UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q




(Mark
One)




x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For
the three months ended August 31, 2010




OR




 ̈ TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the
transition period from ______________ to ______________




Commission
file number  000-52511




PHREADZ,
INC.


(Exact
name of registrant as specified in its charter)





Nevada
                  (State
      or other jurisdiction of incorporation or
                  organization)
                
                98-0471052
                  (IRS
      Employer Identification
No.)





Suite
202, 63Main Street, Flemington, New Jersey08822


(Address
of Principal Executive Offices)





(908)
968-0838


(Registrant's
telephone, including area code)




Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities ExchangeAct of 1934
duringthepast12monthsand (2)has been subject to such filing requirements for the
past 90days.




Yes x     No  ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





Yes  ̈     No  ̈


(Does not
currently apply to the Registrant)





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):




Large
      accelerated filer
             ̈
            
            Accelerated
      filer
             ̈Non-accelerated
      filer
             ̈
            (Do
      not check if a smaller
            Smaller
      reporting company
            xreporting
      company)


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





Yes  ̈ No x





APPLICABLE
ONLY TO CORPORATE ISSUERS





State the
number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date:[66,941,376]Shares of $0.001 par value common
stock outstanding as ofOctober 15, 2010.








PART
      I. FINANCIAL INFORMATION
                3Item
      1. Interim
      Financial Statements.
                3Item
      2. Management's
      Discussion and Analysis or Plan of Operation.
                4Item
      3. Quantitative
      and Qualitative Disclosures about Market Risk
                7Item
      4. Controls
      and Procedures
                7Item
      5. Other
                9PART
      11 - OTHER INFORMATION
                10Item
      1. Legal
      Proceedings
                10Item
      2. Unregistered
      Sales of Equity Securities and Use of Proceeds
                10Item
      3. Defaults
      upon Senior Securities
                10Item
      4. [Removed
      and Reserved]
                10Item
      5. Other
      Information
                10Item
      6. Exhibits
                10SIGNATURES
                11


2




PART
I. Financial Information




Item 1. Interim Financial
Statements.





The
accompanying unaudited consolidated financial statements of  Phreadz, Inc.
("Phreadz) have been prepared in accordance with accounting principles generally
accepted in the United States of America and the rules of the Securities and
Exchange Commission ("SEC"), and, should be read in conjunction with the audited
financial statements and notes thereto contained in Phreadz'sAnnual Report Form
10-K filedwith the SEC on September 13, 2010. In the opinion of management, all
adjustments consisting of normal recurring adjustments, necessary for a fair
presentation of financial position and the results of operations for the interim
period are not necessarily indicative of the results that may be expected for
the full year. Notes to the interim financial statements that would
substantially duplicate the disclosure contained in the audited financial
statements for fiscal 2010 as reported in our Annual Report onForm 10-K
filedwith the SEC on September 13, 2010have been omitted


3




PHREADZ,
      INC.(A
      Development Stage Company)Unaudited
      Financial Statements(Expressed
      in U.S. Dollars)August
      31, 2010





Index
                Page
      NumberConsolidated
      Balance Sheets
                F-1Consolidated
      Statements of Stockholders' Deficiency
                F-2Consolidated
      Statements of Operations
                F-3Consolidated
      Statements of Cash Flows
                F-4Notes
      to Consolidated Financial Statements
                F-5-17








PHREADZ,
      INC.
                (A
      Development Stage Company)Consolidated
      Balance SheetsAugust
      31, 2010 and May 31, 2010(Expressed
      in U.S. Dollars)


August31,2010
                                          
                                          
                                          May31,2010ASSETSCurrentCash
                                          
                                          $
                                          214
                                          
                                          
                                          $
                                          159,025Prepaids
                                          
                                          
                                          -
                                          
                                          
                                          
                                          25,000Total 
      current assets
                                          
                                          
                                          214
                                          
                                          
                                          
                                          184,025Total Assets
                                          
                                          $
                                          214
                                          
                                          
                                          $
                                          184,025LIABILITIESCurrentAccounts
      payable
                                          
                                          $
                                          406,595
                                          
                                          
                                          $
                                          336,448Accrued
      liabilities
                                          
                                          
                                          2,829
                                          
                                          
                                          
                                          2,829Interest
      payable
                                          
                                          
                                          15,369
                                          
                                          
                                          
                                          14,664Memberholder
      loan
                                          
                                          
                                          2,046
                                          
                                          
                                          
                                          2,046Notes
      payable
                                          
                                          
                                          26,000
                                          
                                          
                                          
                                          241,000Stock issuance liability
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,000,632Total current liabilities
                                          
                                          
                                          452,839
                                          
                                          
                                          
                                          1,597,619Total Liabilities
                                          
                                          $
                                          452,839
                                          
                                          
                                          $
                                          1,597,619STOCKHOLDERS’
      (DEFICIENCY) EQUITYShare
      capitalAuthorized:525,000,000
      Shares of common stock par value $0.001Issued,
      allotted and outstanding:66,941,376
      and 61,753,867 shares as of   August 31, 2010 and May 31, 2010,
      respectively
                                          
                                          
                                          66,941
                                          
                                          
                                          
                                          61,754Additional
      paid-in capital
                                          
                                          
                                          13,275,742
                                          
                                          
                                          
                                          11,702,297Deficit accumulated during development
      stage
                                          
                                          
                                          (13,795,308
                                          )
                                          
                                          
                                          (13,177,645
                                          )Total stockholders’ (deficiency)
      equity
                                          
                                          
                                          (452,625
                                          )
                                          
                                          
                                          (1,413,594
                                          )Total liabilities and stockholders’ (deficiency)
      equity
                                          
                                          $
                                          214
                                          
                                          
                                          $
                                          184,025





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


F-1





PHREADZ,
      INC.(A
      Development Stage Company)Consolidated
      Statement of Stockholders' (Deficiency) EquityFor
      the period April 3, 2009 (Inception) to August 31, 2010
                  Page
      1 of  1(Expressed
      in U.S. Dollars)





TotalCommonstock
                                    
                                    
                                    Additional
                                    
                                    
                                    Subscription
                                    
                                    
                                    Deficit
                                    
                                    
                                    Stock-holders'Shares
                                    
                                    
                                    Amount
                                    
                                    
                                    paid-incapital
                                    
                                    
                                    Receivable
                                    
                                    
                                    accumulated
                                    
                                    
                                    (deficiency)Shares
      issued for property April 3, 2009
                                    
                                    
                                    1,920,000
                                    
                                    
                                    $
                                    1,920
                                    
                                    
                                    $
                                    4,998,092
                                    
                                    
                                    $
                                    (90
                                    )
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    4,999,922Shares
      issued for cash May 28, 2010
                                    
                                    
                                    12,480,000
                                    
                                    
                                    $
                                    12,480
                                    
                                    
                                    $
                                    (12,390
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    90Net
      Loss April 3, 2009 (Inception) to May 31,
    2010
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    (186,902
                                    )
                                    
                                    $
                                    (186,902
                                    )Balance,
      May 31, 2009
                                    
                                    
                                    14,400,000
                                    
                                    
                                    $
                                    14,400
                                    
                                    
                                    $
                                    4,985,702
                                    
                                    
                                    $
                                    (90
                                    )
                                    
                                    $
                                    (186,902
                                    )
                                    
                                    $
                                    4,813,110Subscription
      receivable
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    90
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    90Shares
      issued for cash August 25, 2009
                                    
                                    
                                    23,136,000
                                    
                                    
                                    $
                                    23,136
                                    
                                    
                                    $
                                    (22,991
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    145Shares
      issued for cash March 10, 2010
                                    
                                    
                                    5,782,400
                                    
                                    
                                    $
                                    5,782
                                    
                                    
                                    $
                                    (5,746
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    36Recapitalization
      due to reverse merger
                                    
                                    
                                    42,700,000
                                    
                                    
                                    $
                                    42,700
                                    
                                    
                                    $
                                    (83,243
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    (40,543
                                    )Shares
      cancelled due to reverse merger
                                    
                                    
                                    (32,712,176
                                    )
                                    
                                    $
                                    (32,712
                                    )
                                    
                                    $
                                    32,712
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    -Issuance
      of common stock @ $0.15 May 20, 2010
                                    
                                    
                                    1,9333,333
                                    
                                    
                                    $
                                    1,933
                                    
                                    
                                    $
                                    288,067
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    290,000Issuance
      of common stock in settlementof
      notes payable May 31, 2010
                                    
                                    
                                    6,514,310
                                    
                                    
                                    $
                                    6,515
                                    
                                    
                                    $
                                    6,507,796
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    6,514,311Net
      loss for the year ending May 31, 2010
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    (12,990,743
                                    )
                                    
                                    $
                                    (12,990,743
                                    )Balance,
      May 31, 2010
                                    
                                    
                                    61,753,867
                                    
                                    
                                    $
                                    61,754
                                    
                                    
                                    $
                                    11,702,297
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    (13,177,645
                                    )
                                    
                                    $
                                    (1,413,594
                                    )Shares
      issued for cash  on June 8, 2010 @ $0.15
                                    
                                    
                                    1,333,333
                                    
                                    
                                    $
                                    1,333
                                    
                                    
                                    $
                                    198,667
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    200,000Exchange
      agreement issuance June 22, 2010
                                    
                                    
                                    1,334,176
                                    
                                    
                                    $
                                    1,334
                                    
                                    
                                    $
                                    999,298
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,000,632Shares
      issued for cash on July 16, 2010 @ $0.15
                                    
                                    
                                    2,520,000
                                    
                                    
                                    $
                                    2,520
                                    
                                    
                                    $
                                    375,480
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    378,000Net
      loss for the period June 1, 2010 to August 31,
      2010
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    (617,663
                                    )
                                    
                                    $
                                    (617,663
                                    )Balance,
      August 31, 2010
                                    
                                    
                                    66,941,376
                                    
                                    
                                    $
                                    66,941
                                    
                                    
                                    $
                                    13,275,742
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    (13,795,308
                                    )
                                    
                                    $
                                    (452,625
                                    )


F-2





PHREADZ,
      INC.(A
      Development Stage Company)Consolidated
      Statements of OperationsFor
      the three months ended August 31, 2010 and 2009 and
                the
      period from April 3, 2009 (inception) to August 31,
2010(Expressed
      in U.S. Dollars)





From Inception Date
                                      of April 3, 2009 to
                                      August 31, 2010
                                    
                                    
                                    For the Three
                                      Months ended
                                      August 31 2010
                                    
                                    
                                    For the
                                      ThreeMonths
                                      endedAugust 31,
                                      2009Revenue
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -Accounting
                                    
                                    
                                    81,286
                                    
                                    
                                    
                                    27,647
                                    
                                    
                                    
                                    15,147Consulting
                                    
                                    
                                    1,466,369
                                    
                                    
                                    
                                    375,695
                                    
                                    
                                    
                                    198,397Corporate
      finance fees
                                    
                                    
                                    37,140
                                    
                                    
                                    
                                    22,140
                                    
                                    
                                    
                                    -Financing
      expense
                                    
                                    
                                    1,000,632
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -G&A
                                    
                                    
                                    101,093
                                    
                                    
                                    
                                    60,974
                                    
                                    
                                    
                                    1,808Legal
                                    
                                    
                                    401,525
                                    
                                    
                                    
                                    79,541
                                    
                                    
                                    
                                    -Travel
                                    
                                    
                                    173,001
                                    
                                    
                                    
                                    49,910
                                    
                                    
                                    
                                    24,738Operating loss
                                    
                                    
                                    (3,261,046
                                    )
                                    
                                    
                                    (615,907
                                    )
                                    
                                    
                                    (240,090
                                    )Other
      expenseImpairment
      of IP music database
                                    
                                    
                                    (5,000,000
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Interest
      expense (related party)
                                    
                                    
                                    (218,608
                                    )
                                    
                                    
                                    (1,756
                                    )
                                    
                                    
                                    (34,403
                                    )Gain
      on forgiveness of debt
                                    
                                    
                                    221,509
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Loss on settlement of debt
                                    
                                    
                                    (5,537,163
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Net loss for the year
                                    
                                    $
                                    (13,795,308
                                    )
                                    
                                    
                                    (617,663
                                    )
                                    
                                    
                                    (274,493
                                    )Loss per share –basic and dilutedNet loss
                                    
                                    
                                    
                                    
                                    
                                    $
                                    (0.01
                                    )
                                    
                                    $
                                    (0.02
                                    )Weighted
      average number of commonshares outstanding
      - basic and diluted
                                    
                                    
                                    
                                    
                                    
                                    
                                    65,246,392
                                    
                                    
                                    
                                    15,671,209





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


F-3





PHREADZ,
      INC.(A
      Development Stage Company)Consolidated
      Statements of Cash FlowsFor
      the three months ended August 31, 2010 and 2009 and
                the
      period from April 3, 2009 (inception) to August 31,
2010(Expressed
      in U.S. Dollars)





From Inception Date
                                      of April 3, 2009 to
                                      August 31, 2010
                                    
                                    
                                    FortheThree
                                      Monthsended
                                      August312010
                                    
                                    
                                    Forthe
                                      ThreeMonths
                                      endedAugust31,
                                      2009Cash
      flows from (used in) operating activitiesNet
      loss for the year
                                    
                                    $
                                    (13,795,308
                                    )
                                    
                                    $
                                    (617,663
                                    )
                                    
                                    $
                                    (274,493
                                    )Adjustments
      to reconcile net loss to net cashProvided
      by operating activities:-
      Impairment of IP music database
                                    
                                    
                                    5,000,000
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    --
      Loss on acquisition of Atwood
                                    
                                    
                                    (44,361
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    --
      Loss on settlement of debt
                                    
                                    
                                    1,000,632
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Changes
      in operating assets and liabilities:
                                    
                                    
                                    5,537,163
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    --
      (Increase) Decrease in Accrued liabilities
                                    
                                    
                                    2,829
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    --
      (Increase) Decrease in Accounts payable
                                    
                                    
                                    406,596
                                    
                                    
                                    
                                    70,149
                                    
                                    
                                    
                                    --
      (Increase) Decrease in Capitalized Interest
                                    
                                    
                                    121,147
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    28,000-
      (Increase) Decrease in Interest payable
                                    
                                    
                                    15,369
                                    
                                    
                                    
                                    703
                                    
                                    
                                    
                                    6,403-
      (Increase) Decrease in Prepaids
                                    
                                    
                                    -
                                    
                                    
                                    
                                    25,000
                                    
                                    
                                    
                                    (20,000
                                    )- (Increase) Decrease in Subscription
      receivable
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (337
                                    )Net cash provided by operating
      activities
                                    
                                    
                                    (1,755,934
                                    )
                                    
                                    
                                    (521,811
                                    )
                                    
                                    
                                    (260,427
                                    )Cash
      flows from (used in) investing activitiesPurchase
      of Capital Assets
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Net cash (used) provided by investing
      activities
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Cash
      flows from (used in) financing activities
                                    
                                    
                                    
                                    
                                    
                                    
                                    -Proceeds
      from note(s) payable (net)
                                    
                                    
                                    10,000
                                    
                                    
                                    
                                    (215,000
                                    )
                                    
                                    
                                    350,000Proceeds
      from Shareholder  loan
                                    
                                    
                                    2,046
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Shares
      issued for cash
                                    
                                    
                                    868,102
                                    
                                    
                                    
                                    578,000
                                    
                                    
                                    
                                    337Shares issued in settlement of
      debt
                                    
                                    
                                    876,000
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Net cash (used) provided by financing
      activities
                                    
                                    
                                    1,756,148
                                    
                                    
                                    
                                    363,000
                                    
                                    
                                    
                                    350,337Increase in cash and cash
      equivalents
                                    
                                    
                                    214
                                    
                                    
                                    
                                    (158,811
                                    )
                                    
                                    
                                    89,910Effect
      of exchange rate on cash
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Cash and cash equivalents,beginning of year
                                    
                                    
                                    -
                                    
                                    
                                    
                                    159,025
                                    
                                    
                                    
                                    69,350Cash and cash equivalents, end of year
                                    
                                    $
                                    214
                                    
                                    
                                    $
                                    214
                                    
                                    
                                    $
                                    159,260Cash
      and cash equivalents  represented by:Cash
                                    
                                    $
                                    214
                                    
                                    
                                    $
                                    214
                                    
                                    
                                    $
                                    159,260





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


F-4





PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to August 31,
    2010(Expressed
      in U.S. Dollars)




Note
      1.
            Organization
      and Summary of Significant Accounting
Policies




On April
27, 2010 pursuant to share purchase agreements (the “Purchase Agreements”),
Phreadz, Inc. completed the acquisitions of Phreadz USA, LLC (“Phreadz LLC”) and
Universal Database of Music USA, LLC (“UDM”).The acquisitions were accounted for
as a recapitalization effected by a reverse merger, wherein Phreadz and UDM were
considered the acquirer for accounting and financial reporting purposes. 
The pre-merger assets and liabilities of the acquired entities have been brought
forward at their book value and no goodwill has been recognized.  The
consolidated accumulated deficit of PhreadzLLC and UDM has been brought forward,
and common stock and additional paid-in-capital of the combined Company have
been retroactively restated to give effect to the exchange rates as set forth in
the Purchase Agreements.




As set
forth above, on April 27, 2010 (the “Closing Date”) and pursuant to the terms
and conditions of the Purchase Agreements, we: (i) consummated the acquisitions
of Phreadz LLC and UDM, and (ii) each of Phreadz LLC and UDM became our wholly
owned subsidiary. More specifically, pursuant to and in connection with the
Purchase Agreements:




·
            in
      exchange for 100% of the issued and outstanding membership interests of
      Phreadz LLC, we issued to the holders of the PhreadzLLC membership
      interests an aggregate of 21,659,200 shares of our common stock;
      and




·
            in
      exchange for 100% of the issued and outstanding membership interests of
      UDM, we issued to the holders of the UDM membership interests an aggregate
      of 21,659,200 shares of our common
stock.




·
            in
      addition, pursuant to the terms of the Purchase Agreements, 32,712,176
      shares of our issued and outstanding common stock previously held by
      certain stockholders were
cancelled..




As a
result of the acquisitions of PhreadzLLC and UDM, we experienced a change in
control and ceased to be a “shell” company as defined in Rule 12b-2 promulgated
under the Securities Exchange Act of 1934 (the “Exchange Act”).




Phreadz
LLC was organized as a limited liability company in the State of Nevada in April
2009.  Its principal place of business is located at 63 Main Street #202,
Flemington, New Jersey 08822.  Since its inception, PhreadzLLC has not
undertaken any material business activities.




UDM was
organized as a limited liability company in the State of Nevada in April
2009.  Its principal place of business is located at 63 Main Street,
Flemington, New Jersey 08858.  On May 29, 2009, UDM consummated an asset
purchase agreement with Jacques Krischer and UDM, Ltd., pursuant to which it
acquired a music database and search tools.  Since its inception, UDM has
not undertaken any material business activities.


F-5





PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to August 31,
    2010(Expressed
      in U.S. Dollars)




Note 1.
            Organization and Summary of
      Significant Accounting Policies(continued)




Nature
of Operations and Going Concern





The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate the Company’s continuation as a going concern. Since April 3,
2009 (inception), the Company has reported net losses of ($13,795,308),
operating activities have used cash of ($1,755,934)  and the Company has a
stockholders’ deficit of ($452,625) as of August 31, 2010.   These
factors raise substantial doubt about the Company’s ability to continue as a
going concern.




The
Company is actively involved in discussions and negotiations with investors. We
do not believe we have sufficient working capital to operate without additional
funding.  Assuming we raise the necessary capital through the sale of
equity or equity equivalents, we expect that we will have adequate working
capital through 2010.  However, any equity financing may be very dilutive
to our existing shareholders.




There is
no assurance that continued financing proceeds will be obtained in sufficient
amounts necessary to meet the Company's needs. In view of these matters,
continuation as a going concern is dependent upon the Company's ability to meet
its financing requirements, raise additional capital, and the future success of
its operations.  The accompanying consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the possible inability of the Company to
continue as a going concern.




Principles of
Consolidation




The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, PhreadzLLC and UDM. All intercompany
accounts and transactions have been eliminated in consolidation.




Note
      2.
            Significant
      Accounting Policies




(a)
            Accounting
      Estimates




The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the period.  Actual
results may differ from those estimates.




(b)
            Cash
      Equivalents




For
purposes of the statement of cash flows cash equivalents usually consist of
highly liquid investments which are readily convertible into cash with maturity
of three months or less when purchased.


F-6




PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to August 31,
    2010(Expressed
      in U.S. Dollars)




Note 2.
            Significant Accounting
      Policies(continued)




(c)
            Concentration
      of Credit Risk





The
Company has no significant off-balance-sheet concentrations of credit risk such
as foreign exchange contracts, options contracts or other foreign hedging
arrangements.  The Company maintains the majority of its cash balances with
one financial institution, in the form of demand deposits.




(d)
            Income
      Taxes





The Company uses the asset and
liability method to account for income taxes. Underthismethod, deferred income
taxes are determined based on the differencesbetween the tax basis of assets
andliabilities and their reported amounts intheconsolidated financial statements
which will result intaxable or deductible amounts in future years and are
measured using the currentlyenacted tax ratesand laws. A valuation allowance is
provided to reducenet deferred tax assets to the amount that,based on
availableevidence, is more likely than not to be realized.





(e)
            Net
      Loss per Share




Net loss
per share is computed by dividing net loss attributable to common stockholders
by the weighted average number of shares of common stock outstanding during the
applicable period. Diluted loss per share is determined in the same manner as
basic loss per share, except that the number of shares is increased to include
potentially dilutive securities using the treasury stock method. Since the
Company incurred a net loss in all periods presented, all potentially dilutive
securities were excluded from the computation of diluted loss per share since
the effect of including them is anti-dilutive.





Recent
accounting pronouncements




In
September 2006, the FASB issued SFAS No. 157 (Codification reference
ASC 820), “Fair Value Measurements.” SFAS No. 157 defines fair value,
establishes a framework for measuring fair value and expands disclosure about
fair value measurements. It applies to other pronouncements that require or
permit fair value measurements but does not require any new fair value
measurements. The statement defines fair value as “the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.” SFAS
No. 157 establishes a fair value hierarchy (i.e., Levels 1, 2 and 3) to
increase consistency and comparability in fair value measurements and
disclosures. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued FASB Staff
Position (“FSP”) 157-2 (Codification reference ASC 820), “Effective Date of FASB
Statement No. 157” (“FSP SFAS 157-2”), which permits a one-year deferral of
the application of SFAS No. 157 for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually). The
Company adopted SFAS No. 157 and FSP SFAS 157-2 for financial assets and
liabilities effective January 1, 2008, which did not have a material impact
on the Company’s consolidated financial statements.


F-7





PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to August 31,
    2010(Expressed
      in U.S. Dollars)





Recent accounting pronouncements(continued)





The
Company adopted SFAS No. 157 for non-financial assets and non-financial
liabilities effective January 1, 2009, which did not have a material impact
on the Company’s consolidated financial statements. In October 2008, the
FASB issued FSP 157-3 (Codification reference ASC 820), “Determining the Fair
Value of a Financial Asset When the Market for That Asset is Not Active” (“FSP
SFAS 157-3”), which clarifies the application of SFAS No. 157 in a market
that is not active. The adoption of this standard did not have a material impact
on the Company’s consolidated financial statements.





Determination
of Fair Value





At May
31, 2010, the Company applied fair value to all assets based on quoted market
prices, where available. For financial instruments for which quotes from recent
exchange transactions are not available, the Company determines fair value based
on discounted cash flow analysis and comparison to similar instruments.
Discounted cash flow analysis is dependent upon estimated future cash flows and
the level of interest rates. Valuation adjustments may be made to ensure that
financial instruments are recorded at fair value.




The
methods described above may produce a current fair value calculation that may
not be indicative of net realizable value or reflective of future fair values.
If readily determined market values became available or if actual performance
were to vary appreciably from assumptions used, assumptions may need to be
adjusted, which could result in material differences from the recorded carrying
amounts. The Company believes its methods of determining fair value are
appropriate and consistent with other market participants. However, the use of
different methodologies or different assumptions to value certain financial
instruments could result in a different estimate of fair value.





Valuation
Hierarchy




SFAS
No. 157 establishes a three-level valuation hierarchy for the use of fair
value measurements based upon the transparency of inputs to the valuation of an
asset or liability as of the measurement date:




Level 1.    
Inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets. Level 1 assets and liabilities
include debt and equity securities and derivative financial instruments actively
traded on exchanges, as well as U.S. Treasury securities and U.S. Government and
agency mortgage-backed securities that are actively traded in highly liquid over
the counter markets.





Level 2.    
Observable inputs other than Level 1 prices such as quoted prices for
similar assets and liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active, and inputs that
are observable or can be corroborated, either directly or indirectly, for
substantially the full term of the financial instrument. Level 2 assets and
liabilities include debt instruments that are traded less frequently than
exchange traded securities and derivative instruments whose model inputs are
observable in the market or can be corroborated by market observable
data.


F-8





PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to August 31,
    2010(Expressed
      in U.S. Dollars)





Recent accounting pronouncements(continued)





Examples
in this category are certain variable and fixed rate non-agency mortgage-backed
securities, corporate debt securities and derivative contracts.





Level 3.    
Inputs to the valuation methodology are unobservable but significant to the fair
value measurement. Examples in this category include interests in certain
securitized financial assets, certain private equity investments, and derivative
contracts that are highly structured or long-dated.




Application
of Valuation Hierarchy




A
financial instrument's categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement.





In April
2009, the FASB issued updated guidance relating to intangible asset valuation,
which is included in the Codification in ASC 350-30-55, General Intangibles Other Than
Goodwill – Implementation (“ASC 350-30-55”). ASC 350-30-55 amends ASC
350-30, Intangibles – Goodwill
and Other, to identify the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. ASC 350-30-55 is effective for fiscal years
beginning after December 31, 2008. The Company adopted the amendment to ASC
350-30 effective January 1, 2009, and such amendment did not have a
material effect on the Company’s results of operations, financial position or
liquidity.





In May
2009, FASB issued SFAS No. 165, “Subsequent Events”. SFAS 165 establishes
general standards of for the evaluation, recognition and disclosure of events
and transactions that occur after the balance sheet date. Although there is new
terminology, the standard is based on the same principles as those that
currently exist in the auditing standards. The standard, which includes a new
required disclosure of the date through which an entity has evaluated subsequent
events, is effective for interim or annual periods ending after June 15, 2009.
The adoption of SFAS 165 did not have a material effect on the Company’s
consolidated financial statements





Note
      3.
            Intangible





The
Company has valuation reports from CethialBossche Content Network (Montreal,
Canada) dated January 22, 2007 and Copiliot Partners (France) dated January 19,
2007.  The two firms have placed a valuation of between €9.5 and €17
million Euros and €12 million Euros, respectively, on the assets described as
UDM music databases and related tools.  Based on the above and other
comparables, a pro forma five year cash flow analysis, the Company determined
that a fair deemed value of $5,000,000 was appropriate with that deemed value
attributable to the music database at April 3, 2009 (Inception).  As the
Company did not obtain a third party valuation report at the end of the fiscal
period ended February 28, 2010, we fully impaired the $5,000,000 carrying value
of this intellectual property as at that date.


F-9





PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to August 31,
    2010(Expressed
      in U.S. Dollars)





Note
      4.
            Income
      Taxes





As of
August 31, 2010, the Company had a net operating loss carry-forward for income
tax reporting purposes of approximately ($13,795,308)  that may be offset
against future taxable income through 2030.  Current tax laws limit the
amount of loss available to be offset against future taxable income when a
substantial change in ownership occurs.  Therefore, the amount available to
offset future taxable income may be limited.  No tax benefit has been
reported in the financial statements, because the Company believes there is a
50% or greater chance the carry-forwards will expire unused.  Accordingly,
the potential tax benefits of the loss carry-forwards are offset by a valuation
allowance of the same amount.





Note
      5.
            Notes
      Payable





A member
of the Company loaned $250,000 to the Company pursuant to a Note(s) Payable
Agreement dated May 15, 2009. The loan included a $20,000 interest bonus and
accrued simple interest at a rate of 8% per annum. The note was to mature on
April 30, 2012 and become due and payable at that time, including accrued
interest and the interest bonus. The $250,000 was received in two parts on May
5, 2009 and May 18, 2009. Interest accrued at the rate of 8% annually and was
$22,140.43 for the period April 3, 2009 (inception) to May 31, 2010. The note
was assigned by the holder on May 31, 2010 and settled with 1,947,601 shares of
our common stock and 973,801 Series A Warrants, with an exercise price of $0.30
per share, expiring June 30, 2019, and 973,801 Series B Warrants, with an
exercise price of $0.60 per share, expiring June 30, 2019.





A member
of the Company loaned $200,000 to the Company pursuant to a Note(s) Payable
Agreement dated August 10, 2009. The loan terms include a $16,000 interest bonus
and accrues simple interest at a rate of 8% per annum. The note matured on
December 31, 2009 and by agreement was extended to March 31, 2010. Interest
accrued at the rate of 8% annually and was $13,776.64 for the period April 3,
2009 (inception) to May 31, 2010. As of May 31, 2010, this Note(s) Payable was
in default and as of August 3, 2010, $190,000 of the outstanding amount has been
repaid.





A member
of the Company loaned $150,000 to the Company pursuant to a Note(s) Payable
Agreement dated August 20, 2009. The loan included a $12,000 interest bonus and
accrued simple interest at a rate of 8% per annum. The note matured on December
31, 2009 and by agreement was extended to March 31, 2010 and then to May 31,
2010. Interest accrued at the rate of 8% annually and was $9,799.90 for the
period from April 3, 2009 (inception) to May 31, 2010. The notes were assigned
by the holder on May 31, 2010 and settled with 1,145,332 shares of our common
stock,  572,666 Series A Warrants, with an exercise price of $0.30 per
share, expiring June 30, 2019, and 572,666 Series B Warrants, with an exercise
price of $0.60 per share, expiring June 30, 2019.





A member
of the Company loaned $25,000 to the Company pursuant to a Note(s) Payable
Agreement dated September 29, 2009. The loan included a $2,000 interest bonus
and accrued simple interest at a rate of 8% per annum. The note matured on
December 31, 2009 and by agreement was extended to March 31, 2009 and then to
May 31, 2010. Interest accrued at the rate of 8% annually and was $1,355.18 for
the period from April 3, 2009 (inception) to May 31, 2010.  The notes were
assigned by the holder on May 31, 2010 and settled with 189,034 shares of our
common shares and 94,516 Series A Warrants, with an exercise price of $0.30 per
share, expiring June 30, 2019, and 94,516 Series B Warrants, with an exercise
price of $0.60 per share, expiring June 30, 2019.


F-10





PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to August 31,
    2010(Expressed
      in U.S. Dollars)





Note 5.
            Notes Payable and Related Party
      Transaction(continued)





A member
of the Company loaned $100,000 to the Company pursuant to a Note(s) Payable
Agreement dated September 29, 2009. The loan included a $8,000 interest bonus
and accrued simple interest at a rate of 8% per annum. The note matured on
December 31, 2009 and by agreement was extended to March 31, 2009 and then to
May 31, 2010. Interest accrued at the rate of 8% annually was $5,610.10 for the
period from April 3, 2009 (inception) to May 31, 2010. The note was assigned by
the holder on May 31, 2010 and settled with 757,400 shares of our common stock,
378,700 Series A Warrants, with an exercise price of $0.30 per share, expiring
June 30, 2019, and 378,700 Series B Warrants, with an exercise price of $0.60
per share, expiring June 30, 2019.





A member
of the Company loaned $50,000 USD to the Company pursuant to a Note(s) Payable
Agreement dated November 15, 2009. The loan included a $4,000 interest bonus and
accrued simple interest at a rate of 8% per annum. The note matured on December
31, 2009 and by agreement was extended to March 31, 2009 and then to May 31,
2010. Interest accrued at the rate of 8% annually and was $2,236.92 for the
period from April 3, 2009 (inception) to May 31, 2010. The note was assigned by
the holder on May 31, 2010 and settled with 374,912 shares of our common stock,
187,456 Series A Warrants, with an exercise price of $0.30 per share, expiring
June 30, 2019, and 187,456 Series B Warrants, with an exercise price of $0.60
per share, expiring June 30, 2019.





A member
of the Company loaned $100,000 to the Company pursuant to a Note(s) Payable
Agreement dated December 11, 2009. The loan included a $8,000 interest bonus and
accrued simple interest at a rate of 8% per annum. The note matured on January
31, 2010 and by agreement was extended to March 31, 2009 and then to May 31,
2010. Interest accrued at the rate of 8% annually and was $3,929.44 for the
period from April 3, 2009 (inception) to May 31, 2010.  The note was
assigned by the holder on May 31, 2010 and settled with 746,196 shares of our
common stock, 373,098 Series A Warrants, with an exercise price of $0.30 per
share, expiring June 30, 2019, and 373,098 Series B Warrants, with an exercise
price of $0.60 per share, expiring June 30, 2019.





A member
of the Company loaned $100,000 to the Company pursuant to a Note(s) Payable
Agreement dated March 26, 2010. The loan included a $75,000 forgiveness clause
on the completion of our reverse merger as of April 27, 2010. Interest accrued
on a simple basis at a rate of 8% per annum. The note held a maturity date of
June 30, 2010. Interest accrued at the rate of 8% annually and was $887.68 for
the period from April 3, 2009 (inception) to May 31, 2010. On June 30, 2010,
$26,052.06 was paid in settlement of this note, including $164.38 in additional
interest for the period from June 1, 2010 to June 30, 2010.


F-11





PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to August 31,
    2010(Expressed
      in U.S. Dollars)





Note 5.
            Notes Payable and Related Party
      Transaction(continued)





A member
of the Company loaned $100,000 to the Company pursuant to a Note(s) Payable
Agreement dated April 9, 2010. The loan included a $75,000 forgiveness clause on
the completion of our reverse merger as of April 27, 2010. Interest accrued on a
simple basis at a rate of 8% per annum. The note held a maturity date of June
30, 2010. Interest accrued at the rate of 8% annually and was $580.82 for the
period from April 3, 2009 (inception) to May 31, 2010. The note was assigned by
the holder on May 31, 2010 and settled with 170,538 shares of our common stock,
85,269 Series A Warrants, with an exercise price of $0.30 per share, expiring
June 30, 2019, and 85,269 Series B Warrants, with an exercise price of $0.60 per
share, expiring June 30, 2019.





A member
of the Company loaned $10,000 to the Company pursuant to a Note(s) Payable
Agreement dated March 18, 2010. The loan terms included a $7,000 forgiveness
clause on the completion of our reverse merger as of April 27, 2010. Interest
accrued on a simple basis at a rate of 8% per annum. The note held a maturity
date of June 30, 2010. Interest accrued at the rate of 8% annually and was
$110.02 for the period from April 3, 2009 (inception) to May 31, 2010. The note
was assigned by the holder on May 31, 2010 and settled with 20,734 shares of our
common stock, 10,368 Series A Warrants, with an exercise price of $0.30 per
share, expiring June 30, 2019, and 10,368 Series B Warrants, with an exercise
price of $0.60 per share, expiring June 30, 2019.





A member
of the Company loaned $10,000 USD to the Company pursuant to a Note(s) Payable
Agreement dated March 23, 2010. The loan included a $7,000 forgiveness clause on
the completion of our reverse merger as of April 27, 2010. Interest was accrued
on a simple basis at a rate of 8% per annum. The note held a maturity date of
June 30, 2010. Interest accrued at the rate of 8% annually and was $99.06 for
the period from April 3, 2009 (inception) to May 31, 2010. The note was assigned
by the holder on May 31, 2010 and settled with 20,660 shares of our common
stock, 10,330 Series A Warrants, with an exercise price of $0.30 per share,
expiring June 30, 2019, and 10,330 Series B Warrants, with an exercise price of
$0.60 per share, expiring June 30, 2019.





On March
23, 2010 the Company entered into an $85,000 Note(s) Payable Agreement. The loan
terms also included a “right” with the note to receive the equivalent amount of
the face amount of such note on such terms that notes were settled in
consideration of the note. The original note had a maturity date of June 30,
2010 and accrued interest at 8% per annum. The “right” did not accrue interest.
Interest accrued was $1,285.48 for the period from April 3, 2009 (inception) to
May 31, 2010. The note was assigned by the holder on May 31, 2010 and settled
with 1,141,902 shares of our common stock, 570,951 Series A Warrants, with an
exercise price of $0.30 per share, expiring June 30, 2019, and 570,951 Series B
Warrants, with an exercise price of $0.60 per share, expiring June 30, 2019,
including the “right” described above.





On April
27, 2010, Professional Opportunity Fund Ltd. (“POOF”) forgave and cancelled
$57,509 that the Company owed to POOF for expenses paid on behalf of the
Company.  This amount was unsecured, non-interest bearing and had no
specific terms of repayment.





A member
of the Company loaned $2,046 to the Company on no terms.


F-12





PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to August 31,
    2010(Expressed
      in U.S. Dollars)





Note
      6.
            Related
      Parties





On April
27, 2010 we entered into an Employment Agreement with Georges Daou, which, by
agreement was rescinded effective the same day. It was intended that the
aforementioned Employment Agreement was to be replaced with a Consulting
Agreement to be entered into by and between the Company and GJD Holdings, LLC, a
wholly owned subsidiary of Georges Daou, on substantially the same terms as
found in the Employment Agreement of April 27, 2010. Due to Mr. Daou’s
resignation on October 5, 2010, we no longer intend to enter into such
consulting agreement.





On June
15, 2010, our Board of Directors appointed Christine Domecq to serve as our
chief executive officer.  Ms. Domecq’s employment commenced on July 5, 2010
and we entered into an employment agreement with Ms. Domecq.  The agreement
provides for an annual base salary during the term of the agreement of $250,000,
subject to potential upwards adjustments at the discretion of the compensation
committee of the Board of Directors. Ms. Domecq is eligible to receive a bonus
of up to 100% of her then current base salary, with 50% of such bonus to be
awarded at the discretion of the Board of Directors or the compensation
committee and the remaining 50% subject to achievement of milestones to be
established by Ms. Domecq, the Board of Directors and the compensation
committee.  Immediately upon our establishment of an employee stock
option plan, we agreed to grant Ms. Domecq an option to purchase 6,748,316
shares of our common stock.  The option shall have an exercise price
equal to the fair market value of our common stock as of the date of the
employment agreement.  The option shall vest as
follows:  (1) 25% on July 5, 2011 and (2) the remaining
75%  in 18 equal monthly installments beginning July 5,
2011.


F-13





PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to August 31,
    2010(Expressed in U.S.
  Dollars)





Note
      7.
            Commitments





Employment
Agreement with Jacques Krischer





On April
27, 2010, we entered into an employment agreement with Jacques Krischer to serve
as President –Music division (the “Krischer Agreement”).  The Krischer
Agreement is for an initial term of two (2) years from the Closing Date, after
which it will automatically renew for successive one (1) year periods unless
either party terminates the Krischer Agreement on not less than thirty (30) days
notice.  Mr. Krischer will be paid a monthly salary of
$10,000.  Mr. Krischer is eligible to receive a cash bonus, at the
discretion of the Board of Directors.  Mr. Krischer will be allowed to
participate in such employee benefit plans of the Company that may be in effect
from time to time and that are offered to the Company’s other similarly
situated, full-time employees to the extent you are eligible under the terms of
those plans.





On August
1, 2010, we entered into a First Amendment to Employment Agreementwith Jacques
Krischer which provided for the changes described hereinto the Krischer
Agreement. The position title President - Music Division has been changed to
Chief Strategy Officer ("CSO") with the scope of the responsibilities remaining
the same. Other new terms include; i) an option grant of one million shares
under a vesting schedule subject to the adoption by the Company of an employee
Stock Option Plan, ii) eligibility to earn an annual cash bonus of not less than
$150,000 subject to milestones. iii) a base monthly salary of $15,000, and, iv)
twenty five (25) paid vacation days each calendar year subject to Company
policies regarding same.





Mr.
Krischer is a Belgium resident and is currently in process of completing a H-1B
work visa. Until complete Jacques Krischer is invoicing the company for services
rendered.





Employment
Agreement with Jonathan Kossmann





On April
27, 2010, we entered into an employment agreement with Jonathan Kossmann to
serve as President – Phreadz division (the “Kossmann Agreement”).  The
Kossmann Agreement has an initial term of two (2) years from the Closing Date,
after which it will automatically renew for successive one (1) year periods
unless either party terminates the Kossmann Agreement on not less than thirty
(30) days notice.  The Kossman Agreement provides for Mr. Kossmann to
be paid a monthly salary of $10,000 while he provides services to the Company
pursuant to the Kossman Agreement.  Additionally, the Kossman
Agreement provides that Mr. Kossmann is eligible to receive a cash bonus, at the
discretion of the Board.  The Kossman Agreement provides that, for so
long as he is an employee of the Company, Mr. Kossmann is allowed to participate
in such employee benefit plans of the Company that may be in effect from time to
time and that are offered to the Company’s other similarly situated, full-time
employees to the extent he is eligible under the terms of those
plans.





Mr.
Kossman submitted his resignation August 4, 2010, which resignation was accepted
by the Board of Directors, at which time the Kossman Agreement was
terminated.





Mr.
Kossmann is a UK resident and the process of completing a H-1B work visa was
never started. Mr. Kossmanninvoiced the Company for services through his
consulting agreement with Phreadz USA, LLC. Subsequent to the close of the
reverse merger and up until his resignation Mr. Kossmann continued invoicing for
services.


F-14





PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to August 31,
    2010(Expressed in U.S.
  Dollars)





Note
      8.
            Warrants





The value
of the warrants have been calculated using the Black–Scholes method as of the
date of grant based on the following assumptions: an average risk free rate of
1.00%; a dividend yield of 0.00%; a cumulative volatility factor of the expected
market price of the Company’s common stock of 275.06%; and an expected life of 9
years.





On May
20, 2010, we entered into a Unit Purchase Agreement with a single accredited
investor (the May 20th
Purchaser) pursuant to which the May 20th
Purchaser purchased 10.74074 Units (“Units”) at a purchase price of $27,000 per
Unit, for an aggregate purchase price of $290,000.  Each Unit
purchased consisted of: (a) one hundred eighty thousand (180,000) shares of the
Company’s common stock; (b) a Series A Warrant to purchase ninety thousand
(90,000) shares of common stock at an exercise price of $0.30 per share; and (c)
a Series B Warrant to purchase ninety thousand (90,000) shares of common stock
at an exercise price of $0.60 per share.  Accordingly, the May 20th
Purchaser received 1,933,333 shares of common stock; a Series A Warrant to
purchase 966,667 shares of common stock; and a Series B Warrant to purchase
966,666 shares of common stock.





On May
31, 2010, we entered into Unit Purchase Agreements with nine (9) accredited
investors (the May 31st
Purchasers) pursuant to which the May 31st
Purchasers purchased 33.0425 Units at a purchase price of $27,000 per Unit, for
an aggregate purchase price of $892,147.34.  The purchase price for
the Units were paid via assignment of certain outstanding promissory notes
originally issued by our subsidiaries UDM and Phreadz.  In addition,
one May 31st
Purchaser also received the “right” with their note to receive the equivalent
amount of the face amount of such note in Units with the consideration of the
original note. Each Unit purchased consisted of: (a) one hundred eighty thousand
(180,000) shares of the Company’s common stock; (b) a Series A Warrant to
purchase ninety thousand (90,000) shares of common stock at an exercise price of
$0.30 per share; and (c) a Series B Warrant to purchase ninety thousand (90,000)
shares of common stock at an exercise price of $0.60 per
share.  Accordingly, in total, the May 31st
Purchasers received 6,514,310 shares of common stock; a Series A Warrant to
purchase 3,257,154 shares of common stock; and a Series B Warrant to purchase
3,257,154 shares of common stock.





On June
8, 2010, we entered into a Unit Purchase Agreement with a single accredited
investor pursuant to which the Purchaser purchased 7.4074 Units at a Purchase
Price of $27,000 per Unit for an aggregate purchase price of
$200,000.  Each Unit purchased consisted of (a) one hundred eighty
thousand (180,000) shares of the Company’s common stock, par value $0.001 per
share (“Common Stock”); (b) a Series A Warrant  (the “Series A
Warrants”) to purchase ninety thousand (90,000) shares of Common Stock at an
exercise price of $0.30 per share; and (c) a Series B Warrant (the “Series B
Warrants”, together with the Series A Warrants, the “Warrants”) to purchase
ninety thousand (90,000) shares of Common Stock at an exercise price of $0.60
per share.  Accordingly, Purchaser received 1,333,333 shares of Common
Stock (the “Shares”); a Series A Warrant to purchase 666,666 shares of Common
Stock and a Series B Warrant to purchase 666,667 shares of Common
Stock.





On July
16, 2010, we entered into a Unit Purchase Agreements with 13 accredited
investors pursuant to which the Purchasers purchased 14 Units at a Purchase
Price of $27,000 per Unit for an aggregate


F-15





PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to August 31,
    2010(Expressed in U.S.
  Dollars)





Note 8.
            Warrants(continued)





purchase
price of $378,000. Each Unit purchased consisted of (a) one hundred eighty
thousand (180,000) shares of the Company’s common stock, par value $0.001 per
share (“Common Stock”); (b) a.Series A Warrant  (the “Series A
Warrants”) to purchase ninety thousand (90,000) shares of Common Stock at an
exercise price of $0.30 per share; and (c) a Series B Warrant (the “Series B
Warrants”, together with the Series A Warrants, the “Warrants”) to purchase
ninety thousand (90,000) shares of Common Stock at an exercise price of $0.60
per share.  Accordingly, in total, purchasers received 2,520,000
shares of Common Stock (the “Shares”); a Series A Warrant to purchase 1,260,000
shares of Common Stock and a Series B Warrant to purchase 1,260,000 shares of
Common Stock





Southridge
Investment Group LLC. an SEC Registered Broker/Dealer, Member FINRA/SIPC
(“Southridge”) acted as placement agent in connection with the sale of the 13
Units referred to above in the preceding paragraph.  Southridge
received $22,140 in commissions and expenses and 54,000 Series A Warrants and
54,000 Series B Warrants.  We also paid $3,500 in escrow
fees.  The net proceeds of the offering after payments of the
commissions and expenses and escrow fees were approximately
$352,360.





In April
2010the Company entered into an Exchange Agreement with Professional Capital
Partners, Ltd.(“PCP”),  pursuant to which the Company and PCP agreed
to exchange 5,325,824 shares of the Company’s common stock (the "Original
Shares") for $1,000,000 worth of Units in its next financing. The Company has
offered and sold Units in a financing, with each Unit consisting of: (i) 180,000
shares of the Company’s common stock; (ii) a Series A Warrant to purchase 90,000
shares of common stock at an exercise price of $0.30 per share; and (iii) a
Series B Warrant to purchase 90,000 shares of common stock at an exercise price
of $0.60 per share.





On June
22, 2010 PCP exercised this Exchange Agreement and exchanged its Original Shares
for 37 Units.  As a result, PCP received 6,660,000 shares of common
stock; a Series A Warrant to purchase 3,330,000 shares of common stock; and a
Series B Warrant to purchase 3,330,000 shares of common stock in exchange of
5,325,824 and net of shares of common stock of the company.





A
financing expense of $1,000,632 was recorded as of May 31, 2010 as a stock
issuance liability with the exercise of the exchange agreement on June 22, 2010
as this cost became known.The financing cost was determined using the last price
of $0.75 as reported on OTCBB.com on June 11, 2010 prior to the June 22, 2010
exercise date, on the additional 1,334,176 shares of common stock issued to PCP
pursuant to the Exchange Agreement.





The
Company analyzed the beneficial nature of the 9,534,487 Series A Warrants and
9,534,487 Series B Warrants based on the conversion terms described above and
determined that no material beneficial conversion feature
exists.


F-16





PHREADZ,
      INC.(A
      Development Stage Company)Notes
      to Financial StatementsFor
      the period from April 3, 2009 (Inception) to August 31,
    2010(Expressed in U.S.
  Dollars)





Note
      9.
            Common
      Stock





The
acquisition of PhreadzLLC and UDM by the Company on April 27, 2010 was accounted
for as a recapitalization by the Company. The recapitalization was the merger of
two private LLCs into a non-operating public shell corporation (the Company)
with nominal net assets and as such is treated as a capital transaction, rather
than a business combination. The transaction is the equivalent to the issuance
of stock by the private company for the net monetary assets of the shell
corporation. The pre-acquisition consolidated financial statements of Phreadz
LLC and UDM are treated as the historical financial statements of the
consolidated Company. Therefore the capital structure of the consolidated
enterprise, being the capital structure of the legal parent, is different from
that appearing in the financial statements of PhreadzLLC and UDM in earlier
periods due to the recapitalization.





1.
            On
      April 3, 2009, 1,920,000 shares were issued for
  property.


2.
            On
      May 28, 2009, 12,480,000 shares were issued for
  cash.


3.
            On
      August 25, 2009, 23,136,000 shares were issued for
  cash.


4.
            On
      March 10, 2010, 5,782,400 shares were issued for
  cash.


5.
            On
      April 27, 2010, 42,700,000 were issued and 32,712,176 shares were
      cancelled upon recapitalization due to the reverse
  merger.


6.
            On
      May 20, 2010 1,933,333 shares were issued at $0.15 for cash of
      $290,000


7.
            On
      May 31, 2010, 6,514,310 shares were issued in settlement of $892,147.34 in
      notes assigned to the Company with one note-holder also receiving the
      “right” with their settled note to receive the equivalent amount of the
      face amount of their note in consideration of their
  note.


8.
            On
      June 8, 2010 1,333,333 shares were issued at $0.15 for cash of
      $200,00


9.
            On
      June 22, 2010 1,334,176 net shares were issued on account of an April 27,
      2010 Exchange Agreement


10.
            On
      July 16, 2010 2,520,000 shares were issued at $0.15 for cash of
      $378,000





Note
      10.
            Contingencies




There
      is currently a dispute that arose approximately August 14, 2010, between
      former Phreadz-division President Jonathan Kossmann and Phreadz, regarding
      certain intellectual property and confidential information of the Company.
      Mr. Kossmann has claimed that $30,000 is owed to him pursuant to his
      2009-2010 Consulting Agreement with the Company. The Company has conducted
      an investigation into Mr. Kossmann's claim with the assistance of counsel
      and does not believe any money is due to him. Management believes it is
      unlikely that the outcome of this matter will have an adverse impact on
      its result of operations and financial
  condition.




Note
      11.
            Subsequent
      Events




On
September 10, 2010, Christina Domecq was appointed to our Board of
Directors.





On
September 30, 2010 Greg Goldberg submitted his resignation as a Director. On
October 5, 2010 Georges Daou submitted his resignation as Chairman and
Director.





On
October 4, 2010 Douglas Toth was appointed as a Directorto fill a vacancy
created by Messrs. Daou and Goldberg’s resignations.





On
October 15, 2010 John Larkin was appointed to our Board of Directors to fill a
vacancy created by Messrs. Daou and Goldberg’s resignations.


F-17


As of the
date of this Report, our Board of Directors consists of  Douglas Toth,
Christina Domecq, Gordon Samson and John Larkin.





Item 2. Management's
Discussion and Analysis or Plan of Operation.




FORWARD-LOOKING
STATEMENTS




Certain
matters discussed herein are forward-looking statements.  Such
forward-looking statements contained in this Form 10-Q involve risks and
uncertainties, including statements as to:





1.
            our
      future operating results;


2.
            our
      business prospects;


3.
            any
      contractual arrangements and relationships with third
    parties;


4.
            the
      dependence of our future success on the general
  economy;


5.
            any
      possible financings; and


6.
            the
      adequacy of our cash resources and working
  capital.





These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as we “believe," “anticipate,”
“expect,” “estimate” or words of similar meaning.   Similarly,
statements that describe our future plans, objectives or goals are also
forward-looking statements.   Such forward-looking statements are
subject to certain risks and uncertainties which are described in close
proximity to such statements and which could cause actual results to differ
materially from those anticipated as of the date of filing of this Form 10-Q.
  Shareholders, potential investors and other readers are urged to
consider these factors in evaluating the forward-looking statements and are
cautioned not to place undue reliance on such forward-looking statements.
 The forward-looking statements included herein are only made as of the
date of filing of this Form 10-Q, and we undertake no obligation to publicly
update such forward-looking statements to reflect subsequent events or
circumstances.





Corporate
History





We were
incorporated in the State of Nevada on May 12, 2005.





From May
2005 through May 2009, we were in the mineral exploration stage during which
time we never realized any revenues.





On April
27, 2010, pursuant to share purchase agreements (the “Purchase Agreements”),
Phreadz, Inc. (f/k/a Atwood Minerals & Mining Corp.),  completed
the acquisitions of Phreadz USA LLC and Universal Database of Music USA,
LLC.  The acquisitions were accounted for as a recapitalization effected by
a reverse merger, wherein Phreadz and UDM were considered the acquirer for
accounting and financial reporting purposes.  The pre-merger assets and
liabilities of the acquired entities have been brought forward at their book
value and no goodwill has been recognized.  The consolidated accumulated
deficit of Phreadz and UDM has been brought forward, and common stock and
additional paid-in-capital of the combined Company have been retroactively
restated to give effect to the exchange rates as set forth in the Purchase
Agreements.





As a
result of our acquisitions of Phreadz and UDM referred to in the paragraph
above, we experienced a change in control and ceased to be a “shell” company as
defined in Rule 12b-2 promulgated under the Exchange Act.





Overview





We
intends to provide Internet and mobile phone users multimedia social networking
forums and  communication channels to broadcast to worldwide
audiences.   Our multimedia social platform, called Phreadz
(pronounced freds), has
similarities to both Facebook and Twitter.  However, this multimedia social
platform was designed for users to move content between and among all major
social networking sites and media and to create information and entertainment
channels to publish multimedia entertainment and information to large
audiences.


4


Phreadz
will interact with all major multi-media platforms on the World Wide Web.
Additionally, we believe that its entertainment database may be expanded to
become one of the larger and more extensive databases of music that may be able
to  provide a continually expanding multimedia music entertainment
selection to its users.  The music database, which we call Universal
Database of Music or UDM is complemented by music entertainment channels on
Phreadz and graphical music discovery applications for internet browsers—which,
we believe, will also become native to smart phones.





We
believe that we have  two unique product lines – one centered on
social media, the other on music.  Although these product lines are
integrated, they also stand individually as distinct revenue categories and
serve multiple markets.    Phreadz, rooted inconsumer interactive
entertainment, may be able to benefit from revenue derived from two
sources:  advertisers who are willing to pay their host to reach
consumers and consumers who are interested in subscribing to the Phreadz
network.




Results
of Operations





We are in
the development stage and consequently is subject to the risks associated with
development stage companies, including the need for additional financing; the
uncertainty of our technology and intellectual property resulting in successful
commercial products or services as well as the marketing and customer acceptance
of such products or services; competition from larger organizations; dependence
on key personnel; and dependence on corporate partners and
collaborators.  To achieve successful operations, we will require
additional capital to continue research and development and marketing
efforts.  No assurance can be given as to the timing or ultimate
success of obtaining future funding.





The
processes of developing new approaches to music database management, access,
search for UDM and the novel SNS of Phreadz are inherently highly complex,
time-consuming, expensive and uncertain.  We must make long-term
investments and commit significant resources before knowing whether its
development programs will result in products that will achieve market
acceptance.  Product candidates that may appear to be promising at all
stages of development may not reach the market for a number of
reasons.  Product candidates may be found ineffective or may take
longer to progress through the beta trials than had been anticipated, may not be
able to achieve the pre-defined endpoint due to changes in the environment, may
fail to receive necessary approvals, may prove impracticable to manufacture in
commercial quantities at reasonable cost and with acceptable quality, or may
fail to achieve market acceptance.  For these reasons,  we
are unable to predict the period in which material net cash inflows from its
products and services will commence.




On a
consolidated basis, we have generated no revenue from operations and incurred
total operating expenses for the period from April 3, 2009 (dates of inception
for Universal Database of Music USA, LLC (“UDM”) and Phreadz USA, LLC (“Phreadz
LLC”) to August 31, 2010 of ($3,261,046).  For the three month period
June 1, 2010 to August 31, 2010 we incurred total operating expenses of
($615,907) as compared to the same three month period of June 1, 2009 to August
31, 2009 of ($240,090).The increase is primarily from additional legal fees and
D&O insurance related to our reverse merge transaction on April 27, 2010.
The total net losses for the period from April 3, 2009 (dates of inception for
UDM and Phreadz LLC) to August 31, 2010 was ($13,795,308). This is primarily on
account of the non cash items of a $5,000,000 impairment of the UDM music
database to fully impair the original attributed value, a $5,537,163 stock
issuance expense on settlement of debt and the stock issuance expense of
$1,000,632 in settlement of An April 2010 Exchange Agreement. The total net
losses for the period June 1, 2010 to August 31, 2010 was ($617,663) compared to
the same three month period of June 1, 2009 to August 31, 2009 of $274,493. have
incurred no sales and marketing expenses to date.  We expect these
expenses to increase as we emerge from our development stage.




Liquidity
and Capital Resources




As of
August 31, 2010, we had a working capital deficit of ($452,625) compared to a
working capital deficit of ($191,383)  as of August 31, 2009. Cash and
cash equivalents at August 31, 2010 was $214 a decrease of $159,046 from the
balance of $159,260 as at May 31, 2010. Our current level of operations does not
generate sufficient cash to fund our working capital
needs.  Accordingly, we will have to raise capital to fund our
short-term working capital needs.  No assurance can be made that we
will have access to the capital markets in future, or that financing will be
available on acceptable terms to satisfy our future and on-going cash
requirements that we need to implement its business strategies. Our inability to
access the capital markets or obtain acceptable financing could have a material
adverse affect on its results of operations and financial condition, and could
severely threaten our ability to continue as a going concern.


5


Operating
Activities




Net cash
used in operating activities for the period from April 3, 2009 (dates of
inception for UDM and Phreadz LLC, respectively) to August 31, 2010 was
($1,755,934), and from June 1, 2010 to August 31, 2010 was approximately
($521,811)compared to the same period June 1, 2009 to August 31, 2009 of
($260,427). The consolidated Company expects net cash used in operating
activities to increase going forward as the Company pursues its business plan
and undertakes additional product development and the enforcing of intellectual
propertyclaims.




Financing
Activities





Net cash
provided by financing activities for the period from April 3, 2009 (dates of
inception for UDM and Phreadz LLC)  to August 31, 2010, was
approximately $1,756,148.  and from June 1, 2010 to August 31, 2010
was approximately $ 363,000 compared to the same period June 1, 2009 to August
31, 2009 of $350,337. This consisted of net proceeds received from the issuance
of notes payable and shares issued for cash.




Plan
of Operation and Funding





We expect
that working capital requirements will continue to be funded through a
combination of  note payables and further issuances of
securities.





We have
no lines of credit or other bank financing arrangements. Generally, we have
financed operations to date through the proceeds of the private placement of
equity and debt instruments. In connection with our business plan, management
anticipates additional increases in operating expenses and capital expenditures
relating to: (i) developmental expenses associated with a start-up business; and
(ii) marketing expenses. We intend to finance these expenses with further
issuances of securities, and debt issuances. Thereafter, we expect we will need
to raise additional capital and generate revenues to meet long-term operating
requirements. Additional issuances of equity or convertible debt securities will
result in dilution to our current shareholders. Further, such securities might
have rights, preferences or privileges senior to our common stock. Additional
financing may not be available upon acceptable terms, or at all. If adequate
funds are not available or are not available on acceptable terms, we may not be
able to take advantage of prospective new business endeavors or opportunities,
which could significantly and materially restrict our business operations. We
will have to raise additional funds in the next twelve months in order to
sustain and expand our operations. We currently do not have a specific plan of
how we will obtain such funding; however, we anticipate that additional funding
will be in the form of equity financing from the sale of our common
stock.





Off-Balance
Sheet Arrangements





As of the
date of this Quarterly Report on Form 10-Q, we do not have any off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors.





Going
Concern





The
independent auditors' report accompanying our audited financial statements for
the year ended May 31, 2010 contained an explanatory paragraph expressing
substantial doubt about our ability to continue as a going concern. The
financial statements have been prepared "assuming that we will continue as a
going concern," which contemplates that we will realize our assets and satisfy
our liabilities and commitments in the ordinary course of
business.


6


Item
3. Quantitative and Qualitative Disclosures about Market Risk




Not
applicable to a "smaller reporting company" as defined in Item 10(f)(1) of SEC
Regulation S-K





Item
4. Controls and Procedures





Our Chief
Executive Officer and Chief Financial Officer are responsible for establishing
and maintaining disclosure controls and procedures for the Company.





(a) Evaluation of Disclosure
Controls and Procedures





Based on
their evaluation as of the end of the period covered by this Quarterly Report on
Form 10-Q, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) are not effective to ensure that information required to be
disclosed by us in report that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s (“SECs”) rules and forms and to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required
disclosure.





(b) Management's Report on
Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining internal control over
financial reporting and disclosure controls.  Internal control over
financial reporting is a process designed by, or under the supervision of, our
principal executive and principal financial officers, or persons performing
similar functions, and effected by our Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:





1.
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect ourtransactions and dispositions of
  assets;


2.
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with authorizations of our management and
      directors; and


3.
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on the financial
statements.





Disclosure
controls and procedures are designed to ensure that information required to be
disclosed in reports filed by us under the Exchange Act is appropriately
recorded, processed, summarized and reported within the specified time
periods.





Management
has conducted an evaluation of the effectiveness of our internal control over
financial reporting as of August 31, 2010 based on the framework established in
the Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).





Based on
this assessment, management concluded that as of August 31, 2010 we had material
weaknesses in its internal control procedures.





A
material weakness is a control deficiency, or combination of control
deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of our annual or interim
financial statements would not be prevented or detected on a timely
basis.


7


We have
concluded that our internal control over financial reporting was ineffective as
of August 31, 2010.





Our
assessment identified certain material weaknesses which are set forth
below:





Financial
Statement Close Process





1.
            There
      are insufficient written policies and procedures for accounting and
      financial reporting with respect to the requirements and application of US
      GAAP and SEC disclosure
requirements.





2.
            There
      is insufficient supervision and review by our corporate management,
      particularly relating to complex transactions requiring analysis of equity
      and debt instruments.





3.
            There
      is a lack of formal processes and timelines for closing the books and
      records at the end of each reporting
period.





4.
            We
      currently have an insufficient level of monitoring and oversight controls
      for review and recording of stock issuances, agreements and contracts,
      including insufficient documentation and review of the selection and
      application of US GAAP to significant non-routine transactions. In
      addition this has resulted in a lack of controls over the issuance of our
      stock which resulted in names of holders being spelt
      incorrectly.





These
weaknesses restrict our ability to timely gather, analyze and report information
relative to the financial statements.





Entity
Level Controls





1.
            There
      are insufficient corporate governance policies. Our corporate governance
      activities and processes are not always formally documented. Specifically,
      decisions made by the Board of Directors to be carried out by management
      should be documented and communicated on a timely basis to reduce the
      likelihood of any misunderstandings regarding key decisions affecting our
      operations and management.





2.
            We
      currently haveinsufficient resources and an insufficient level of
      monitoring and oversight, which may restrict our ability to gather,
      analyze and report information relative to the financial statements in a
      timely manner, including insufficient documentation and review of the
      selection and application of US GAAP to significant non-routine
      transactions. In addition, the limited size of the accounting department
      makes it impractical to achieve an optimum segregation of
      duties.





3.
            There
      are limited processes and limited or no documentation in place for the
      identification and assessment of internal and external risks that would
      influence the success or failure of the achievement of entity-wide and
      activity-level objectives.





Functional
Controls and Segregation of Duties





1.
            There
      is an inadequate segregation of duties consistent with control
      objectives.  Our management is composed of a small number of
      individuals resulting in a situation where limitations on segregation of
      duties exist.  In order to remedy this situation we would need
      to hire additional staff to provide greater segregation of
      duties.  Currently, it is not feasible to hire additional staff
      to obtain optimal segregation of duties.  Management will
      reassess this matter in the following year to determine whether
      improvement in segregation of duties is
  feasible.


2.
            There
      is a lack of top level reviews in place to review targets, product
      development, joint ventures or financing.  All major business
      decisions are carried out by our officers with Board of Directors approval
      when needed.





Accordingly,
as the result of identifying the above material weaknesses, we have concluded
that these control deficiencies resulted in a reasonable possibility that a
material misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis by the company’s internal
controls.


8


Management
believes that the material weaknesses set forth above were the result of the
scale of our operations and are intrinsic to our small
size.  Management believes these weaknesses did not have a material
effect on our financial results and intends to take remedial actions upon
receiving funding for our business operations.





Management’s
report was not subject to attestation by our independent registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management’s report herein.





Plan
of Remediation





We are
committed to improving our financial organization.  As part of this
commitment, we will create a position to segregate duties consistent with
control objectives and will increase our personnel resources and technical
accounting expertise within the accounting function when funds are available to
us by preparing and implementing sufficient written policies and checklists
which will set forth procedures for accounting and financial reporting with
respect to the requirements and application of US GAAP and SEC disclosure
requirements.





Management
believes that preparing and implementing sufficient written policies and
checklists will remedy the material weaknesses pertaining to insufficient
written policies and procedures for accounting and financial reporting with
respect to the requirements and application of US GAAP and SEC disclosure
requirements.  Further, management believes that the hiring of
additional personnel who have the technical expertise and knowledge will result
in proper segregation of duties and provide more checks and balances within the
department. These personnel will provide the depth of knowledge and time
commitment to provide a greater level of review for corporate
activities.  The appointment of additional outside directors with
industry expertise will greatly decrease any control and procedure issues the
company may encounter in the future.





We will
continue to monitor and evaluate the effectiveness of our internal controls and
procedures and our internal controls over financial reporting on an ongoing
basis and are committed to taking further action and implementing additional
enhancements or improvements, as necessary and as funds allow.





We intend
to take appropriate and reasonable steps to make the necessary improvements to
remediate these deficiencies, including:





1)
            We
      will document a formal code of
ethics


2)
            We
      will revise processes to provide for a greater role of independent board
      members in the oversight and review until such time that we are adequately
      capitalized to permit hiring additional personnel to address segregation
      of duties issues, ineffective controls and insufficient supervision and
      review by our corporate management.


3)
            We
      will continue to update the documentation of our internal control
      processes, including formal risk assessment of our financial reporting
      processes


4)
            Consolidate
      all books and records into one accounting
system


5)
            Commence
      the development of internal controls and procedures surrounding the
      financial reporting process, primarily through the use of account
      reconciliations, and supervision.





(c) Changes in Internal Controls
over Financial Reporting





We intend
to undertake a number of measures to remediate the material weaknesses discussed
under “Management’s Report on Internal Control Over Financial Reporting”
above.  Those measures, described under “Plan of Remediation,” will be
implemented by us in accordance with its plan of remediation, and when
implemented, will materially affect, or are reasonably likely to materially
affect, our internal control over financial reporting.  Other than as
described above, there have been no changes in our internal control over
financial reporting during the period  ended August 31, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.





Item
5. Other




None


9




Part
II- Other Information




Item
1. Legal Proceedings




We are
not a party to any legal proceedings. Management is not aware of any legal
proceedings proposed to be initiated against us. However, from time to time, we
may become subject to claims and litigation generally associated with any
business venture operating in the ordinary course.





Item
1A. Risk Factors




Not
applicable to a "smaller reporting company" as defined in Item 10(f)(1) of SEC
Regulation S-K





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds




See our
Current Reports on Form 8-K dated June 8, 2010 and July 16, 2010, which reports
are incorporated herein by reference.





Item
3. Defaults upon Senior Securities




No report
required.





Item
4. (Removed and Reserved)




No report
required.





Item
5. Other Information




On
October 15, 2010 John Larkin was appointed to our Board of Directors to fill the
vacancy created by Messrs. Daou and Goldberg’s resignations.Mr. Larkin earned a
bachelor’s degree in Business Administration from California State University,
Northridge, in 1970. Mr. Larkin is active in LarkinRivero Business
Management,LLC., and  also serves as a Director with the Bergen
Foundation, the Light Foundation, the Raising Malawi Foundation and the Susan
Strong Davis Foundation.





Item
6. Exhibits




EXHIBIT
INDEX





Exhibit No.
              
              Exhibit31.1
              
              Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.*31.2
              
              Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.*32.1
              
              Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.*32.2
              
              Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.*








* Filed
herewith.


10


SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





PHREADZ,
      INC.Date:       October
      15, 2010
                    By:
                    /s/
      Christina DomecqChristina
      Domecq, Chief Executive
Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, 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/
      Christina Domecq
                              
                              Chief
      Executive Officer
                              
                              October
      15, 2010Christina
      Domecq
                              
                              (Principal
      Executive Officer)/s/
      Gordon A. Samson
                              
                              Chief
      Financial Officer, Secretary, Treasurer and Director
                              
                              October
      15, 2010Gordon
      A. Samson
                              
                              (Principal
      Accounting and Financial Officer)/s/
      Douglas Toth
                              
                              Chairman
      and Director
                              
                              October
      15, 2010Douglas
      Toth/s/
      John Larkin
                              
                              Director
                              
                              October
      15, 2010John
      Larkin


11