as of May 17, 2002 (incorporated by
      reference to Exhibit 10.18 to the Registrant’s Annual Report on Form
      10-KSB for the year ended December 31, 2003 filed with the Securities and
      Exchange Commission on April 15, 2004)
 10.20
    Mobile
      Channel Agreement between AT&T Wireless Services, Inc. and Dwango
      North America, Inc. effective as of September 26, 2002 (incorporated by
      reference to Exhibit 10.19 to the Registrant’s Annual Report on Form
      10-KSB for the year ended December 31, 2003 filed with the Securities and
      Exchange Commission on April 15, 2004)
 10.21
      *
    Addendum
      to Mobile Channel Agreement Digital Goods Electronic Wallet between
      AT&T Wireless Services, Inc. and Dwango North America, Inc., dated
      September 26, 2002 (incorporated by reference to Exhibit 10.20 to the
      Registrant’s Annual Report on Form 10-KSB for the year ended December 31,
      2003 filed with the Securities and Exchange Commission on April 15,
      2004)
 10.22
    Letter
      agreement, dated January 8, 2004 with Alexandra Global Master Fund Ltd.
      (incorporated by reference to Exhibit 10.21 to the Registrant’s Annual
      Report on Form 10-KSB for the year ended December 31, 2003 filed with the
      Securities and Exchange Commission on April 15,
2004)
 10.23
    Marilyn
      Miller notes and extension (incorporated by reference to Exhibit 10.22 to
      the Registrant’s Annual Report on Form 10-KSB for the year ended December
      31, 2003 filed with the Securities and Exchange Commission on April 15,
      2004)
 10.24
    License
      Agreement, dated October 29, 2003, between Dwango North America, Inc. and
      Enorbus Technologies (incorporated by reference to Exhibit 10.23 to the
      Registrant’s Annual Report on Form 10-KSB for the year ended December 31,
      2003 filed with the Securities and Exchange Commission on April 15,
      2004)
 10.25
    Technology
      License Agreement, dated August 14, 2002, between Dwango North America,
      Inc. and Dwango Co. Ltd. (incorporated by reference to Exhibit 10.24 to
      the Registrant’s Annual Report on Form 10-KSB for the year ended December
      31, 2003 filed with the Securities and Exchange Commission on April 15,
      2004)
 10.26
    Trademarks
      License Agreement between Dwango Co., Ltd. and Dwango North America, Inc.,
      effective as of August 14, 2002 (incorporated by reference to Exhibit
      10.25 to the Registrant’s Annual Report on Form 10-KSB for the year ended
      December 31, 2003 filed with the Securities and Exchange Commission on
      April 15, 2004)
 10.27
    Letter
      agreement, dated March 19, 2004 with Alexandra Global Master Fund Ltd.
      (incorporated by reference to Exhibit 10.26 to the Registrant’s Annual
      Report on Form 10-KSB for the year ended December 31, 2003 filed with the
      Securities and Exchange Commission on April 15,
2004)
 10.28
      *
    Licensing
      Agreement effective as of March 30, 2004 by and between Dwango North
      America Corp., RealNetworks, Inc. and Rolling Stone LLC. (incorporated by
      reference to Amendment No. 1 to the Registrant’s Registration Statement on
      Form SB-2 (SEC File No.: 333-112371) that was declared effective by the
      Securities and Exchange Commission on August 12,
2004)
 32
  
 10.29
      *
    Licensing
      Agreement, effective as of January 14, 2004, between Dwango North America
      Corp. and ESPN Enterprises, Inc. (incorporated by reference to Amendment
      No. 1 to the Registrant’s Registration Statement on Form SB-2 (SEC File
      No.: 333-112371) that was declared effective by the Securities and
      Exchange Commission on August 12,
2004)
 10.30
    Placement
      Agent Agreement dated April 30, 2002 by and among Dwango North America,
      Inc., HCFP/Brenner Securities, LLC and RG Securities LLC, as amended
      (incorporated by reference to Amendment No. 1 to the Registrant’s
      Registration Statement on Form SB-2 (SEC File No.: 333-112371) that was
      declared effective by the Securities and Exchange Commission on August 12,
      2004)
 10.31
      *
    Digital
      Item License and Distribution Agreement, dated June 4, 2004, by and
      between Nextel Operations, Inc. and Dwango North America Corp.
      (incorporated by reference to Amendment No. 2 to the Registrant’s
      Registration Statement on Form SB-2 (SEC File No.: 333-112371) that was
      declared effective by the Securities and Exchange Commission on August 12,
      2004)
 10.32
      *
    Amendment
      No. 1 to Mobile Channel Agreement, dated June 8, 2004, between AT&T
      Wireless Services and Dwango North America, Inc. (incorporated by
      reference to Amendment No. 2 to the Registrant’s Registration Statement on
      Form SB-2 (SEC File No.: 333-112371) that was declared effective by the
      Securities and Exchange Commission on August 12,
2004)
 10.33
      *
    Amendment
      No. 1 to Digital Item License and Distribution Agreement, effective as of
      June 18, 2004, between Nextel Operations, Inc. and Dwango North America
      Corp. (incorporated by reference to Amendment No. 2 to the Registrant’s
      Registration Statement on Form SB-2 (SEC File No.: 333-112371) that was
      declared effective by the Securities and Exchange Commission on August 12,
      2004)
 10.34
      *
    T-Mobile
      Current Gateway Program Agreement between T-Mobile USA, Inc. and Dwango
      North America Corp. effective July 30, 2004 (incorporated by reference to
      Exhibit 10.34 to the Registrant’s Quarterly Report on Form 10-QSB for the
      quarter ended June 30, 2004 filed with the Securities and Exchange
      Commission August 20, 2004)
 10.35*
    License
      Agreement, dated September 7, 2004 between Dwango North America Corp. and
      Beliefnet, Inc. (incorporated by reference to the Registrant’s
      Registration Statement on Form SB-2 (SEC File No.: 333-119268) that was
      declared effective by the Securities and Exchange Commission on November
      10, 2004)
 10.36*
    License
      Agreement for access to wireless network, entered into on October 22,
      2004, between Dwango North America Corp. and Nextel Operations Inc.
      (incorporated by reference to Exhibit 10.36 to the Registrant’s Quarterly
      Report on Form 10-QSB for the quarter ended September 30, 2004 filed with
      the Securities and Exchange Commission November 19,
  2004)
 10.37*
    Wireless
      Distribution Agreement between Dwango North America Corp. and Playboy.com,
      Inc. entered into on November 18, 2004.
 10.38*
    License
      Agreement, between Dwango North America Corp. and Napster, LLC entered
      into on November 29, 2004.
 10.39
    Sub-lease
      contract between Dwango North America Corp. and Microsoft Corporation
      entered into on December 14, 2004.
 10.40*
    Content
      Provider Standard Service Agreement between Dwango North America Corp. and
      Wmode Inc. with an effective date of March 10,
2005.
 10.41
    Employment
      Agreement, dated March 1, 2005, between Dwango North America Corp. and
      Rick J. Hennessey (incorporated by reference to Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K (Date of Report: March 1, 2005)
      filed with the Securities and Exchange Commission on March 7,
      2005)
 10.42
    Employment
      Agreement, dated March 1, 2005, between Dwango North America Corp. and
      Alexander U. Conrad (incorporated by reference to Exhibit 10.2 to the
      Registrant’s Current Report on Form 8-K (Date of Report: March 1, 2005)
      filed with the Securities and Exchange Commission on March 7,
      2005)
 10.43
    Director
      Agreement, dated March 8, 2005, between Dwango North America Corp. and
      Victor Cohn (incorporated by reference to Exhibit 10.1 to the Registrant’s
      Current Report on Form 8-K (Date of Report: March 8, 2005) filed with the
      Securities and Exchange Commission on March 14,
2005)
 14
    Code
      of Ethics (incorporated by reference to Exhibit 14 to the Registrant’s
      Annual Report on Form 10-KSB for the year ended December 31, 2003 filed
      with the Securities and Exchange Commission on April 15,
    2004)
 21
    Subsidiaries:
 Dwango
      North America, Inc. is a Texas corporation
 OTA
      Acquisition Corp. is a Washington
corporation
 23
    Consent
      of Eisner LLP
 31.1
    Certification
      of Chief Executive Officer
 31.2
    Certification
      of Chief Financial Officer
 32
    Certification
      pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
 
 *
Requested Confidential Treatment
  33
 
 **Item
13B. Reports on Form 8-K**
 
 On
October 6, 2004, we filed a Current Report on Form 8-K to report, as an Item
5.02 disclosure, the resignation of James Scibelli as a member of the board of
directors of our company.
 
 On
October 28, 2004, we filed a Current Report on Form 8-K to report, as an Item
1.01 disclosure, the execution of a license agreement with Nextel Operations
Inc.
 
 On
November 24, 2004, we filed a Current Report on Form 8-K to report, as an Item
1.01 and 2.02 disclosure, the execution of a wireless distribution agreement
with Playboy.com, Inc. and the results of operations of our company for the
quarter ended September 30, 2004.
 
 On
December 3, 2004, we filed a Current Report on Form 8-K to report, as an Item
1.01 disclosure, the execution of a license agreement with Napster,
LLC.
 
 On
December 20, 2004, we filed a Current Report on Form 8-K, which was amended on
December 27, 2004, to report, as an Item 1.01 and 2.03 disclosure, the execution
of a sublease with Microsoft Corporation.
 
 **Item
14. Principal Accounting Fees and Services**
  Eisner
LLP served as our registered public accounting firm for the years ended
December 31, 2004 and December 31, 2003. During the two fiscal years ended
December 31, 2004, the aggregate fees for accounting services billed to Dwango
were as follows:
 **Audit
Fees**
 
 The
aggregated fees billed by Eisner LLP for the year ended December 31, 2004 for
professional services rendered for it’s audit of our annual financial statements
and review of our unaudited financial statements included in our Form 10-QSB for
2004 were $141,000. The aggregated fees billed by Eisner LLP for the year ended
December 31, 2003 for professional services rendered for it’s audit of our
annual financial statements and review of our unaudited financial statements
included in our Form 10-QSB for 2003 were $185,000.
 
 **Audit-Related
Fees**
 
 Eisner
LLP did not provide any assurance and related services in 2004 or 2003 that are
reasonably related to the performance of the audit or review of our financial
statements that are not reported under the preceding paragraph.
 
 **Tax
Fees**
 
 The
aggregate fees billed by Eisner LLP in 2004 for professional services rendered
for tax compliance, tax advice or tax planning were $9,000. There were no fees
billed by Eisner LLP in 2003 for professional services rendered for tax
compliance, tax advice or tax planning.
 
 **All
Other Fees**
 
 The
aggregate fees billed by Eisner LLP in 2004 for professional services rendered
other than those described above consisting primarily of services relating to
the review of our registration statements and issuance of related consents were
$178,000. The aggregate fees billed by Eisner LLP in 2003 for professional
services rendered other than those described above consisting primarily of
services relating to the review of our registration statement were
$31,000
 
 **Pre-Approval
Policies**
 
 Our Audit
Committee has not adopted any blanket pre-approval policies. Instead, the
Committee will specifically pre-approve the provision by Eisner LLP of all audit
or non-audit services.
 
 Our Audit
Committee approved all of the services provided by Eisner LLP and described in
the preceding paragraphs.
 
 
 34
   
 INDEX TO
FINANCIAL STATEMENTS
  **Page**Report
      of Independent Registered Public Accounting Firm
    F-1Consolidated
      Balance Sheet as of December 31, 2004
    F-2Consolidated
      Statements of Operations for the Years Ended December 31, 2004 &
      2003
    F-3Consolidated
      Statements of Changes in Capital Deficit for the Years Ended December 31,
      2004 & 2003
    F-4Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2004 &
      2003
    F-5Notes
      to Consolidated Financial Statements
    F-6
 
 ****
 35
 ****
 **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 The Board
of Directors and Stockholders
 Dwango
North America Corp.
 
 We have
audited the accompanying balance sheet of Dwango North America Corp. and
subsidiaries as of December 31, 2004, and the related consolidated statements of
operations, capital deficit and cash flows for the years ended December 31, 2004
and 2003. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Dwango North America
Corp. and subsidiaries as of December 31, 2004, and the consolidated results of
their operations and their consolidated cash flows for the years ended December
31, 2004 and 2003, in conformity with U.S. generally accepted accounting
principles.
 Eisner
LLP
 New York,
NY
 March 4,
2005
 
 
 F-1
 *****Dwango
      North America Corp. and Subsidiaries****Condensed
      Consolidated Balance Sheet****(In
      Thousands)**

**December
      31,****2004****ASSETS**Current
      Assets:Cash
    
    $
    82Accounts
      Receivable
    
    
    803Prepaid
      Royalties
    
    
    793Prepaid
      expenses
    
    
    286Other
      current assets
    
    
    83Total
      current assets
    
    
    2,047Fixed
      assets, (net)
    
    
    251Deferred
      financing costs
    
    
    765Intangibles,
      net
    
    
    49Prepaid
      License
    
    
    288$
    3,400**LIABILITIES
      AND CAPITAL DEFICIT**Current
      Liabilities:Accounts
      payable and accrued expenses
    
    $
    1,335Current
      portion of lease obligation
    
    
    45Total
      current liabilities
    
    
    1,380Long-Term
      Liabilities:Senior
      convertible notes payable, net of debtdiscount
      of $4,070,000
    
    
    1,845Accrued
      interest - senior convertible notes
    
    
    264Long
      term portion of lease obligation
    
    
    79Total
      Liabilities
    
    
    3,568Preferred
      stock $.001 par value authorized 10,000 sharesRedeemable
      Series A Convertible Preferred stock,$.001
      par value; issued and outstanding 1,250 shares;including
      $71,000 of accrued dividends and net of debtdiscount
      and deferred financing of $1,122,000.
    
    
    199Redeemable
      Series B Convertible Preferred stock,$.001
      par value; issued and outstanding 3,000 shares;including
      $124,000 of accrued dividends and net of debtdiscount
      and deferred financing of $2,158,000.
    
    
    966Capital
      deficit:Common
      stock, $.001 par value; 50,000,000 sharesauthorized;
      issued and outstanding 8,251,000shares
    
    
    8Additional
      paid-in capital
    
    
    14,469Accumulated
      deficit
    
    
    (15,810
    )Total
      capital deficit
    
    
    (1,333
    )$
    3,400See
      notes to Consolidated Financial Statements***
 **
 F-2
 **
 **Dwango
      North America Corp. and Subsidiaries****Consolidated
      Statement of Operations****(In
      Thousands, except per share data)**
  **Year
      Ended****Dectember
      31,****2004**
    
    **2003**Net
      Revenue
    
    $
    1,645
    
    $
    22Cost
      of revenues
    
    
    986
    
    
    —Gross
      profit
    
    
    659
    
    
    22Expenses:Sales
      and marketing
    
    
    1,161
    
    
    32Research
      and development
    
    
    2,587
    
    
    181General
      and administrative
    
    
    3,700
    
    
    3,895Operating
      loss
    
    
    (6,789
    )
    
    (4,086
    )Other
      expenses:Interest
      expense, includingamortization
      of debt issuance costand
      interest on convertible notes,net
      of interest income
    
    
    2,588
    
    
    564Loss
      on impairment of intangible asset
    
    
    306
    
    
    —**Net
      loss**
    
    $
    (9,683
    )
    $
    (4,650
    )Accretion
      and deemed dividends on redeemablepreferred
      stock
    
    
    (660
    )
    
    —**Net
      Loss attributable to****common
      stockholders**
    
    $
    (10,343
    )
    $
    (4,650
    )**Common
      share data:**Basic
      and diluted loss per share
    
    $
    (1.47
    )
    $
    (0.92
    )Weighted
      average number ofbasic
      and diluted commonshares
      outstanding
    
    
    7,058
    
    
    5,078See
      notes to Consolidated Financial Statements
 **


F-3





****Dwango
      North America Corp. and Subsidiaries****Consolidated
      Statements of Capital Deficit****(In
      Thousands)**

**Preferred
      Stock**
    
    **Common
      Stock****$.001
      Par Value**
    
    **$.001
      Par Value**
    
    **Additional**
    
    
    
    **Total****Number
      of**
    
    
    
    **Number
      of**
    
    
    
    **Paid-in**
    
    **Accumulated**
    
    **Capital****Shares**
    
    **Amount**
    
    **Shares**
    
    **Amount**
    
    **Capital**
    
    **Deficit**
    
    **Deficit****Balance
      at January 1, 2003**
    
    
    
    
    
    
    
    
    4,841
    
    $
    5
    
    $
    1,573
    
    $
    (1,477
    )
    $
    101Warrants
      issued in connection with notespayable,
      net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,059
    
    
    
    
    
    2,059Conversion
      of note payable from related party
    
    
    
    
    
    
    
    
    83
    
    
    
    
    
    100
    
    
    
    
    
    100Common
      stock issued in acquisition ofSOMA
      Games
    
    
    
    
    
    
    
    
    39
    
    
    
    
    
    48
    
    
    
    
    
    48Options
      granted to consultant/director
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198
    
    
    
    
    
    198Options
      granted to employee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    
    
    25Reverse
      merger stock issuance
    
    
    
    
    
    
    
    
    660Sale
      of 250,000 shares of stock
    
    
    
    
    
    
    
    
    250
    
    
    
    
    
    276
    
    
    
    
    
    276Net
      loss for the year endedDecember
      31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,650
    )
    
    (4,650
    )**Balance
      at December 31, 2003**
    
    
    
    
    
    
    
    
    5,873
    
    
    5
    
    
    4,279
    
    
    (6,127
    )
    
    (1,843
    )Conversion
      of cash advance from related party
    
    
    
    
    
    
    
    
    369
    
    
    
    
    
    442
    
    
    
    
    
    442Common
      stock issued in connection with purchase ofsoftware
      and covenants not to compete
    
    
    
    
    
    
    
    
    681
    
    
    1
    
    
    529
    
    
    
    
    
    530Stock
      issued in connection with employment agreements
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    3
    
    
    
    
    
    3Warrants
      issued in connection with brand licensingagreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    440
    
    
    
    
    
    440Common
      stock issued for services
    
    
    
    
    
    
    
    
    50
    
    
    
    
    
    68
    
    
    
    
    
    68Warrants
      issued in connection with notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,269
    
    
    
    
    
    2,269Warrants
      issued to investment bankers inconnection
      with fund raising services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71
    
    
    
    
    
    71Warrants
      issued in connection with Series Apreferred
      stock and stock issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    804
    
    
    
    
    
    804Preferred
      stock issued in connection with privatefinancing
      Series A preferred stock
    
    
    1.250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    —Warrants
      issued in connection with Series Bpreferred
      stock and stock issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,384
    
    
    
    
    
    2,384Preferred
      stock issued in connection with privatefinancing
      Series B preferred stock
    
    
    3.000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    —Warrants
      issued to convertible notes payablein
      connection with issuance of Series B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,173
    
    
    
    
    
    2,173Warrants
      issued to convertible Series Ain
      connection with issuance of Series B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    381
    
    
    
    
    
    381Common
      stock issued in payment of interest onsenior
      convertible notes
    
    
    
    
    
    
    
    
    226
    
    
    
    
    
    288
    
    
    
    
    
    288Common
      stock issued upon conversion of principal
    
    
    
    
    
    
    
    
    679
    
    
    1
    
    
    646
    
    
    
    
    
    647and
      accrued interest on senior convertible notesCommon
      stock issued upon exercise of warrants
    
    
    
    
    
    
    
    
    371
    
    
    1
    
    
    352
    
    
    
    
    
    353Accretion
      and deemed dividend on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (660
    )
    
    
    
    
    (660
    )Net
      loss for the year endedDecember
      31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,683
    )
    
    (9,683
    )**Balance
      at December 31, 2004**
    
    
    **4.250**
    
    **$**
    **—**
    
    
    **8,251**
    
    **$**
    **8**
    
    **$**
    **14,469**
    
    **$**
    **(15,810**
    **)**
    **$**
    **(1,333**
    **)**See
      notes to Consolidated Financial Statements**





F-4




**Dwango
      North America Corp. and Subsidiaries****Consolidated
      Statements of Cash Flows****(In
      Thousands)**
  **Year
      Ended****December
      31,****2004**
    
    **2003****Cash
      flows from operating activities:**Net
      loss
    
    $
    (9,683
    )
    $
    (4,650
    )Adjustments
      to reconcile net loss tonet
      cash used in operatingactivities:Depreciation
      expense
    
    
    106
    
    
    54Write
      off of fixed assets (net)
    
    
    64Common
      stock issued for rent
    
    
    
    
    
    17Common
      stock issued as compensation
    
    
    3
    
    
    48Option
      issued to consultant/director
    
    
    
    
    
    198Optons
      granted to employee
    
    
    
    
    
    25Amortization
      of debt discount
    
    
    1,727
    
    
    345Amortization
      of intangible assets
    
    
    41Write
      off of intangible assets
    
    
    440Amortization
      of prepaid licenses
    
    
    152Deferred
      financing cost
    
    
    414
    
    
    125Changes
      in:Accounts
      receivable
    
    
    (794
    )
    
    (9
    )Prepaid
      expenses
    
    
    (1,012
    )
    
    14Other
      assets
    
    
    (63
    )
    
    (12
    )Accounts
      payable and
    
    
    253
    
    
    872accrued
      expensesAccrued
      Interest
    
    
    523
    
    
    90Net
      cash used inoperating
      activities
    
    
    (7,829
    )
    
    (2,883
    )**Cash
      flows from investing activities:**Deferred
      acquisition cost
    
    
    39
    
    
    (39
    )Leasehold
      improvements
    
    
    (8
    )Purchase
      of fixed assets
    
    
    (90
    )
    
    (149
    )Net
      cash used ininvesting
      activities
    
    
    (59
    )
    
    (188
    )**Cash
      flows from financing activities:**Cash
      Overdraft
    
    
    (2
    )
    
    2Proceeds
      from line of credit
    
    
    
    
    
    50Repayment
      of line of credit
    
    
    
    
    
    (50
    )Repayment
      of capital lease
    
    
    (25
    )Proceeds
      from issuance of notespayable
      and warrants
    
    
    3,625
    
    
    2,500Financing
      costs in connection with convertiblenotes
    
    
    
    
    
    (442
    )Proceeds
      from issuance of stock and warrants
    
    
    
    
    
    276Proceeds
      from related party advamceProceeds
      from exercise of warrants
    
    
    353
    
    
    442Proceeds
      from issuance of Series Apreferred
      stock and warrants
    
    
    1,062Proceeds
      from issuance of Series Bpreferred
      stock and warrants
    
    
    2,957Net
      cash providedby financing activities
    
    
    7,970
    
    
    2,778**Net
      increase (decrease) in cash**
    
    
    82
    
    
    (293
    )Cash
      at beginning of period
    
    
    —
    
    
    293**Cash
      at end of period**
    
    $
    82
    
    $
    —**Supplementary
      disclosure of cash****flow
      information:**Interest
      paid
    
    $
    9
    
    $
    2**Noncash
      transactions:**Conversion
      of debt to common stock
    
    
    442
    
    
    100Warrants
      issued as financing cost
    
    
    
    
    
    290Common
      stock issued in connection with fees forinvestor
      relations services
    
    
    68Warrants
      issued in connection with Series Apreferred
      stock and stock issuance costs
    
    
    804Warrants
      issued to investment bankers for fundraising
      services in connection with Series Apreferred
      stock
    
    
    71Warrants
      issued in connection withbrand
      licensing agreement
    
    
    440Common
      stock issued for purchase of software
    
    
    440Common
      stock issued for covenant not tocompete
    
    
    90Debt
      discount recorded for warrantsissued
      with convertible notes
    
    
    2,269
    
    
    1,920Common
      Stock issued in payment of intereston
      senior convertible notes
    
    
    288Common
      Stock issued for redemption ofprincipal
      on senior convertible notes
    
    
    646Warrants
      issued in connection with Series Bpreferred
      stock and stock issuance costs
    
    
    2,384Warrants
      and convertible stock issued withratchet
      affect of financing for Notes Payable
    
    
    2,173Warrants
      and convertible stock issued withratchet
      affect of financing for Series A
    
    
    381Fixed
      assets acquired through capital lease
    
    
    134Accretion
      for Series A preferred stock
    
    
    195Accretion
      for Series B preferred stock
    
    
    270Deemed dividend
      Series A preferred stock
    
    
    71Deemed dividend
      Series B preferred stock
    
    
    124See
      notes to Consolidated Financial Statements


F-5





Notes to
the Financial Statements December 31, 2004 and 2003





**Note
A - Summary of Significant Accounting Policies**





**[1]**
    **Description
      of business:**




Dwango
North America Corp. provides wireless content and application publishing
channels through North American wireless carriers, developing and publishing
content and applications for wireless devices, and developing and providing
wireless network technology for both content and applications developed
internally and for partner content developers. Dwango North America Corp.
is a media company whose products include ringtones, games, images and messaging
services for mobile devices.
 
 The
accompanying consolidated financial statements include the accounts of Dwango
North America Corp. (“Corp”) and its wholly owned subsidiaries OTA Acquisition
Corp (“OTA”) and Dwango North America, Inc. (“DNA, Inc.”) (the “Company”
collectively). All significant inter-company transactions and balances have been
eliminated in consolidation.


**[2]**
    **Recapitalization
      and Presentation:**





On
September 29, 2003, Woodland Hatchery, Inc. (“Woodland”) acquired a majority of
the outstanding common stock of DNA, Inc. pursuant to an exchange offer. The
stockholders of DNA, Inc. that elected to participate in the exchange, received
stock of Woodland based on an exchange ratio of 1.3934814 shares of common stock
for each share of common stock of DNA, Inc. surrendered. Shares of common stock
underlying DNA, Inc.’s outstanding stock options, warrants and convertible notes
were similarly effected and will be exercisable into the number of shares based
on the exchange ratio. Following the recapitalization, Woodland changed its name
to Dwango North America Corp. Pursuant to the recapitalization, DNA, Inc. became
a wholly owned subsidiary of Corp. The stockholders of DNA, Inc. acquired a
majority of the voting stock of Corp. pursuant to the exchange, and DNA, Inc.
was deemed to be the accounting acquirer. Such exchange was treated for
accounting purposes as a capital transaction with an inactive shell company.
Accordingly, purchase accounting treatment was not applicable and no goodwill
resulted from this transaction. Therefore, all historical financial information
and financial statements for the periods presented are those of DNA, Inc. and
give retroactive effect as if the recapitalization occurred at the beginning of
the periods presented.





Prior to
the exchange, in connection with the recapitalization, Woodland effected a
one-for-4.5 reverse stock split of its common stock, leaving 2,548,889 shares of
common stock before the surrender and cancellation of 1,888,889 shares of common
stock of Woodland (on a post-reverse stock split basis) owned by Cody T.
Winterton, the former President and principal stockholder of Woodland. Mr.
Winterton assumed all of the pre-closing liabilities of Woodland, all of the
pre-closing assets of Woodland which were transferred to Mr. Winterton and he
was paid $50,000 which is included in the accompanying financial statements for
the year ended December 31, 2003 as selling, general and administrative expense.
Accordingly, Mr. Winterton assumed all assets and liabilities of Woodland
existing immediately prior to the closing. Immediately after closing, on a
consolidated basis, the only assets and liabilities of the Company were those of
DNA, Inc.





**[3]**
    **Revenue
      recognition:**





The
Company sells its content for a download fee. The download fee model is based on
a single fee per downloaded application or bundle of applications. Download fees
are assessed on a per download basis for each game or bundle of games downloaded
to a consumer’s wireless handset. Ringtones and other features operate on the
same basis. Some of the download features will have expirations based on time.
In some cases, the Company is able to pre-load its content on a manufacturer’s
handset. In that case, revenue is only earned when that content is activated and
a fee is paid to the wireless carrier which supports the handset. Revenue is
recognized by delivery and acceptance upon the occurrence of a download of an
application to the end user. Persuasive evidence of an arrangement occurs when
the carrier is notified of the end-user transaction and they place a charge on
the end-user’s bill. The carrier reports to the company the product and dollar
amount of revenue earned, which establishes that delivery and performance have
occurred, evidence of collectibility and subsequent to the issuance of the
carrier reports, the carrier remits the agreed upon price for each download
which substantiates fixed and determinable pricing. The Company records revenue
net of fees retained by the carriers.





**[4]**
    **Software
      development costs:**





The
Company accounts for software development costs in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed. Accordingly, costs
incurred internally in creating a software product is charged to expense when
incurred as research and development costs until technological feasibility has
been established for the product. Once technological feasibility is established,
all development cost is capitalized until the product is available for general
release to customers. Judgment is required in determining when the technological
feasibility of a product is established, in estimating the life of the product
for which the capitalized costs will be amortized and in estimating if the
carrying value of capitalized software costs is equal to or less than future
operating profits from the associated products. To date, the Company has not
capitalized any software development costs.





F-6





**[5]**
    **Basis
      of presentation:**





The
Company has incurred losses since inception and at December 31, 2004, the
Company had a capital deficit of $1,333,000 and has been dependent on funds
raised from equity and debt financings. In
January and February 2005, the Company issued additional series of preferred
stock and received gross proceeds of approximately $15,700,000 (see Note K). The
management of the Company believes that these funds should be sufficient to fund
the Company’s operations through December 31, 2005.
 
 Through
September 30, 2004, the company had been reporting as a development stage
enterprise.  During the Quarter ended December 31, 2004, the Company had
commenced significant revenue generating operations.  Hence, the Company is
no longer considered to be in the development stage.


**[6]**
    **Use
      of estimates:**





The
accounting and financial reporting policies of the Company conform to accounting
principles generally accepted in the United States of America. The preparation
of financial statements in conformity with such accounting principles requires
management to make assumptions and estimates that impact the amounts reported in
those statements. Such assumptions and estimates are subject to change in the
future as additional information becomes available or as circumstances are
modified. Actual results could differ from these estimates. Significant areas
where estimates are used include impairment of long lived assets, software
capitalization and valuation of options and warrants.





**[7]**
    **Fixed
      assets:**





Property
and equipment are recorded at cost. Depreciation of computer and office
equipment and furniture and fixtures is computed using the straight-line method
over the estimated useful lives of the assets (three to seven years). Leasehold
improvements are amortized over the shorter of the term of the lease or useful
life of the improvements.





**[8]**
    **Income
      taxes:**





The
Company accounts for income taxes following the asset and liability method in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes.” Under such method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years that the asset is expected to be recovered or the liability
settled. The effect on deferred tax assets and liabilities of a change in tax
law or rates is recognized in income in the period that includes the enactment
date of change. A valuation allowance is recorded for deferred tax assets that
cannot be currently recognized due to the Company’s cumulative losses and the
uncertainty of future recoverability.





**[9]**
    **Stock
      Based Compensation**





The
Company accounts for stock-based employee and directors compensation under
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
to Employees,” and related interpretations. The Company has adopted the
disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based
Compensation - Transition and Disclosure,”.





Had
compensation cost for the Company’s stock option grants been determined based on
the fair value at the grant dates consistent with the methodology of SFAS No.
123, the Company’s net loss and net loss per share for the periods indicated
would have been increased to the pro forma amounts indicated as
follows:





**Year
      Ended**
      **December
      31,**
      **2004**
    
    **Year
      Ended**
      **December
      31,**
      **2003**Net
      loss attributable to common stockholders
    
    $
    (10,343,000
    )
    $
    (4,650,000
    )Stock-based
      employee compensation expense included in reported net
loss
    
    
    
    
    
    25,000Stock-based
      employee compensation determined under the fair value based method, net of
      related tax effect
    
    
    (919,000
    )
    
    (610,000
    )Pro
      forma net loss attributable to common stockholders
    
    $
    (11,262,000
    )
    $
    (5,235,000
    )Net
      loss per common share (basic and diluted):As
      reported
    
    $
    (1.47
    )
    $
    (.92
    )Pro
      forma
    
    $
    (1.60
    )
    $
    (1.03
    )






F-7





The per
share weighted average fair value of stock options granted during 2004 and 2003
were $.91 and $1.10, respectively, estimated on the dates of grant using the
Black-Scholes option-pricing model with the following assumptions: risk-free
interest rates of 2.7% - 3.9%, volatility of 44%-113%, dividend yield of 0% and
expected lives of six years.





**[10]**
    **Loss
      per share:**





The
Company’s basic and diluted net loss per share is computed by dividing the net
loss by the weighted average number of outstanding common shares. Potentially
dilutive shares, which were excluded from the computation of diluted loss per
share because their inclusion would have been anti-dilutive, are as
follows:




**Year
      Ended**
      **December
      31,****2004**
    
    **Year
      Ended**
      **December
      31,****2003**Options
    
    
    3,828,000
    
    
    2,282,000Warrants
    
    
    10,602,000
    
    
    2,753,000Convertible
      notes
    
    
    6,226,000
    
    
    2,083,000Preferred
      stock
    
    
    4,474,000Total
      potentially dilutive shares
    
    
    25,130,000
    
    
    7,118,000





**[11]**
    **Concentration
      of credit risk:**





The
Company maintains a portion of its cash balances in accounts which at times
exceed the federally insured limits.





**[12]**
    **Valuation
      of long-lived assets:**





Long-lived
assets such as property, equipment and intangible assets are reviewed for
impairment when events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. An impairment loss is recognized
when estimated future undiscounted cash flows expected to result from the use of
the assets and their eventual disposition are less than their carrying
amount.





**[13]**
    **Fair
      value of financial instruments:**





The fair
values of the Company’s financial instruments, including short-term notes
payable, approximate their carrying values because their interest rates
approximate rates of interest which correspond to instruments with similar
maturities. The carrying amount of the long-term debt approximates fair value at
December 31, 2004 based on the interest rates available to the Company and debt
instruments with similar terms.





**[14]**
    **Advertising
      costs:**





Advertising
costs, which are expensed as incurred, for the year ended December 31, 2004 and
2003, were $411,000 and $54,000, respectively.






F-8


****


**[15]**
    **Research
      & Development:**


Research
and development expenses include payroll and employee benefits associated with
product development. Technological feasibility for our products is reached
shortly before the products are released. Costs incurred after technological
feasibility is established, are not material, and accordingly, we have expensed
all research and development costs when incurred during the years ended December
31, 2004 & 2003.





**[16]**
    **Recent
      Accounting Pronouncements**


In
December 2004, the FASB issued SFAS No. 123 (revised), “Share-Based Payment”
(FAS 123R) which replaces FAS 123 and supersedes APB No. 25. FAS 123R requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values
beginning with the first interim or annual period after December 15, 2005 for
small business filers, with early adoption encouraged. The pro forma disclosures
previously permitted under FAS 123 no longer will be an alternative to financial
statement recognition. We are required to adopt FAS 123R beginning January 1,
2006. Under FAS 123R, we must determine the appropriate fair value model to be
used for valuing share-based payments, the amortization method for compensation
cost and the transition method to be used at date of adoption. The transition
methods include prospective and retroactive adoptions. We are evaluating the
requirements of FAS 123R and expect that the adoption of FAS 123R will have a
material impact on our consolidated results of operations and earnings per
share. We have not yet determined the method of adoption or the effect of
adopting FAS 123R.


**Note
B - Fixed Assets**





Fixed
assets consist of the following:




**Estimated**
      **Useful
      Lives**
    
    **Year
      Ended December 31,****2004**Furniture
      and fixtures
    
    
    7
      years
    
    $
    6,000Leased
      Equipment
    
    
    3
      years
    
    
    149,000Leasehold
      Improvements
    
    
    1
      year
    
    
    8,000Computer
      and office equipment
    
    
    3
      years
    
    
    131,000294,000Less:
      accumulated depreciation and amortization
    
    
    
    
    
    43,000$
    251,000


****


**Note
C - Acquisition**




In 2004,
we acquired Over-the-Air Wireless, Inc., (“OTA”) and we obtained: (i) an
intangible asset comprised of software for the downloading of our games and
ringtones and the billing of these downloads, (ii) the services of and
employment agreements with three individuals, two of whom who currently hold the
positions of chief executive officer and president, respectively, in our
company, and (iii) two-year non-compete agreements. For accounting purposes,
this transaction was accounted for as a purchase of assets and hiring of new
employees with a non-compete agreement. (See Note J)


**Note
D - Debt**





**[1]**
    **Line
      of credit:**





The
Company had a credit facility with a financial institution that permited
borrowings of up to $50,000, which expired on April 11, 2004. The credit
facility was not renewed.




F-9





**[2]**
    **Loans
      and notes payable:**




During
2003, Dwango issued Senior Subordinated Convertible Promissory Notes totaling
$2,500,000. In connection with the issuance of the notes, the Company also
issued warrants to the note holders to purchase 2,083,333 shares of common
stock, exercisable at $1.20 per share until September 15, 2006. The fair value
of the warrants was $920,000, utilizing the Black Scholes option-pricing model
with the following assumption: 90% volatility, three-year expected life,
risk-free interest rate of 4% and a dividend yield ratio of 0%. In accordance
with EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible
Instruments,” the Company allocated the net proceeds between the convertible
notes and the warrants based on the relative fair value based method. The
proceeds allocated to the warrants of $920,000 was recorded as debt discount.
Additionally, the beneficial conversion feature resulting from the difference
between the proceeds allocated to, and the relative fair value of the discount
of $920,000 is being amortized over the life of the convertible notes. Upon the
conversion of the notes into common stock, the unamortized debt discount balance
will be recognized as additional interest expense. The notes bear interest at 8%
and are convertible, at the option of the holder, at any time into shares of
common stock at $1.20 per share, subject to certain anti-dilution provisions.
The full principal amount of the promissory notes and the related accrued
interest are due on September 15, 2006. The notes may be prepaid, and the
warrants may be redeemed for $.01 per share of common stock underlying the
warrants, on 30 days prior written notice to the holder thereof if the closing
sales price (or closing bid price) of the Company’s common stock on its
principal trading market is at least twice the then current conversion or
exercise price, as applicable, for a period of ten consecutive trading days
ending within 20 days prior to the date of the notice of prepayment or
redemption, as applicable. $585,000 of the notes have been converted as of
December 31, 2004. In connection with the sale of these notes, the Company
incurred $689,000 in costs consisting of: placement agent fees of approximately
$291,000 and warrants to placement agent to purchase 417,208 shares of common
stock at $1.20 per share that expire in September 2006, valued at $291,000. The
warrants were valued by utilizing the Black Scholes option-pricing model with
the following assumptions: 90% volatility, five-year expected life, risk-free
interest rate of 4% and a dividend yield of 0%, legal expenses of approximately
$82,000; and other costs of approximately $25,000. All but 55,000 of the
warrants remain unexercised as of December 31, 2004. Of the costs, $550,000 has
been allocated as deferred financing costs, to be amortized over 40 months, or
earlier if converted into common stock, and the remaining $139,000 of costs has
been attributable to additional paid-in capital. On August 26, 2004, as a result
of the issuance of Series B per the terms of the note, the conversion and
exercise prices have been adjusted to $.95. As a result of antidilution
provisions, the Company was required to issue additional warrants to the note
holder to purchase 548,246 shares of common stock, exercisable at $.95 per share
until September 16, 2007. The fair value of the warrants was adjusted using the
difference between the fair value of the warrants pre-adjustment and the fair
value of the warrants post-adjustment amounting to an additional debt discount
of $403,489 to be amortized over the remaining life of the warrants. The fair
value of the warrants pre-adjustment was approximately $1,128,462 utilizing the
Black Sholes option-pricing model with the following assumption: 90% volatility,
two-year and four-month expected life, risk-free interest rate of 2.44% - 4.01
and a dividend yield ratio of 0%. The fair value of the warrants post-adjustment
was approximately $514,923 utilizing the Black Sholes option-pricing model with
the following assumption: 99% volatility, two-year and four-month expected life,
risk-free interest rate of 2.85% and a dividend yield ratio of 0%. The fair
value of the conversion feature was adjusted using the difference between the
fair value of the conversion feature pre-adjustment and the fair value of the
conversion feature post-adjustment amounting to an additional debt discount in
the amount of $403,489 to be amortized over the remaining life of the note. For
the year ended December 31, 2004, interest expense and amortization of deferred
financing costs on these notes were approximately $1,132,000 and $169,000,
respectively.


The
$1,700,000 Senior Convertible Promissory Note was issued to Alexandra Global
Master Fund Ltd on January 8, 2004. In connection with the issuance of the note,
the Company also issued warrants to the note holder to purchase 708,333 shares
of common stock, exercisable at $1.20 per share until January 8, 2008. The fair
value of the warrants was approximately $656,000 utilizing the Black Scholes
option-pricing model with the following assumption: 88% volatility, three-year
expected life, risk-free interest rate of 2.37% and a dividend yield ratio of
0%. In accordance with EITF00-27, “Application of Issue No. 98-5 to Certain
Convertible Instruments,” the Company allocated the net proceeds between the
convertible note and the warrants based on the relative fair values. The
proceeds allocated to the warrants of $474,000 was recorded as debt discount.
Additionally, the beneficial conversion feature resulting from the difference
between the proceeds allocated to, and the relative fair value of the discount
of $474,000, is being amortized over the life of the convertible note. Upon the
conversion of the note into common stock, the unamortized debt discount balance
will be recognized as additional interest expense. The note bears interest at 9%
and is convertible, at the option of the holder, at any time into shares of
common stock at $1.20 per share, subject to certain anti-dilution provisions.
The full principal amount of the note and the related accrued interest are due
on January 8, 2007. The note may be prepaid, and the warrants may be redeemed,
for $.01 per share of common stock underlying the warrants, on 30 days prior
written notice to the holder thereof if the closing sales price (or closing bid
price) of the Company’s common stock on its principal trading market is at least
twice the then current conversion or exercise price, as applicable, for a period
of ten consecutive trading days ending within 20 days prior to the date of the
notice of prepayment or redemption, as applicable and other conditions. In
connection with the sale of this note, the Company incurred  $379,000 in
costs consisting of: placement agent fees of approximately $136,000 and warrants
to the placement agent to purchase 212,500 shares of common stock at $1.20 per
share that expire on January 7, 2009, valued at $197,000, legal expenses of
approximately $45,000; and other costs of approximately $1,000. The warrants
were valued by utilizing the Black Scholes option-pricing model with the
following assumptions: 88% volatility, three-year expected life, risk-free
interest rate of 2.37% and a dividend yield of 0%. Of the aggregate costs,
$328,000 has been allocated as deferred financing costs, to be amortized over 36
months or earlier if converted into common stock, and the remaining $51,000 of
costs has been allocated to additional paid-in capital. On August 26, 2004, as a
result of the issuance of Series B, per the terms of the note, the conversion
and exercise prices have been adjusted to $.95. As a result of antidilution
provisions, the Company was required to issue additional warrants to the note
holder to purchase 372,807 shares of common stock, exercisable at $.95 per share
until January 8, 2008. The fair value of the warrants was adjusted using the
difference between the fair value of the warrants pre-adjustment and the fair
value of the warrants post-adjustment amounting to an additional debt discount
of $144,546 to be amortized over the remaining life of the warrants. The fair
value of the warrants pre-adjustment was approximately $370,377 utilizing the
Black Sholes option-pricing model with the following assumption: 99% volatility,
two-year and four-month expected life, risk-free interest rate of 2.85% and a
dividend yield ratio of 0%. The fair value of the warrants post-adjustment was
approximately $514,923 utilizing the Black Sholes option-pricing model with the
following assumption: 99% volatility, two-year and four-month expected life,
risk-free interest rate of 2.85% and a dividend yield ratio of 0%. The fair
value of the conversion feature was adjusted using the difference between the
fair value of the conversion feature pre-adjustment and the fair value of the
conversion feature post-adjustment amounting to an additional debt discount in
the amount of $372,807 to be amortized over the remaining life of the note. As
of December 31, 2004, none of the note has been converted nor any warrants
exercised. For the year ended December 31, 2004, interest expense and
amortization of deferred financing costs on these notes were approximately
$542,000 and $109,000, respectively.






F-10


The
$2,300,000 Senior Convertible Promissory Note was issued to Alexandra Global
Master Fund Ltd on March 19, 2004. In connection with the issuance of the note,
the Company also issued warrants to the note holder to purchase 958,333 shares
of common stock, exercisable at $1.20 per share until March 19, 2008. The fair
value of the warrants was $706,000, utilizing the Black Scholes option-pricing
model with the following assumption: 91% volatility, three-year expected life,
risk-free interest rate of 1.97% and a dividend yield ratio of 0%. In accordance
with EITF00-27, “Application of Issue No. 98-5 to Certain Convertible
Instruments,” the Company allocated the net proceeds between the convertible
note and the warrants based on the relative fair value based method. The
proceeds allocated to the warrants of $ 540,000 were recorded as debt discount.
Additionally, the beneficial conversion feature resulting from the difference
between the proceeds allocated to, and the relative fair value of the discount
of $ 540,000, is being amortized over the life of the note. Upon the conversion
of the note into common stock, the unamortized debt discount balance will be
recognized as additional interest expense. The note bears interest at 9% and is
convertible, at the option of the holder, at any time into shares of common
stock at $1.20 per share, subject to certain anti-dilution provisions. The full
principal amount of the note and the related accrued interest are due on March
19, 2007. The note may be prepaid, and the warrants may be redeemed for $.01 per
share of common stock underlying the warrants, on 30 days prior written notice
to the holder thereof if the closing sales price (or closing bid price) of the
Company’s common stock on its principal trading market is at least twice the
then current conversion or exercise price, as applicable, for a period of ten
consecutive trading days ending within 20 days prior to the date of the notice
of prepayment or redemption, as applicable and other conditions. In connection
with the sale of this note, the Company incurred $339,000 in costs consisting
of: placement agent fees of approximately $184,000, and warrants issued to the
placement agent to purchase 191,666 shares of common stock at $1.20 per share
that expire on March 19, 2009, valued at $141,000, legal expenses of
approximately $13,000, and other costs of approximately $1,000. Of the aggregate
costs, $292,000 has been allocated as deferred financing costs, to be amortized
over 36 months or earlier if converted into common stock, and the remaining
$47,000 of costs has been allocated to additional paid-in capital. On August 26,
2004, as a result of the issuance of Series B (the preferred stock is
convertible and the warrants are exercisable at $.95 per share), per the terms
of the note, the conversion and exercise prices have been adjusted to $.95. In
addition, the Company was required to issue additional warrants to the note
holder to purchase 504,386 shares of common stock, exercisable at $.95 per share
until January 8, 2008. The fair value of the warrants was adjusted using the
difference between the fair value of the warrants pre-adjustment and the fair
value of the warrants post-adjustment amounting to an additional debt discount
of $198,810 to be amortized over the remaining life of the warrants. The fair
value of the warrants pre-adjustment was approximately $526,161 utilizing the
Black Sholes option-pricing model with the following assumption: 99% volatility,
two-year and four-month expected life, risk-free interest rate of 2.85% and a
dividend yield ratio of 0%. The fair value of the warrants post-adjustment was
approximately $724,971 utilizing the Black Sholes option-pricing model with the
following assumption: 99% volatility, two-year and four-month expected life,
risk-free interest rate of 2.85% and a dividend yield ratio of 0%. The fair
value of the conversion feature was adjusted using the difference between the
fair value of the conversion feature pre-adjustment and the fair value of the
conversion feature post-adjustment amounting to an additional debt discount in
the amount of $504,386 to be amortized over the remaining life of the note. As
of December 31, 2004, none of the note has been converted nor any warrants
exercised. For the year ended December 31, 2004, interest expense and
amortization of deferred financing costs on these notes were approximately
$559,000 and $101,000, respectively


F-11




**Note
E - Commitments**


**[1]**
    **Operating
      leases:**


****





The
Company leases office space and computer equipment for its headquarters in
Seattle, WA. In December 2004, the company entered into a lease for its new
headquarters which commenced on March 1, 2005 for a term of two years. The
Landlord has the option of terminating the lease with four months written notice
providing that notice does not come prior to the fifteenth month of the term.
The Company’s lease obligation for its former headquarters in Seattle expires on
April 30, 2005.




In
December 2002, the Company entered into a lease for office space in Houston,
Texas, which expires on January 31, 2006. In October 2003, the Company amended
the Texas lease, which effectively cancelled the old lease. The new lease
expires in October 2006. We have subleased the Houston office for the duration
of the lease at the rate of $57,000 per year. On July 6, 2004, the Company
entered into an agreement to sublet the Houston office for a term of twenty-five
months commencing on September 1, 2004. In November 2004, the Company entered
into a one year lease for a game studio in San Francisco, California which
commenced in December 2004 at the lease rate of $76,000 per year.





Rent
expense for the years ended December 31, 2004 and 2003 were $240,000 and $39,000
respecively.





Total
future minimum lease payments under these lease agreements are as
follows:





**Year
      Ending****December
      31,**
    
    **Amount**2005
    
    $
    397,0002006
    
    
    430,0002007
    
    
    80,000$
    907,000




**[2]**
    **Royalities
      and Advertising**




On August
14, 2002, the Company entered into two licensing agreements with Dwango Japan, a
stockholder of the Company, to use its trademark (25-year term) and intellectual
property (eight-year term) in North America. The agreements provide for
royalties of 2% (intellectual property) and 0.5% (trademark) of the total gross
revenue, subject to an annual minimum royalty (commencing October 1, 2002) of
$50,000 per each agreement.. For the years ended December 31, 2004 and 2003
royalty expense was $105,000 and $100,000 respectively
 
 On March
30, 2004 the Company entered into a licensing agreement with RollingStone
whereby the Company licenses the RollingStone brand for use with its
products. For the year ended December 31, 2004, royalty expense was
$627,000.
 On
September 7, 2004 the Company entered into a licensing agreement with Beliefnet
whereby the Company licenses the Beliefnet brand for use with it products. The
license agreement is for a one year term and provides for minimum royalties to
be paid upon launch of the products. Products were launched in the first quarter
of 2005. As of December 31, 2004, no products have been launched and,
accordingly, the royalty expense was $0.
  On
November 1, 2004 the Company entered into a licensing agreement with Playboy
whereby the Company licenses the Playboy brand for use with its products. The
license agreement is for a three year term and provides for minimum royalties to
be paid upon launch of the products. As of December 31, 2004, no products have
been launched and, accordingly, the royalty expense was $0.
 
 On
November 23, 2004 the Company entered into a licensing agreement with Napster
whereby the Company licenses the Napster brand for use with its products. The
license agreement is for a one year term and provides for minimum royalties to
be paid upon launch of the products. As of December 31, 2004, no products have
been launched and, accordingly, the royalty expense was $0.
 
 The
following table summarizes, as of December 31, 2004, our obligations and
commitments to make future payments pursuant to our agreements with Rolling
Stone, Playboy, Napster, Beliefnet and Flow C.C.M. (for royalty and
advertising):
 **Payments Due By
      Period**
    ********
    ****
    ******Total**
    ****
    ******Less Than 1
      year**
    ****
    ******1-3
      years**
    ****
    ******After 3
      years**Royalty
      Expense
    
    $
    1,163,000
    
    $
    1,118,000
    
    $
    45,000
    
    $
    —Advertising
      Expense
    
    
    1,000,000
    
    
    726,000
    
    
    274,000
    
    
    —$
    2,163,000
    
    $
    1,844,000
    
    $
    319,000
    
    $
    —


**Note
F - Preferred Stock**





During
the year ended December 31, 2004, Dwango issued 1,250 shares of Series A
convertible preferred stock (“ **Series
A** ”). The
material terms of the Series A are as follows:





*Dividends.* Holders
of Series A are entitled to cumulative dividends at the rate of $120 per annum
per share. Such dividends may be paid in cash or, at the company’s option and
subject to certain limitations, accrued until the shares of Series A to which
such dividends relate are redeemed or converted into shares of common
stock.





*Liquidation
preference.* Upon any
liquidation, dissolution or winding up of the Company, the holders of Series A
shall be entitled to payment of $1,000 per share plus an amount equal to any
accrued and unpaid dividends, before any distribution is made to the holders of
the common stock. If the assets to be distributed are insufficient to permit
such payment, then the assets to be so distributed shall be distributed ratably
among the holders of Series A.





*Optional
conversion.* A holder
of shares of Series A may convert any or all of such shares and all accrued and
unpaid dividends thereon, at the holder’s option at any time, into shares of our
common stock at the lower of $0.95 per share subject to anti-dilution
adjustments. To exercise such conversion rights, a holder must give the Company
acceptable notice and the Company is then obligated to issue the number of
shares of common stock into which the Series A is being converted within five
trading days after the conversion notice is given.





*Mandatory
Redemption.* The
Company is required to redeem the outstanding Series A on June 14, 2007. The
Company must give a redemption notice to each holder not less than 30 or more
than 35 business days prior to June 14, 2007. On such redemption date, or such
later date as a holder shall surrender the certificate for the Series A being
redeemed, the Company must pay to each holder $1,000 per share plus the amount
of any accrued but unpaid dividends.





*Optional
Redemption.* Upon the
occurrence of certain events, as defined in the agreement, the holders of Series
A have the right, at their option, to require our company to redeem all or part
of their shares.




F-12




*Redemption
Limitation.* If the
Company restricted from redeeming the Series A by reason of a restriction
contained in the Nevada General Corporation Law, the redemption date for such
shares shall be extended to the date that is 30 days after the date on which the
Company is no longer so restricted from redeeming the shares.





*Anti-Dilution
protection.* The
Series A is protected against dilution upon the occurrence of certain events,
including but not limited to, sales of shares of common stock for less than fair
market value or the then conversion price per share.





*Voting
Rights* . Except
as otherwise provided by law, the holders of Series A are not entitled to vote
on any matter.


For the
year ended December 31, 2004, the deemed dividend, amortization of deferred
financing costs and accretion of preferred stock to liquidation value on
the Series was $71,000, $32,000 and $163,000 respectively.





During
the year ended December 31, 2004, Dwango issued 3,000 shares of Series B
convertible preferred stock as (“ **Series
B** ”). The
material terms of the Series B are as follows:




*Dividends.* Holders
of Series B are entitled to cumulative dividends at the rate of $120 per annum
per share. Such dividends may be paid in cash or, at our company’s option and
subject to certain limitations, accrued until the shares of Series B to which
such dividends relate are redeemed or converted into shares of common
stock.





*Liquidation
preference.* Upon any
liquidation, dissolution or winding up of our company, the holders of Series B
shall be entitled to payment of $1,000 per share plus an amount equal to any
accrued and unpaid dividends, before any distribution is made to the holders of
our common stock. If the assets to be distributed are insufficient to permit
such payment, then the entire assets available for distribution shall be
distributed ratably among the holders of Series B and Series A.





*Optional
conversion.* A holder
of shares of Series B may convert any or all of such shares and all accrued and
unpaid dividends thereon, at the holder’s option at any time, into shares of our
common stock at $.95 per share. To exercise such conversion rights, a holder
must give us acceptable notice and we are then obligated to issue the number of
shares of common stock into which the Series B is being converted within five
trading days after the conversion notice is given.





*Mandatory
Redemption.* We are
required to redeem the outstanding Series B on August 26, 2007. We must give a
redemption notice to each holder not less than 30 or more than 35 business days
prior to August 26, 2007. On such redemption date, or such later date as a
holder shall surrender the certificate for the Series B being redeemed, we must
pay to each holder $1,000 per share plus the amount of any accrued but unpaid
dividends.





*Optional
Redemption.* Upon the
occurrence of the following events, the holders of Series B have the right, at
their option, to require our company to redeem all or part of their shares of
Series B.








F-13





*Redemption
Limitation* . If we
are restricted from redeeming the Series B by reason of a restriction contained
in the Nevada General Corporation Law, the redemption date for such shares shall
be extended to the date that is 30 days after the date on which we are no longer
so restricted from redeeming the shares.





*Anti-Dilution
protection.* The
Series B is protected against dilution upon the occurrence of certain events,
including but not limited to, sales of shares of common stock for less than fair
market value or the then conversion price per share


**


*Voting
Rights.* Except
as otherwise provided by law, the holders of Series B are not entitled to vote
on any matter. **


For the
year ended December 31, 2004, the deemed dividend, amortization of deferred
financing costs and accretion of preffered stock to liquidation value on the
Series B was $124,000, $3,000 and $267,000 respectively.


**Note
G - Capital Deficit**





**[1]**
    **Stock
      issuances:**





In
December 2003, the Company issued 250,000 shares of common stock, valued at
$1.20 per share and issued 250,000 warrants with an exercise price of $1.20 per
share, which expire on December 12, 2007, to Alexandra Global Master Fund, Ltd,
for gross proceeds of $300,000 net of financing costs paid to placement agent of
$24,000. The Company issued 50,000 warrants with an exercise price of $1.20 per
share, which expires on December 11, 2008, to RG Securities and HCFP Brenner
Securities, LLC, placement agent.

In
January 2004, the Company issued to Alexandra Global Master Fund Ltd. warrants
to purchase 125,000 shares of common stock pursuant to the Bridge Agreement
between the Company and Alexandra dated December 12, 2003.

In February 2004, the Company issued 681,000 shares of common
stock to four individuals in the acquisition of Over -the - Air Wireless, Inc.
in consideration for intangible assets value at $530,000.

In March
2004, the Company issued 2,090 shares of common stock to one individual pursuant
to an employment agreement valued at approximately $3,000.

In May
2004, the Company issued 50,000 shares of common stock to an investor relations
firm which, in addition to cash fees paid monthly, as advance compensation for
investor relations services to be provided over twelve months.

In June
2004, the Company issued 88,861 shares of common stock to Alexandra Global
Master Fund Ltd. as payment for accrued interest, through May 31, 2004, on its
$1.7 million and $2.3 million 9% senior convertible notes due 2007.

In
December 2004, the Company issued 371,000 shares of common stock resulting from
the exercise of warrants. The Company received proceeds of
$353,000.

During
2004, the Company issued 905,000 shares of common stock as a result of
conversion of Senior Subordinated Convertible Promissory Notes. The issuance of
shares was respect to $935,000 in principal and accrued interest.


**[2]**
    **Stock
      option plan:**




On April
1, 2002, the Company established an Equity Incentive Plan (the “Original Plan”)
under which stock options may be granted. The Original Plan was replaced by an
Equity Incentive Plan on September 29, 2003 (the “Plan”) in connection with the
reverse acquisition of Woodland. Options under the Original Plan were replaced
with comparable options under the Plan. A stock option grant allows the holder
of the option to purchase a share of the Company’s common stock in the future at
a stated price. The Plan is administered by the Compensation Committee of the
Board of Directors, which determines the individuals to whom the options shall
be granted, as well as the terms and conditions of each option grant, the option
price and the duration of each option, which cannot be more than ten
years.


F-14





**Year
      Ended**
      **December
      31,**
      **2004**
    
    **Year
      Ended**
      **December
      31,**
      **2003****Shares**
    
    **Weighted
      Average**
      **Exercise****Price**
    
    **Shares**
    
    **Weighted
      Average**
      **Exercise****Price**Options
      outstanding at beginning of period
    
    
    2,282,000
    
    $
    1.21
    
    
    730,000
    
    $
    0.91Granted
    
    
    4,018,000
    
    $
    1.35
    
    
    1,552,000
    
    $
    1.34Cancelled
    
    
    (2,472,000
    )
    $
    1.24
    
    
    —Exercised
    
    
    —
    
    
    
    
    
    —Outstanding
      at end of period
    
    
    3,828,000
    
    $
    1.34
    
    
    2,282,000
    
    $
    1.21





The
following summarizes information about stock options at December 31,
2004:




**Options
      Outstanding**
    
    **Options
      Exercisable****Number**
      **Outstanding**
    
    **Range
      of**
      **Exercise**
      **Prices**
    
    **Weighted**
      **Average**
      **Exercise**
      **Price**
    
    **Weighted**
      **Average**
      **Remaining**
      **Life
      in**
      **Years**
    
    **Number**
      **Exercisable**
    
    **Weighted**
      **Average**
      **Exercise**
      **Price**118,000
    
    $
    0.80
    
    $
    0.80
    
    
    7.28
    
    
    118,000
    
    $
    0.80203,000
    
    $
    1.20
    
    $
    1.20
    
    
    8.72
    
    
    55,000
    
    $
    1.201,818,000
    
    $
    1.25
    
    $
    1.25
    
    
    9.25
    
    
    128,000
    
    $
    1.25520,000
    
    $
    1.30
    
    $
    1.30
    
    
    9.76
    
    
    156,000
    
    $
    1.30567,000
    
    $
    1.45
    
    $
    1.45
    
    
    8.29
    
    
    466,000
    
    $
    1.45250,000
    
    $
    1.50
    
    $
    1.50
    
    
    8.89
    
    
    250,000
    
    $
    1.50352,000
    
    $
    1.81
    
    $
    1.81
    
    
    9.98
    
    
    —
    
    $
    1.813,828,000
    
    
    
    
    
    
    
    
    
    
    
    1,173,000
    
    $
    1.34




****


Note H - Significant Customer
Concentrations





The Company's customers primarily consist of major
wireless carriers. Revenues from the Company's customers which account for more
than 10% of the Company's revenues are as follows:





Year
      Ended
      December
      31,Revenues
    
    2004
    
    2003Customer
      A
    
    
    35.2
    %
    
    0
    %Customer
      B
    
    
    31.1
    %
    
    33.2
    %Customer
      C
    
    
    26.7
    %
    
    5.8
    %





**Note
I - Income Taxes**




As of
December 31, 2004, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $16,071,000, which may be available to
offset future federal taxable income, if any, from 2021 through 2024. The
ability of the company to utilize its operating loss carryforwards in future
years is subject to annual limitations in accordance with provisions of section
382 of the Internal Revenue Code. Management does not expect the Company to be
taxable in the near future and, accordingly , has  established a 100%
valuation allowance against the deferred tax asset created by the net operating
loss carryforwards at December 31, 2004 and 2003. The valuation allowance
increased $3,463,000 and $1,575,000, respectively for the years ended December
31, 2004, and December 31, 2003, respectively.
 
 **Note
J - Intangible Asset**
 
 Intangible
assets with definite lives, consisting of technology received in connection with
acquisitions, are amortized over their estimated useful lives ranging from three
to five years. In accordance with SFAS 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” the carrying value of intangible assets with
definite lives and other long-lived assets is reviewed on a regular basis for
the existence of facts that may indicate that the assets are impaired. Such an
asset is considered impaired when its estimated future cash flows are less than
the amount of its carrying value. If the carrying value of this asset is deemed
not recoverable, it is adjusted downwards to the asset’s estimated fair
value.
 
 The OTA
software intangible asset was found to be impaired during the fourth
quarter of the year ended December 31, 2004. While the software acquired in the
OTA acquisition in February 2004 provided the genesis for the publishing
platform that is currently in use, the decision was made to write off the
asset in November 2004 as the software had been phased out during the
reengineering of our publishing platform ongoing through 2004. The software was
valued at $440,000 at the date of acquisition with a useful life of 3 years. At
the date of disposal, the software had a remaining life of 2 years and 3 months
and a book value of $318,000.


**Note
K - Subsequent Events**





In
January 2005, the Company sold to Alexandra Global Master Fund Ltd.
(“Alexandra”) 700 shares of our Series C Convertible Preferred Stock (“Series
C”) initially convertible into 426,830 shares of our common stock and four year
warrants to purchase 170,732 shares of our common stock for a purchase price of
$700,000. The Series C is convertible at $1.64, and the warrants are
exercisable, at $1.97 per share. In February 2005, Alexandra elected to convert
their entire Series C holdings and warrants, plus accrued dividends into 703
shares of Series D Preferred Stock and warrants to purchase 150,750 shares of
Common Stock.






F-15





In
February 2005, the Company issued 15,000 shares of Series D Convertible
Preferred Stock (“Series D”) initially convertible into 11,216,784 shares of
common stock and five year warrants to purchase 3,365,035 shares of our common
stock for a purchase price of $15,000,000. The Series D is convertible at $1.40
per share, and the warrants are exercisable, at $1.68 per share. On February 1,
2008, any unconverted Series D must be redeemed for its stated value of $1,000
per share $15,000,000 plus any unpaid dividends are to be paid in
full.




The sale
of the Series D Preferred Stock and Warrants triggered anti-dilution provisions
affecting (i) the conversion price of certain notes issued in the Company's
private placements completed in January 2004 and March 2004, (ii) the conversion
price of its Series A and Series B, and (iii) the exercise price of and number
of shares issuable under various outstanding warrants.
 
 As a
result of the anti-dilution provisions of the $1,700,000 Senior Convertible
Promissory Notes and the issuance of Series D convertible preferred stock, the
conversion and exercise prices have been adjusted to $.93 . In addition, the
Company was required to issue additional warrants to the note holder to purchase
38,483 shares of common stock, exercisable at $.93 per share until January 8,
2008. The fair value of the warrants was adjusted using the difference between
the fair value of the warrants pre-adjustment and the fair value of the warrants
post-adjustment amounting to an additional debt discount of $86,118 to be
amortized over the remaining life of the warrants. The fair value of the
warrants pre-adjustment was approximately $919,361 utilizing the Black Sholes
option-pricing model with the following assumption: 105% volatility, one-year
and eleven-month expected life, risk-free interest rate of 3.43% and a dividend
yield ratio of 0%. The fair value of the warrants post-adjustment was
approximately $945,444 utilizing the Black Sholes option-pricing model with the
following assumption: 105% volatility, one-year and eleven-month expected life,
risk-free interest rate of 3.43% and a dividend yield ratio of 0%. The fair
value of the conversion feature was adjusted using the difference between the
fair value of the conversion feature pre-adjustment and the fair value of the
conversion feature post-adjustment amounting to an additional debt discount in
the amount of $60,034 to be amortized over the remaining life of the
note.
  As a
result of the anti-dilution provisions of the $2,300,000 Senior Convertible
Promissory Notes and the issuance of Series D convertible preferred stock, the
conversion and exercise prices have been adjusted to $.93 . In addition, the
Company was required to issue additional warrants to the note holder to purchase
52,066 shares of common stock, exercisable at $.93 per share until March 19,
2008. The fair value of the warrants was adjusted using the difference between
the fair value of the warrants pre-adjustment and the fair value of the warrants
post-adjustment amounting to an additional debt discount of $116,748 to be
amortized over the remaining life of the warrants. The fair value of the
warrants pre-adjustment was approximately $1,283,286 utilizing the Black Sholes
option-pricing model with the following assumption: 105% volatility, two-year
and two-month expected life, risk-free interest rate of 3.43% and a dividend
yield ratio of 0%. The fair value of the warrants post-adjustment was
approximately $1,318,812 utilizing the Black Sholes option-pricing model with
the following assumption: 105% volatility, two-year and two-month expected life,
risk-free interest rate of 3.43% and a dividend yield ratio of 0%. The fair
value of the conversion feature was adjusted using the difference between the
fair value of the conversion feature pre-adjustment and the fair value of the
conversion feature post-adjustment amounting to an additional debt discount in
the amount of $81,222 to be amortized over the remaining life of the
note.
  As a
result of the anti-dilution provisions of the Series A Convertible Preferred
Stock and the issuance of Series D convertible preferred stock, the conversion
and exercise prices have been adjusted to $.93 and an additional 28,297 warrants
have been issued. The fair value of the conversion feature and warrants were
adjusted using the difference between the fair value of the conversion feature
and warrants pre-adjustment and the fair value of the conversion feature and
warrants post-adjustment amounting to an additional debt discount in the amount
of $83,032 to be amortized through July 2007.
  As a
result of the anti-dilution provisions of the Series B Convertible Preferred
Stock and the issuance of Series D convertible preferred stock, the conversion
and exercise prices have been adjusted to $.93 and an additional 67,912 warrants
have been issued. The fair value of the conversion feature and warrants were
adjusted using the difference between the fair value of the conversion feature
and warrants pre-adjustment and the fair value of the conversion feature and
warrants post-adjustment amounting to an additional debt discount in the amount
of $199,625 to be amortized through August 2007.


F-16







SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.












DWANGO NORTH AMERICA CORP.Date: March 30, 2005
    By:
    /s/ Rick J. HennesseyRick J. Hennessey, Chief Executive Officer
      (principal executive officer)




DWANGO NORTH AMERICA CORPDate: March 30, 2005
    By:
    /s/ J. Paul QuinnJ. Paul Quinn, Chief Financial Officer
      (principal financial and accounting
    officer)




In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.








**Signature**
    
    **Title**
    
    **Date**/s/
      Rick J. Hennessey
    
    Director
    
    March
      25, 2005Rick
      J. Hennessey/s/
      Victor A. Cohn
    
    Director
      & Chairman of the Board
    
    March
      28, 2005Victor
      A. Cohn/s/
      Alexander U. Conrad
    
    Director
    
    March
      25, 2005Alexander
      U. Conrad/s/
      L. Derrick Ashcroft
    
    Director
    
    March
      28, 2005L.
      Derrick Ashcroft/s/
      Vishal Bhutani
    
    Director
    
    March
      28, 2005Vishal
      Bhutani/s/
      Paul Eibeler
    
    Director
    
    March
      29, 2005Paul
      Eibeler








36





EXHIBIT
INDEX





(a)
    Exhibits





Number
    Description





2
    Agreement
      and Plan of Reorganization, dated September 19, 2003, among Woodland
      Hatchery, Inc., Dwango North America, Inc. and the securityholders of
      Dwango listed therein (incorporated by reference to Exhibit 2.1 to the
      Registrant’s Current Report on Form 8-K (Date of Report: September 29,
      2003) filed with the Securities and Exchange Commission on October 7,
      2003)


3.1
    Articles
      of Incorporation, as amended to date (incorporated by reference to
      Exhibits 3.1 to the Registration Statement on Form SB-2 filed with the
      Securities and Exchange Commission on September 6, 2001 and Exhibit 3.1 to
      the Registrant’s Current Report on Form 8-K (Date of Report: September 29,
      2003) filed with the Securities and Exchange Commission on October 7,
      2003)


3.2
    Certificate
      of Designations of Series A (incorporated by reference to Exhibit 3.1 to
      the Registrant’s Current Report on Form 8-K (Date of Report: June 14,
      2004) filed with the Securities and Exchange Commission on June 21,
      2004)


3.3
    Amendment
      to Certificate of Designations of Series A (incorporated by reference to
      Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (Date of
      Report: August 25, 2004) filed with the Securities and Exchange Commission
      on August 31, 2004


3.4
    Certificate
      of Designations of Series B (incorporated by reference to Exhibit 3.2 to
      the Registrant’s Current Report on Form 8-K (Date of Report: August 25,
      2004) filed with the Securities and Exchange Commission on August 31,
      2004


3.5
    Certificate
      of Designations of Series C Convertible Preferred Stock (incorporated by
      reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K
      (Date of Report: January 12, 2005) filed with the Securities and Exchange
      Commission on January 18, 2005


3.6
    Certificate
      of Designations of Series D Convertible Preferred Stock (incorporated by
      reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K
      (Date of Report: February 1, 2005) filed with the Securities and Exchange
      Commission on February 3, 2005


3.7
    Amended
      and Restated Bylaws of the Registrant (incorporated by reference to
      Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (Date of
      Report: June 1, 2004) filed with the Securities and Exchange Commission on
      June 3, 2004)


4.1
    Specimen
      Common Stock Certificate (incorporated by reference to Exhibit 3 the Form
      8-A filed with the Securities and Exchange Commission on June 3,
      2004)


4.2
    Form
      of 8% Senior Convertible Promissory Note due 2006 (incorporated by
      reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
      (Date of Report: September 29, 2003) filed with the Securities and
      Exchange Commission on October 7, 2003)


4.3
    9%
      Senior Convertible Note due 2007 issued to Alexandra Global Master Fund
      Ltd. dated January 8, 2004 (incorporated by reference to Exhibit 4.4 to
      the Registrant’s Current Report on Form 8-K (Date of Report: December 12,
      2003) filed with the Securities and Exchange Commission on January 16,
      2004)


4.4
    Form
      of Warrants to purchase 41,722 shares of common stock issued in August
      2002 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current
      Report on Form 8-K (Date of Report: September 29, 2003) filed with the
      Securities and Exchange Commission on October 7,
2003)


4.5
    Form
      of Warrants to purchase an aggregate of 83,444 shares of common stock
      (incorporated by reference to Exhibit 4.3 to the Registrant’s Current
      Report on Form 8-K (Date of Report: September 29, 2003) filed with the
      Securities and Exchange Commission on October 7,
2003)


4.6
    Form
      of Warrants to purchase an aggregate of 2,086,037 shares of common stock
      (incorporated by reference to Exhibit 4.4 to the Registrant’s Current
      Report on Form 8-K (Date of Report September 29, 2003) filed with the
      Securities and Exchange Commission on October 7,
2003)


4.7
    Form
      of Warrants to purchase an aggregate of 417,208 shares of common stock
      issued to HCFP/Brenner Securities, LLC and RG Securities, LLC for acting
      as placement agent in connection with the September 2003 private placement
      (incorporated by reference to Exhibit 4.7 to the Registrant’s Annual
      Report on Form 10-KSB for the year ended December 31, 2003 filed with the
      Securities and Exchange Commission on April 15,
2004)


4.8
    Form
      of Bridge Warrants issued to Alexandra Global Master Fund (incorporated by
      reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K
      (Date of Report: December 12, 2003) filed with the Securities and Exchange
      Commission on January 16, 2004)


4.9
    Form
      of Warrants to purchase an aggregate of 272,784 shares of common stock
      issued to HCFP Brenner Securities and RG Securities, LLC (incorporated by
      reference to Exhibit 4.9 to the Registrant’s Annual Report on Form 10-KSB
      for the year ended December 31, 2003 filed with the Securities and
      Exchange Commission on April 15, 2004)


4.10
    Warrant
      issued to Alexandra Global Master Fund Ltd. dated January 8, 2004
      (incorporated by reference to Exhibit 4.5 to the Registrant’s Current
      Report on Form 8-K (Date of Report: December 12, 2003) filed with the
      Securities and Exchange Commission on January 16,
2004)


37
   
 4.11
    Form
      of Registration Rights Agreement relating to 834,465 shares of common
      stock and 83,444 shares of common stock underlying warrants issued by the
      registrant in October 2002 (incorporated by reference to Exhibit 4.11 to
      the Registrant’s Annual Report on Form 10-KSB for the year ended December
      31, 2003 filed with the Securities and Exchange Commission on April 15,
      2004)


4.12
    Form
      of Registration Rights Agreement relating to shares of common stock
      underlying 8% senior convertible notes due 2006 and related warrants
      issued by the registrant in offering completed in September 2003
      (incorporated by reference to Exhibit 4.12 to the Registrant’s Annual
      Report on Form 10-KSB for the year ended December 31, 2003 filed with the
      Securities and Exchange Commission on April 15,
2004)


4.13
    Registration
      Rights Agreement, dated February 4, 2004, among Dwango North America Corp.
      and the former shareholders of Over-the-Air Wireless, Inc. (incorporated
      by reference to Exhibit 10.2 to the Registrant’s Current Report Form 8-K
      (Date of Report: February 4, 2004) filed with the Securities and Exchange
      Commission on February 19, 2004)


4.14
    9%
      Senior Convertible Note due 2007 issued to Alexandra Global Master Fund
      Ltd. dated March 19, 2004 (incorporated by reference to Exhibit 4.2 to the
      Registrant’s Current Report on Form 8-K (Date of Report: March 19, 2004)
      filed with the Securities and Exchange Commission on March 29,
      2004)


4.15
    Warrant
      issued to Alexandra Global Master Fund Ltd., dated March 19, 2004
      (incorporated by reference to Exhibit 4.3 to the Registrant’s Current
      Report on Form 8-K (Date of Report: March 19, 2004) filed with the
      Securities and Exchange Commission on March 29,
2004)


4.16
    Subscription
      Agreement, dated June 14, 2004, between Dwango North America Corp. and
      Alexandra Global Master Fund Ltd. (incorporated by reference to Exhibit
      4.1 to the Registrant’s Current Report on Form 8-K (Date of Report: June
      14, 2004) filed with the Securities and Exchange Commission on June 21,
      2004)


4.17
    Warrant
      issued to Alexandra Global Master Fund Ltd. dated June 14, 2004
      (incorporated by reference to Exhibit 4.2 to the Registrant’s Current
      Report on Form 8-K (Date of Report: June 14, 2004) filed with the
      Securities and Exchange Commission on June 21,
2004)


4.18
    Subscription
      Agreement, dated July 2, 2004, between Dwango North America Corp. and
      Alexandra Global Master Fund Ltd. (incorporated by reference to Exhibit
      4.1 to the Registrant’s Current Report on Form 8-K (Date of Report: July
      2, 2004) filed with the Securities and Exchange Commission on July 8,
      2004)


4.19
    Warrant
      issued to Alexandra Global Master Fund Ltd. dated July 2, 2004
      (incorporated by reference to Exhibit 4.2 to the Registrant’s Current
      Report on Form 8-K (Date of Report: July 2, 2004) filed with the
      Securities and Exchange Commission on July 8,
2004)


4.20
    Subscription
      Agreement, dated August 2, 2004, between Dwango North America Corp. and
      Alexandra Global Master Fund Ltd. (incorporated by reference to Exhibit
      4.1 to the Registrant’s Current Report on Form 8-K (Date of Report: August
      2, 2004) filed with the Securities and Exchange Commission on August 5,
      2004)


4.21
    Warrant
      issued to Alexandra Global Master Fund Ltd. dated August 2, 2004
      (incorporated by reference to Exhibit 4.2 to the Registrant’s Current
      Report on Form 8-K (Date of Report: August 2, 2004) filed with the
      Securities and Exchange Commission on August 5,
2004)


4.22
    Subscription
      Agreement, dated August 26, 2004, between Dwango North America Corp. and
      the investors named therein (incorporated by reference to Exhibit 4.1 to
      the Registrant’s Current Report on Form 8-K (Date of Report: August 25,
      2004) filed with the Securities and Exchange Commission on August 31,
      2004)


4.23
    Form
      of Warrant issued to investors in August 2004 Series B financing
      (incorporated by reference to Exhibit 4.2 to the Registrant’s Current
      Report on Form 8-K (Date of Report: August 25, 2004) filed with the
      Securities and Exchange Commission on August 31,
2004)


4.24
    Subscription
      Agreement, dated January 12, 2005, between Dwango North America Corp. and
      Alexandra Global Master Fund Ltd. (incorporated by reference to Exhibit
      4.1 to the Registrant’s Current Report on Form 8-K (Date of Report:
      January 12, 2005) filed with the Securities and Exchange Commission on
      January 18, 2005)


4.25
    Warrant
      issued to Alexandra Global Master Fund Ltd. dated January 12, 2005
      (incorporated by reference to Exhibit 4.2 to the Registrant’s Current
      Report on Form 8-K (Date of Report: January 12, 2005) filed with the
      Securities and Exchange Commission on January 18,
2005)


4.26
    Subscription
      Agreement, dated February 1, 2005, between Dwango North America Corp. and
      the investors named therein (incorporated by reference to Exhibit 4.1 to
      the Registrant’s Current Report on Form 8-K (Date of Report: February 1,
      2005) filed with the Securities and Exchange Commission on February 3,
      2005)


4.27
    Form
      of Warrant to purchase an aggregate of 3,365,035 shares of common stock
      (incorporated by reference to Exhibit 4.2 to the Registrant’s Current
      Report on Form 8-K (Date of Report: February 1, 2005) filed with the
      Securities and Exchange Commission on February 3,
2005)


10.1
    2003
      Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the
      Registrant’s Annual Report on Form 10-KSB for the year ended December 31,
      2003 filed with the Securities and Exchange Commission on April 15,
      2004)


10.2
    Office
      Lease Agreement, dated April 25, 2002, by and between Queen Anne Square,
      LLC and Dwango North America Inc. (incorporated by reference to Exhibit
      10.2 to the Registrant’s Annual Report on Form 10-KSB for the year ended
      December 31, 2003 filed with the Securities and Exchange Commission on
      April 15, 2004)


38
  
 10.3
    Office
      Lease Agreement, dated November 2002, between San Felipe Plaza, Ltd. and
      Dwango North America, Inc., as amended (incorporated by reference to
      Exhibit 10.3 to the Registrant’s Annual Report on Form 10-KSB for the year
      ended December 31, 2003 filed with the Securities and Exchange Commission
      on April 15, 2004)


10.4
    Bridge
      Agreement, dated December 12, 2003, between Dwango North America Corp. and
      Alexandra Global Master Fund Ltd. (incorporated by reference to Exhibit
      4.1 to the Registrant’s Current Report on Form 8-K (Date of Report:
      December 12, 2003) filed with the Securities and Exchange Commission on
      January 16, 2004)


10.5
    Note
      Purchase Agreement, dated January 8, 2004, between Dwango North America
      Corp. and Alexandra Global Master Fund Ltd. (incorporated by reference to
      Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (Date of
      Report: December 12, 2003) filed with the Securities and Exchange
      Commission on January 16, 2004)


10.6
    Conversion
      Agreement, dated January 28, 2004, between Dwango North America Corp. and
      Robert E. Huntley (incorporated by reference to Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K (Date of Report: January 14, 2004)
      filed with the Securities and Exchange Commission on January 30,
      2004)


10.7
    Conversion
      Agreement, dated January 28, 2004, between Dwango North America Corp. and
      Paul Eibeler (incorporated by reference to Exhibit 10.2 to the
      Registrant’s Current Report on Form 8-K (Date of Report: January 14, 2004)
      filed with the Securities and Exchange Commission on January 30,
      2004)


10.8
    Agreement
      and Plan of Merger, dated as of February 4, 2004, among Dwango North
      America Corp., OTA Acquisition Corp., Over-the-Air Wireless, Inc., and the
      stockholders of Over-the-Air Wireless, Inc. (incorporated by reference to
      Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Date of
      Report: February 4, 2004) filed with the Securities and Exchange
      Commission on February 19, 2004)


10.9
    Note
      Purchase Agreement, dated March 19, 2004, between Dwango North America
      Corp. and Alexandra Global Master Fund Ltd. (incorporated by reference to
      Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (Date of
      Report: March 19, 2004) filed with the Securities and Exchange Commission
      on March 29, 2004)


10.10
    Form
      of Employment Agreement between Dwango North America Corp. and each of
      Rick J. Hennessey, David Adams, and Alexander U. Conrad (incorporated by
      reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K
      (Date of Report: February 4, 2004) filed with the Securities and Exchange
      Commission on February 19, 2004)


10.11
    Form
      of Assignment of Inventions Agreement between Dwango North America Corp.
      and each of the former shareholders of Over-the-Air Wireless, Inc.
      (incorporated by reference to Exhibit 10.4 to the Registrant’s Current
      Report on Form 8-K (Date of Report: February 4, 2004) filed with the
      Securities and Exchange Commission on February 19,
2004)


10.12
    Software
      License Agreement between ALLTEL Communications Inc. and Dwango North
      America Inc. executed December 19, 2003 (incorporated by reference to
      Exhibit 10.11 to the Registrant’s Annual Report on Form 10-KSB for the
      year ended December 31, 2003 filed with the Securities and Exchange
      Commission on April 15, 2004)


10.13
      *
    Direct
      Bill Services Agreement between Cingular Wireless LLC and Dwango North
      America, Inc. executed on January 9, 2004 (incorporated by reference to
      Exhibit 10.12 to the Registrant’s Annual Report on Form 10-KSB for the
      year ended December 31, 2003 filed with the Securities and Exchange
      Commission on April 15, 2004)


10.14
      *
    Software
      Distribution Agreement between Motorola, Inc. and Dwango North America,
      Inc. executed September 24, 2003 (incorporated by reference to Exhibit
      10.13 to the Registrant’s Annual Report on Form 10-KSB for the year ended
      December 31, 2003 filed with the Securities and Exchange Commission on
      April 15, 2004)


10.15
      *
    License
      and Revenue Sharing Agreement between NEC America, Inc. and Dwango North
      America, Inc. effective January 1, 2003 (incorporated by reference to
      Exhibit 10.14 to the Registrant’s Annual Report on Form 10-KSB for the
      year ended December 31, 2003 filed with the Securities and Exchange
      Commission on April 15, 2004)


10.16
      *
    Java
      Wireless Applications Agreement between T-Mobile USA, Inc. and Dwango
      North America, Inc. effective as of September 3, 2003 (incorporated by
      reference to Exhibit 10.15 to the Registrant’s Annual Report on Form
      10-KSB for the year ended December 31, 2003 filed with the Securities and
      Exchange Commission on April 15, 2004)


10.17
    Brew
      Application License Agreement between Cellco Partnership d/b/a Verizon
      Wireless and Dwango North America Inc. Submitted via click through web
      interface on October 11, 2002 (incorporated by reference to Exhibit 10.16
      to the Registrant’s Annual Report on Form 10-KSB for the year ended
      December 31, 2003 filed with the Securities and Exchange Commission on
      April 15, 2004)


10.18
    Brew
      Pricing Terms and Carrier Agreement between Qualcomm Incorporated and
      Dwango North America, Inc. Submitted via click through on May 21, 2002
      (incorporated by reference to Exhibit 10.17 to the Registrant’s Annual
      Report on Form 10-KSB for the year ended December 31, 2003 filed with the
      Securities and Exchange Commission on April 15,
2004)


10.19
    Amendment
      No. 1 to Brew Developer Agreement between Qualcomm Incorporated and Dwango
      North America, Inc. effective as of May 17, 2002 (incorporated by
      reference to Exhibit 10.18 to the Registrant’s Annual Report on Form
      10-KSB for the year ended December 31, 2003 filed with the Securities and
      Exchange Commission on April 15, 2004)


10.20
    Mobile
      Channel Agreement between AT&T Wireless Services, Inc. and Dwango
      North America, Inc. effective as of September 26, 2002 (incorporated by
      reference to Exhibit 10.19 to the Registrant’s Annual Report on Form
      10-KSB for the year ended December 31, 2003 filed with the Securities and
      Exchange Commission on April 15, 2004)


10.21
      *
    Addendum
      to Mobile Channel Agreement Digital Goods Electronic Wallet between
      AT&T Wireless Services, Inc. and Dwango North America, Inc., dated
      September 26, 2002 (incorporated by reference to Exhibit 10.20 to the
      Registrant’s Annual Report on Form 10-KSB for the year ended December 31,
      2003 filed with the Securities and Exchange Commission on April 15,
      2004)


39
  
 10.22
    Letter
      agreement, dated January 8, 2004 with Alexandra Global Master Fund Ltd.
      (incorporated by reference to Exhibit 10.21 to the Registrant’s Annual
      Report on Form 10-KSB for the year ended December 31, 2003 filed with the
      Securities and Exchange Commission on April 15,
2004)


10.23
    Marilyn
      Miller notes and extension (incorporated by reference to Exhibit 10.22 to
      the Registrant’s Annual Report on Form 10-KSB for the year ended December
      31, 2003 filed with the Securities and Exchange Commission on April 15,
      2004)


10.24
    License
      Agreement, dated October 29, 2003, between Dwango North America, Inc. and
      Enorbus Technologies (incorporated by reference to Exhibit 10.23 to the
      Registrant’s Annual Report on Form 10-KSB for the year ended December 31,
      2003 filed with the Securities and Exchange Commission on April 15,
      2004)


10.25
    Technology
      License Agreement, dated August 14, 2002, between Dwango North America,
      Inc. and Dwango Co. Ltd. (incorporated by reference to Exhibit 10.24 to
      the Registrant’s Annual Report on Form 10-KSB for the year ended December
      31, 2003 filed with the Securities and Exchange Commission on April 15,
      2004)


10.26
    Trademarks
      License Agreement between Dwango Co., Ltd. and Dwango North America, Inc.,
      effective as of August 14, 2002 (incorporated by reference to Exhibit
      10.25 to the Registrant’s Annual Report on Form 10-KSB for the year ended
      December 31, 2003 filed with the Securities and Exchange Commission on
      April 15, 2004)


10.27
    Letter
      agreement, dated March 19, 2004 with Alexandra Global Master Fund Ltd.
      (incorporated by reference to Exhibit 10.26 to the Registrant’s Annual
      Report on Form 10-KSB for the year ended December 31, 2003 filed with the
      Securities and Exchange Commission on April 15,
2004)


10.28
      *
    Licensing
      Agreement effective as of March 30, 2004 by and between Dwango North
      America Corp., RealNetworks, Inc. and Rolling Stone LLC. (incorporated by
      reference to Amendment No. 1 to the Registrant’s Registration Statement on
      Form SB-2 (SEC File No.: 333-112371) that was declared effective by the
      Securities and Exchange Commission on August 12,
2004)


10.29
      *
    Licensing
      Agreement, effective as of January 14, 2004, between Dwango North America
      Corp. and ESPN Enterprises, Inc. (incorporated by reference to Amendment
      No. 1 to the Registrant’s Registration Statement on Form SB-2 (SEC File
      No.: 333-112371) that was declared effective by the Securities and
      Exchange Commission on August 12, 2004)


10.30
    Placement
      Agent Agreement dated April 30, 2002 by and among Dwango North America,
      Inc., HCFP/Brenner Securities, LLC and RG Securities LLC, as amended
      (incorporated by reference to Amendment No. 1 to the Registrant’s
      Registration Statement on Form SB-2 (SEC File No.: 333-112371) that was
      declared effective by the Securities and Exchange Commission on August 12,
      2004)


10.31
      *
    Digital
      Item License and Distribution Agreement, dated June 4, 2004, by and
      between Nextel Operations, Inc. and Dwango North America Corp.
      (incorporated by reference to Amendment No. 2 to the Registrant’s
      Registration Statement on Form SB-2 (SEC File No.: 333-112371) that was
      declared effective by the Securities and Exchange Commission on August 12,
      2004)


10.32
      *
    Amendment
      No. 1 to Mobile Channel Agreement, dated June 8, 2004, between AT&T
      Wireless Services and Dwango North America, Inc. (incorporated by
      reference to Amendment No. 2 to the Registrant’s Registration Statement on
      Form SB-2 (SEC File No.: 333-112371) that was declared effective by the
      Securities and Exchange Commission on August 12,
2004)


10.33
      *
    Amendment
      No. 1 to Digital Item License and Distribution Agreement, effective as of
      June 18, 2004, between Nextel Operations, Inc. and Dwango North America
      Corp. (incorporated by reference to Amendment No. 2 to the Registrant’s
      Registration Statement on Form SB-2 (SEC File No.: 333-112371) that was
      declared effective by the Securities and Exchange Commission on August 12,
      2004)


10.34
      *
    T-Mobile
      Current Gateway Program Agreement between T-Mobile USA, Inc. and Dwango
      North America Corp. effective July 30, 2004 (incorporated by reference to
      Exhibit 10.34 to the Registrant’s Quarterly Report on Form 10-QSB for the
      quarter ended June 30, 2004 filed with the Securities and Exchange
      Commission August 20, 2004)


10.35*
    License
      Agreement, dated September 7, 2004 between Dwango North America Corp. and
      Beliefnet, Inc. (incorporated by reference to the Registrant’s
      Registration Statement on Form SB-2 (SEC File No.: 333-119268) that was
      declared effective by the Securities and Exchange Commission on November
      10, 2004)


10.36*
    License
      Agreement for access to wireless network, entered into on October 22,
      2004, between Dwango North America Corp. and Nextel Operations Inc.
      (incorporated by reference to Exhibit 10.36 to the Registrant’s Quarterly
      Report on Form 10-QSB for the quarter ended September 30, 2004 filed with
      the Securities and Exchange Commission November 19,
  2004)


10.37*
    Wireless
      Distribution Agreement between Dwango North America Corp. and Playboy.com,
      Inc. entered into on November 18, 2004.


10.38*
    License
      Agreement, between Dwango North America Corp. and Napster, LLC entered
      into on November 29, 2004.


10.39
    Sub-lease
      contract between Dwango North America Corp. and Microsoft Corporation
      entered into on December 14, 2004.


10.40*
    Content
      Provider Standard Service Agreement between Dwango North America Corp. and
      Wmode Inc. with an effective date of March 10,
2005.


40
  
 10.41
    Employment
      Agreement, dated March 1, 2005, between Dwango North America Corp. and
      Rick J. Hennessey (incorporated by reference to Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K (Date of Report: March 1, 2005)
      filed with the Securities and Exchange Commission on March 7,
      2005)


10.42
    Employment
      Agreement, dated March 1, 2005, between Dwango North America Corp. and
      Alexander U. Conrad (incorporated by reference to Exhibit 10.2 to the
      Registrant’s Current Report on Form 8-K (Date of Report: March 1, 2005)
      filed with the Securities and Exchange Commission on March 7,
      2005)


10.43
    Director
      Agreement, dated March 8, 2005, between Dwango North America Corp. and
      Victor Cohn (incorporated by reference to Exhibit 10.1 to the Registrant’s
      Current Report on Form 8-K (Date of Report: March 8, 2005) filed with the
      Securities and Exchange Commission on March 14,
2005)


14
    Code
      of Ethics (incorporated by reference to Exhibit 14 to the Registrant’s
      Annual Report on Form 10-KSB for the year ended December 31, 2003 filed
      with the Securities and Exchange Commission on April 15,
    2004)


21
    Subsidiaries:


Dwango
      North America, Inc. is a Texas corporation


OTA
      Acquisition Corp. is a Washington
corporation


23
    Consent
      of Eisner LLP
 31.1
    Certification
      of Chief Executive Officer


31.2
    Certification
      of Chief Financial Officer


32
    Certification
      pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002





*
Requested Confidential Treatment










41