- Amended Quarterly Report (10-Q/A)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/ A-2

(Mark One)

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

For the Quarterly Period Ended December 31, 2010

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

For the Transition Period from _________ to _________

Commission file number: 000-52904

ATTITUDE DRINKS INCORPORATED

(Exact name of registrant as specified on its charter)

Delaware		65-0109088
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

10415 Riverside Drive, #101, Palm Beach Gardens, Florida 33410 USA

(Address of principal executive offices)

(561) 799-5053

(Registrant’s telephone number, including area code)

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

Yes x No o

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

Large accelerated filer o Accelerated filer o

Non-accelerated filer o Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS :

State the number of shares outstanding of each of the registrant's classes of common equity, as of the latest practicable date: 31,998,906 shares issued and outstanding as of February 18, 2011.

EXPLANATORY NOTE

This amendment No. 2 on Form 10-Q/A-2 amends the Registrant’s Quarterly Report on Form 10-Q/A for the period ended December 31, 2010, which the Registrant previously filed with the Securities and Exchange Commission (SEC) on July 6 , 2011. The Registrant is filing this amendment for the purpose of responding to SEC comments.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

INDEX

PAGE #

PART I

FINANCIAL INFORMATION

Item 1 .	Condensed Consolidated Financial Statements:

	Condensed Consolidated Balance Sheets – December 31, 2010 (unaudited) and March 31, 2010	4

	Condensed Consolidated Statements of Operations – Three Months Ended December 31, 2010 and 2009, Nine Months Ended December 31, 2010 and 2009 and the Development Stage Period from Inception (June 18, 2007) to December 31, 2010 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows – Nine Months Ended December 31, 2010 and 2009 and the Development Stage Period from Inception (June 18, 2007) to December 31, 2010 (unaudited)	6

	Notes to Condensed Consolidated Financial Statements (unaudited)	7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

Item 2.

Unregistered Sales of Equity and Use of Proceeds

Item 3.

Defaults upon Senior Securities

Item 4.

Submission of Matters to a Vote of Security Holders

Item 5.

Other Information/Subsequent Events

Item 6.

Exhibits

SIGNATURES

EXHIBITS

DOCUMENTS INCORPORATED BY REFERENCE: See Exhibits

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31, 2010			March 31, 2010
	(Unaudited)
- ASSETS -
CURRENT ASSETS:
Cash and cash equivalents	$	24,652		$	38,611
Accounts receivable		142			10,973
Inventories		127,605			12,713
Prepaid expenses		85,651			88,911
TOTAL CURRENT ASSETS		238,050			151,208

FIXED ASSETS, NET		29,280			34,636

OTHER ASSETS:
Deferred financing costs, net		149,480			-
Trademarks, net		27,318			26,800
Deposits and other		24,389			24,389

TOTAL OTHER ASSETS		201,187			51,189

TOTAL ASSETS	$	468,517		$	237,033

- LIABILITIES AND STOCKHOLDERS' (DEFICIT) -
CURRENT LIABILITIES:
Accounts payable	$	1,498,812		$	1,287,824
Accrued liabilities		3,490,517			3,509,860
Derivative liabilities		340,862			4,858,123
Short-term bridge loans payable		388,000			388,000
Convertible notes payable		5,552,068			17,975,009
Non convertible note payable		10,250			34,000
Loans payable to related parties		21,463			21,463
TOTAL CURRENT LIABILITIES		11,301,972			28,074,279

CONVERTIBLE NOTES PAYABLE – NET OF CURRENT PORTION		842,290			-

STOCKHOLDERS' (DEFICIT):
Series A convertible preferred stock, par value $0.001 per share, 20,000,000 shares authorized, 9,000,000 shares issued and outstanding at December 31, 2010 and March 31, 2010		9,000			9,000
Common stock, par value $0.001, 1,000,000,000 shares authorized, 14,910,438 and 4,306,437 shares issued and outstanding at December 31, 2010 and March 31, 2010, respectively		14,910			4,306
Additional paid-in capital		6,470,470			5,959,687
Stock subscription receivable		-			(59,400	)
Deficit accumulated during the development stage		(18,170,125	)		(33,750,839	)

TOTAL STOCKHOLDERS' (DEFICIT)		(11,675,745	)		(27,837,246	)

TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT)	$	468,517		$	237,033

See accompanying notes to condensed consolidated financial statements

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
CONDENSED CONSOLIDTED STATEMENTS OF OPERATIONS


													Development
													Stage Period
	Three Months			Three Months			Nine Months			Nine Months			From Inception
	Ended			Ended			Ended			Ended			(June 18, 2007)
	December 31,			December 31,			December 31,			December 31,			to Decmber 31,
	2010			2009			2010			2009			2010

REVENUES:
Net revenues	$	1,976		$	-		$	5,284		$	(4,791	)	$	36,508
Product and shipping costs		(2,331	)		(18,591	)		(4,124	)		(95,127	)		(179,781	)
GROSS PROFIT (LOSS)		(355	)		(18,591	)		1,160			(99,918	)		(143,273	)

OPERATING EXPENSES:
Salaries, taxes and employee benefits		126,777			141,943			254,287			2,329,884			3,673,670
Marketing and promotion		100,489			67,725			184,848			258,441			2,227,909
Consulting fees		1,000			-			1,000			16,731			465,409
Professional and legal fees		69,218			76,493			197,313			238,400			843,067
Travel and entertainment		(5,176	)		-			1,990			9,241			215,472
Product development costs		1,800			10,650			4,200			19,650			121,700
Stock compensation expense		-			-			125,000			-			1,883,600
Other operating expenses		173,129			75,955			315,593			211,956			1,193,996
		467,237			372,766			1,084,231			3,084,303			10,624,823

LOSS FROM OPERATIONS		(467,592	)		(391,357	)		(1,083,071	)		(3,184,221	)		(10,768,096	)

OTHER INCOME (EXPENSE):
Derivative income (expense)		42,348			(527,230	)		4,636,162			(675,524	)		958,131
Loss on extinguishment of debt		-			(205,422	)		(1,034	)		(205,422	)		(3,417,877	)
Loss on sale of assets		-			-			-			-			(8,338	)
Impairment loss		-			-			-			-			(507,500	)
Interest income (expense) and other		(743,709	)		(460,214	)		12,028,657			(1,213,710	)		(4,426,445	)
Income (expense)		(701,361	)		(1,192,866	)		16,663,785			(2,094,656	)		(7,402,029	)

INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES		(1,168,953	)		(1,584,223	)		15,580,714			(5,278,877	)		(18,170,125	)

Provision for income taxes		-			-			-			-			-

NET INCOME (LOSS)	$	(1,168,953	)	$	(1,584,223	)	$	15,580,714		$	(5,278,877	)	$	(18,170,125	)

Basic income (loss) per common share	$	(0.08	)	$	(0.75	)	$	1.47		$	(2.65	)

Diluted income (loss) per common share	$	(0.08	)	$	(0.75	)	$	0.09		$	(2.65	)

Weighted average common shares
outstanding - basic		14,358,738			2,106,220			10,574,770			1,990,758

Weighted average common shares
outstanding - diluted		14,358,738			2,106,220			170,087,598			1,990,758

See accompanying notes to condensed consolidated financial statements

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


							Development
							Stage Period
	Nine Months			Nine Months			From Inception
	Ended			Ended			(June 18, 2007) to
	December 31,			December 31,			December 31,
	2010			2009			2010
	(Unaudited)			(Unaudited)			(Unaudited

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss)	$	15,580,714		$	(5,278,877	)	$	(18,170,125	)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization		8,607			8,540			39,679
Amortization of deferred financing costs		44,620			229,952			930,680
Compensatory stock and warrants		125,000			1,865,628			3,821,449
Derivative expense/(income)		(4,636,162	)		675,524			(958,131	)
Fair value adjustment of convertible note		(12,119,591	)		820,364			2,080,198
Impairment loss		-			-			507,500
Stock subscription receivable		59,400			-			-
Loss on debt extinguishment		1,034			205,422			3,417,877
Amortization of debt discount		39,961			-			587,320
Loss on disposal of fixed assets		-			-			3,914
Loss on sale of marketable securities		-			7,020			8,338
Changes in operating assets and liabilities:
Accounts receivable		10,831			5,540			(142	)
Prepaid expenses and other assets		33,260			103,369			(156,040	)
Inventories		(114,892	)		95,259			(127,605	)
Accounts payable and accrued liabilities		106,028			951,840			4,664,830
Net cash (used) in operating activities		(861,190	)		(310,419	)		(3,350,258	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment		(1,865	)		-			(31,165	)
Proceeds from sale of marketable securities		-			52,589			67,663
Trademarks		(1,904	)		(5,045	)		(69,026	)
Net cash provided (used) in investing activities		(3,769	)		47,544			(32,528	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible notes payable		955,000			170,000			2,585,000
Proceeds from short-term bridge loans payable		125,000			-			1,680,000
Costs associated with financing		(178,500	)		(26,111	)		(549,562	)
Repayment of notes		(50,500	)		-			(310,500	)
Capital contribution - common stock		-			-			2,500
Net cash provided by financing activities		851,000			143,889			3,407,438

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		(13,959	)		(118,986	)		24,652

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		38,611			119,637			-

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	24,652		$	651		$	24,652

See accompanying notes to condensed consolidated financial statements

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 1. Organization, Basis of Presentation and Significant Accounting Policies

(a) Organization :

Attitude Drinks Incorporated, a Delaware corporation, and subsidiary (“the Company”) is a development stage company that is engaged in the development and sale of functional beverages, primarily in the United States.

Attitude Drinks Incorporated (“Attitude”, “We” or the “Company”) was formed in Delaware on September 11, 1988 under the name of International Sportfest, Inc. In January 1994, the Company acquired 100% of the issued and outstanding common stock of Pride Management Services PLC ("PMS"). PMS was a holding company of six subsidiaries in the United Kingdom engaged in the leasing of motor vehicles throughout the United Kingdom. Simultaneously with the acquisition of PMS, we changed our name to Pride, Inc. On October 1, 1999, the Company acquired all of the issued and outstanding stock of Mason Hill & Co. and changed its name to Mason Hill Holdings, Inc. During the quarter ended June 30, 2001, the operating subsidiary, Mason Hill & Co., was liquidated by the Securities Investors Protection Corporation. As a result, the Company became a shell corporation whose principal business was to locate and consummate a merger with an ongoing business.

On September 19, 2007, the Company acquired Attitude Drink Company, Inc., a Delaware corporation (“ADCI”), under an Agreement and Plan of Merger (“Merger Agreement”) among Mason Hill Holdings, Inc. (“MHHI”) and ADCI. Pursuant to the Merger Agreement, each share of ADCI common stock was converted into 40 shares of Company common stock resulting in the issuance of 4,000,000 shares of Company common stock. The acquisition was accounted for as a reverse merger (recapitalization) with ADCI deemed to be the accounting acquirer, and the Company deemed to be the legal acquirer. Accordingly, the financial information presented in the financial statements is that of ADCI as adjusted to give effect to any difference in the par value of the issuer's and the accounting acquirer's stock with an offset to capital in excess of par value. The basis of the assets, liabilities and retained earnings of ADCI, the accounting acquirer, has been carried over in the recapitalization. On September 30, 2007, the Company changed its name to Attitude Drinks Incorporated. Its wholly owned subsidiary, ADCI, was incorporated in Delaware on June 18, 2007.

The Company is a development stage enterprise as defined by FASB Accounting Standards Codification. All losses accumulated since the inception of the Company will be considered as part of the Company's development stage activities. All activities of the Company to date relate to its organization, history, merger of its subsidiary, fundings and product development. The Company's fiscal year end is March 31. Its plan of operation during the next twelve months is to focus on the non-alcoholic single serving beverage business, developing and marketing products in three fast growing segments: sports recovery, functional dairy and milk/juice blends. Our company’s common stock shares (OTCBB: ATTD) began trading in June, 2008.

We implemented a 1-for-20 reverse stock split on July 7, 2010. We restated all applicable financial data throughout this report for the nine months ended December 31, 2010 and 2009 as well as any financial data for the year ended March 31, 2010.

(b) Basis of Presentation/Going Concern:

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements of the Company contain all adjustments necessary to present fairly the Company’s financial position as of December 31, 2010 and 2009 and the results of its operations and cash flows for the three and nine month periods

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 1. Organization, Basis of Presentation and Significant Accounting Policies (Continued):

(b) Basis of Presentation/Going Concern (continued):

ended December 31, 2010 and 2009. The significant accounting policies followed by the Company are set forth in Note 3 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended March 31, 2010, which is incorporated herein by reference. Specific reference is made to that report for a description of the Company’s securities and the notes to consolidated financial statements included therein. The accompanying unaudited interim financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States of America ("U.S. GAAP").

The results of operations for the nine months period ended December 31, 2010 are not necessarily indicative of the results to be expected for the full year.

The Company’s consolidated financial statements include the accounts of Attitude Drinks Incorporated and its wholly-owned subsidiary, Attitude Drink Company, Inc. All material intercompany balances and transactions have been eliminated.

The accompanying financial statements have been prepared on a going concern basis, which assumes the Company will realize its assets and discharge its liabilities in the normal course of business. As reflected in the accompanying financial statements, the Company had insignificant revenues for the nine months period ended December 31, 2010, a working capital deficit of $11,063,922 as of December 31, 2010 and has incurred losses to date resulting in an accumulated deficit of $18,170,125, including derivative income and expense. These factors create substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and pay its liabilities when they come due. Management’s plan includes obtaining additional funds by debt and/or equity financings; however, there is no assurance of additional funding being available.

Inventories, as estimated by management, currently consist of raw materials and finished goods and are stated at the lower of cost on the first in, first-out method or market. The inventory is comprised of the following:

	December 31, 2010		March 31, 2010
	(unaudited)
Finished goods	$	127,605	$	7,754
Raw materials		-		4,959
Total inventories	$	127,605	$	12,713

(d) Prepaid expenses:

Prepaid expenses of $85,651 consist mainly of retainers for legal fees that were paid with shares of the Company’s common stock. These retainers will be reduced through the incurrence of future legal expenses.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 1. Organization, Basis of Presentation and Significant Accounting Policies (Continued):

(e) Trademarks:

Trademarks consist of costs associated with the acquisition and development of certain trademarks. Trademarks, when acquired, will be amortized using the straight-line method over 15 years. Amortization of trademarks for the nine months ended December 31, 2010 was $1,386.

(f) Financial Instruments:

Financial instruments, as defined in the FASB Accounting Standards Codification, consist of cash, evidence of ownership in an entity, and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, notes payable, derivative financial instruments and convertible debt that we have concluded that some of these items are more akin to debt than equity. We carry cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities at historical costs; their respective estimated fair values approximate carrying values due to their current nature.

Derivative financial instruments, as defined in the FASB Accounting Standards Codification, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.

We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts, such as debt financing arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by the FASB Accounting Standards Codification, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements. However, we are allowed to elect fair value measurement of the hybrid financial instruments, on a case-by-case basis, rather than bifurcate the derivative. We believe that fair value measurement of the hybrid convertible promissory notes arising from our October 23, 2007, January 8, 2008, January 27, 2009, March 30, 2009 and July 15, 2010 financing arrangements provide a more meaningful presentation of that financial instrument.

(g) Income (Loss) Per Common Share:

The basic income (loss) per common share is computed by dividing the income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the reporting period. Diluted income/(loss) per common share is computed similar to basic income/(loss) per common share except that diluted income/(loss) per common share includes dilutive common stock equivalents, using the treasury stock method, and assumes that the convertible debt instruments were converted into common stock upon issuance, if dilutive. For the nine months ended December 31, 2010, potential common shares arising from the Company’s stock

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 1. Organization, Basis of Presentation and Significant Accounting Policies (Continued):

(g) Income (Loss) Per Common Share (continued):

warrants, stock options, convertible debt and preferred stock amounting to 230,468,007 shares were included in the computation of diluted income per share.

(h) Recent Accounting Pronouncements Applicable to the Company:

Recent accounting pronouncements - We have reviewed accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. We believe that the following impending standards may have an impact on our future filings. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.

In January 2010, FASB issued Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in ASC Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, the ASU 2010-06 amends Codification Subtopic 820-10 to now require: a reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements. In addition, ASU 2010-06 clarifies the existing requirements that reporting entities use judgment in determining the appropriate classes of assets and liabilities for purposes of reporting fair value measurement for each class of assets and liabilities and provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The ASU is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The Company has not elected early application of this ASU but does not believe its adoption will have a significant impact on its financial statements.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on our present or future financial statements.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 2. Accrued Liabilities:

Accrued liabilities consist of the following:

	December 31, 2010 (unaudited)		March 31, 2010
Accrued payroll and related taxes	$	2,043,463	$	2,209,114
Accrued marketing program costs		580,000		580,000
Accrued professional fees		70,625		62,130
Accrued interest		545,047		435,773
Accrued consulting fees		161,580		140,852
Other payables		89,802		81,991
Total	$	3,490,517	$	3,509,860

Note 3. Short-term Bridge Loans:

Summary of short-term bridge loan balances are as follows:

	December 31, 2010		March 31, 2010
	(Unaudited)
April 2, 2008	$	120,000	$	120,000
April 9, 2008		120,000		120,000
April 14, 2008		60,000		60,000
May 19, 2008		33,000		33,000
August 5, 2008		55,000		55,000
Total	$	388,000	$	388,000

April 2, 2008 financing :

On April 2, 2008, the Company entered into a financing arrangement that provided for the issuance of $120,000 face value short term bridge loans, due June 30, 2008, plus warrants to purchase (i) 10,000 shares of our common stock and (ii) additional warrants to purchase 10,000 shares of our common stock, representing an aggregate 20,000 shares. We determined that the warrants issued in this financing arrangement met the conditions for equity classification. The Company accounts for debt issued with stock purchase warrants in accordance with the FASB Accounting Standards Codification. The proceeds of the debt were allocated between the debt and the detachable warrants based on the relative fair values of the debt security and the warrants. We allocated a value of $98,864 to the warrants, which was accreted through the original maturity date using the effective interest method.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 3. Short-term Bridge Loans (continued):

April 2, 2008 financing (continued) :

We entered into the following Modification and Waiver Agreements related to this financing:

Date	Terms	Consideration
June 2008	Extend maturity to July 30, 2008	1) Warrants indexed to 5,000 shares of common stock 2) Warrants indexed to 5,000 shares of common stock
September 2008	Extend maturity to December 15,2008	12,000 shares of restricted stock
January 2009	Extend maturity date to April 30, 2009	1) Warrants indexed to 12,000 shares of common stock 2) 12,000 shares of restricted stock

The modifications resulted in a loss on extinguishment of $296,975 in accordance with the Financial Accounting Standards Codification, representing the fair value of warrants issued as consideration. The notes were considered in default on December 15, 2008 due to non-payment. Remedy for default was acceleration of principal so the notes were recorded at face value as of December 15, 2008. As of December 31, 2010, this note was considered in default for non-payment. The company is negotiating with the debt holder to extend the due date of this debt.

After consideration for the reverse stock split, the applicable issued Class A warrants and exercise prices (adjusted for the reverse stock split) are as follows: 10,000 warrants at $10.00 – original issuance; modifications of 5,000 warrants at $10.00 and 12,000 warrants at $1.00.

April 9, 2008 and April 14, 2008 financing:

On April 9, 2008, the Company entered into a financing arrangement that provided for the issuance of $120,000 face value short term bridge loans, due July 10, 2008, plus warrants to purchase (i) 10,000 shares of our common stock and (ii) additional warrants to purchase 10,000 shares of our common stock, representing an aggregate 20,000 shares. On April 14, 2008, the Company entered into a financing arrangement that provided for the issuance of $60,000 face value short term bridge loan notes payable, due July 15, 2008, plus warrants to purchase (i) 5,000 shares of our common stock and (ii) additional warrants to purchase 5,000 shares of our common stock, representing an aggregate 10,000 shares. We determined that the warrants issued in these financing arrangements met the conditions for equity classification so we allocated the proceeds of the debt between the debt and the detachable warrants based on the relative fair values of the debt security and the warrants in accordance with the FASB Accounting Standards Codification.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 3. Short-term Bridge Loans (continued):

April 9, 2008 and April 14, 2008 financing (continued):

We entered into the following Modification and Waiver Agreements related to the April 9, 2008 financing:

Date	Terms	Consideration
June 2008	Extend maturity to August 10, 2008	Warrants indexed to 10,000 shares of common stock
September 2008	Extend maturity to December 15, 2008	12,000 shares of restricted stock
January 2009	Extend maturity date to April 30, 2009	1) Warrants indexed to 12,000 shares of common stock 2) 12,000 shares of restricted stock
February 2010	Extend maturity date to June 30, 2010	1) Warrants indexed to 12,000 shares of common stock 2) 12,000 shares of restricted stock
June 2010	Extend maturity date to December 31, 2010	1) Warrants indexed to 12,000 shares of common stock 2) 12,000 shares of restricted stock

The modifications resulted in a loss on extinguishment of $13,442 in accordance with the Financial Accounting Standards Codification, representing the fair value of warrants issued as consideration. On September 9, 2010, we entered into another agreement for the April 9, 2008 short-term bridge loan to extend the maturity date to 12/31/2010. For this consideration, we cancelled a total of 51,000 (adjusted for the reverse stock split) previously issued Class A warrants and 15,000 Class B warrants for the issuance of a new warrant agreement for the same number of 51,000 warrants but with a new exercise price of $.05 and a new expiration date of September 9, 2013. During January, 2011, we reached agreement with the note holder to extend the maturity date to March 31, 2011 through the issuance of 100,000 restricted shares of common stock and another 12,000 Class A warrants at an exercise price of $.05 with a life of three years.

We entered into the following Modification and Waiver Agreements related to the April 14, 2008 financing:

Date	Terms	Consideration
June 2008	Extend maturity to July 19, 2008	Warrants indexed to 2,500 shares of common stock
September 2008	Extend maturity to December 15, 2008	6,000 shares of restricted stock
January 2009	Extend maturity date to April 30, 2009	1) Warrants indexed to 6,000 shares of common stock 2) 6,000 shares of restricted stock

The modifications resulted in a loss on extinguishment of $171,622 in accordance with the Financial Accounting Standards Codification, representing the fair value of warrants issued as consideration.

On December 15, 2008, we were in default on the notes for non-payment of the required principal payment. The remedy for event of default was acceleration of principal and interest so they were recorded at face value.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 3. Short-term Bridge Loans (continued):

April 9, 2008 and April 14, 2008 financing (continued):

As of September 30, 2010, this April 14, 2008 note was considered in default for non-payment. The company is negotiating with the debt holder to extend the due date of the note. It was determined that the extension warrants required liability accounting as the warrants contain full-ratchet protection and are being recorded at fair value with changes in fair value being recorded in derivative (income) expense.

After consideration for the reverse stock split, the applicable issued Class A warrants and exercise prices (adjusted for the reverse stock split) are as follows: 5,000 warrants at $10.00 – original issuance; modifications of 2,500 warrants at $10.00 and 6,000 warrants at $1.00.

May 19, 2008 financing:

On May 19, 2008, the Company entered into a financing arrangement that provided for the issuance of $33,000 face value short term bridge loan notes payable, due June 19, 2008, plus warrants to purchase (i) 5,000 shares of our common stock and (ii) additional warrants to purchase 5,000 shares of our common stock, representing an aggregate 10,000 shares.

We determined that the warrants issued in these financing arrangements met the conditions for equity classification so we allocated the proceeds of the debt between the debt and the detachable warrants based on the relative fair values of the debt security and the warrants in accordance with the FASB Accounting Standards Codification. The fair value of the warrants using the Black-Scholes pricing model was $280,560, and we allocated a value of $29,569 to the warrants in accordance with the FASB Accounting Standards Codification.

We entered into the following Modification and Waiver Agreements related to the May 19, 2008 financing:

Date	Terms	Consideration
June 2008	Extend maturity to July 30, 2008	1)Warrants indexed to 2,500 shares of common stock 2) Additional warrants to purchase 2,500 shares of common stock
September 2008	Extend maturity to December 15, 2008	3,300 shares of restricted stock
January 2009	Extend maturity date to April 30, 2009	1) Warrants indexed to 3,300 shares of common stock 2) 3,300 shares of restricted stock

We recorded a loss on extinguishment of $140,550 in accordance with the FASB Accounting Standards Codification related to these modifications, representing the fair value of warrants issued as consideration.

On December 15, 2008, we were in default on the notes for non-payment of the required principal payment. The remedy for this event of default was acceleration of principal and interest so they were recorded at face value.

As of December 31, 2010, this note was considered in default for non-payment. We are negotiating with the debt holder to extend the due date of this note. After consideration for the reverse stock split, the applicable issued

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 3. Short-term Bridge Loans (continued):

May 19, 2008 financing (continued):

Class A warrants and exercise prices (adjusted for the reverse stock split) are as follows: 5,000 warrants at $10.00; 2,500 warrants at $10.00; 3,300 warrants at $1.00.

Information and significant assumptions as of December 31, 2010 and March 31, 2010 for the extension warrants related to the April and May financings which are required to be recorded at fair value each reporting period:


	June 23, 2008						June 27, 2009
	Extension Warrants						Extension Warrants
	December			March			December			March
		31, 2010			31, 2010			31, 2010			31, 2010
Estimated fair value of underlying common share	$	0.02		$	1.00		$	0.02		$	0.052
Conversion or strike price	$	10.00		$	1.00		$	1.00		$	1.00
Volatility (based upon Peer Group)		70.00	%		150.60	%		130.00	%		110.93	%
Equivalent term (years)		0.48			1.23			3.08			3.83
Risk-free rate		0.18	%		0.41	%		1.04	%		2.55	%
Dividends		--			--			--			--

August 5, 2008 financing:

On August 5, 2008, the Company entered into a financing arrangement that provided for the issuance of $55,000 face value short term bridge loans, due September 5, 2008, plus warrants to purchase (i) 5,000 shares of our common stock at an exercise price of $10.00 and (ii) additional warrants to purchase 5,000 shares of our common stock at an exercise price of $15.00, representing an aggregate 10,000 shares. The due date of the loan was extended to December 15, 2008 with 5,500 restricted shares of common stock issued as consideration. On December 15, 2008, we were in default on the notes for non-payment of the required principal payment. Remedies for an event of default are acceleration of principal and interest. There were no incremental penalties for the event of default; however, the notes were recorded at face value.

We also evaluated the warrants to determine if they required liability or equity accounting. The warrants issued in conjunction with the financing are redeemable for cash upon the occurrence of acquisition, merger or sale of substantially all assets of the Company in an all cash transaction; therefore, the FASB Accounting Standards Codification requires that they be recorded as derivative liabilities on our balance sheet and marked to fair value each reporting period. We allocated the proceeds of the debt to the warrants, and the remaining portion was allocated to the debt instrument. The fair value of the warrants using the Black-Scholes pricing model was $62,700 and since the fair value of the warrants exceeded the proceeds from the financing, we recorded a day-one derivative loss of $12,700.

On January 15, 2009, we extended the term on the note from December 15, 2008 to April 30, 2009, and we issued investor warrants to purchase 5,500 shares of our common stock and 5,500 shares of restricted common stock as consideration for the extension. We recorded a loss on extinguishment of $2,112 in accordance with the FASB Accounting Standards Codification, representing the fair value of warrants issued as consideration.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 3. Short-term Bridge Loans (continued):

August 5, 2008 financing (continued

As of December 31, 2010, this note was considered in default for non-payment. The company is negotiating with the debt holder to extend the due date of the note.

After consideration for the reverse stock split, the applicable issued Class A warrants and exercise prices are as follows: 5,000 warrants at $10.00 – original issuance; modification of 5,500 warrants at $10.00.

Information and significant assumptions as of December 31, 2010 for warrants which are required to be recorded at fair value each reporting period:

	June 23, 2009						January 27, 2009
	Extension Warrants						Extension Warrants
	December			March			December			March
		31, 2010			31, 2010			31, 2010			31, 2010
Estimated fair value of underlying common share	$	0.02		$	1.00		$	0.02		$	1.00
Conversion or strike price	$	10.00		$	1.00		$	1.00		$	1.00
Volatility (based upon Peer Group)		80.00	%		150.84	%		130.00	%		110.93	%
Equivalent term (years)		0.59			1.35			3.08			3.83
Risk-free rate		0.198	%		0.41	%		1.058	%		2.55	%
Dividends		--			--			--			--

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 4. Convertible Notes Payable:

Convertible debt carrying values consist of the following:			December		March
				31, 2010		31, 2010
$	312,000	Convertible Note Financing, due March 31, 2011 (a)	$	166,889	$	1,257,963
$	600,000	Convertible Note Financing, due March 31, 2011 (b)		792,128		2,444,412
$	500,000	Convertible Note Financing, due March 31, 2011 (b)		943,488		3,225,265
$	100,000	Convertible Note Financing, due March 31, 2011 (b)		60,240		328,015
$	243,333	Convertible Note Financing, due March 31, 2011 (c)		292,000		292,000
$	60,833	Convertible Note Financing, due March 31, 2011 (d)		60,833		60,833
$	20,000	Convertible Note Financing, due March 31, 2011 (c)		20,000		20,000
$	120,000	Convertible Note Financing, due March 31, 2011 (e)		261,931		803,999
$	5,000	Convertible Note Financing, due March 31, 2011 (e)		11,218		33,316
$	5,000	Convertible Note Financing, due March 31, 2011 (e)		10,913		33,499
$	60,000	Convertible Note Financing, due March 31, 2011 (e)		130,448		401,481
$	70,835	Convertible Note Financing, due March 31, 2011 (e)		154,614		474,586
$	507,500	Convertible Note Financing, due March 31, 2011 (f)		886,495		3,111,581
$	200,000	Convertible Note Financing, due March 31, 2011 (e)		422,613		1,331,904
$	161,112	Convertible Note Financing, due March 31, 2011 (e)		334,278		1,064,011
$	27,778	Convertible Note Financing, due March 31, 2011 (e)		56,447		182,738
$	111,111	Convertible Note Financing, due March 31, 2011 (g)		211,686		707,736
$	50,000	Convertible Note Financing, due March 31, 2011 (e)		98,541		323,968
$	55,000	Convertible Note Financing, due March 31, 2011 (e)		107,867		356,364
$	137,500	Convertible Note Financing, due March 31, 2011 (e)		253,624		890,912
$	55,000	Convertible Note Financing, due March 31, 2011 (e)		107,245		-
$	100,000	Convertible Note Financing, due March 31, 2011 (h)		168,570		630,426

		Total convertilbe notes payable due in less than 12 months		5,552,068		17,975,009
$	900,000	Convertible Note Financing, due July 15, 2012 (i)		742,290		-

		Total convertible notes payable	$	6,294,358	$	17,975,009

(a) $312,000 convertible notes payable

On January 8, 2008, we executed secured convertible notes in the aggregate of $520,000 with three lenders, all unrelated entities. We received a net amount of $430,000 with the $90,000 discount being treated as interest. The loans became payable on May 7, 2008, or we had the option of compelling the holder to convert all, or a portion of the outstanding principal and accrued interest into Company common stock based on defined criteria. On February 13, 2008, we repaid $260,000 of these loans. During the quarter ended June 30, 2010, $16,800 of the principal balance of the notes was converted into common shares at the default conversion price of $.16 calculated pursuant to the notes default provisions. Including the above $16,800 conversion, a total of $138,792 of the principal balance has been converted into common shares.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 4. Convertible Notes Payable (continued)

(a) $312,000 convertible notes payable (continued)

We have entered into the following Modification and Waiver Agreements related to this financing:

Date	Terms	Consideration
June 2008	Extend maturity to July 15, 2008	9,750 shares of common stock
September 2008	Extend maturity to sooner of January 1, 2009 or closing of another funding	Increase principal by $52,000
January 2009	Extend maturity date to July 1, 2009 and add a conversion option of $0.05	140,000 shares of restricted stock
January 2010	Extend maturity date to June 30, 2010	Convertible notes (See Note 4(h))
July 2010	Extend maturity date to March 31, 2011	Change in conversion price to $.035

The addition of a conversion option and the issuance of restricted stock in January 2009 resulted in an extinguishment loss of $56,000 under the FASB Accounting Standards Codification.

The January 2010 modification resulted in an extinguishment loss of $72,441. On July 14, 2010, we extended the due date to March 31, 2011 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $900,000.

We chose to value the entire hybrid instrument at fair value. We estimate the fair value of the hybrid contract as a common stock equivalent, enhanced by the forward elements (coupon, puts, and calls), because that technique embodies all of the assumptions (including credit risk, interest risk, stock price volatility and conversion behavior estimates) that are necessary to fair value complex, hybrid contracts.

(b) $1,200,000 convertible notes payable

On October 23, 2007, we entered into a Subscription agreement with a group of accredited investors. Under this agreement, we agreed to sell up to $1,200,000 of our securities consisting of 10% convertible notes, shares of common stock and Class A and Class B common stock purchase warrants. The original subscription agreement required that we have an effective registration statement in order for the second closing date to occur. On February 15, 2008, we obtained a Waiver of Certain Conditions that allowed us to waive the requirement for the Registration Statement to become effective prior to the occurrence of the Second closing.

The indexed shares and closing dates for the three tranches of the $1,200,000 financing are as follows:

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 4. Convertible Notes Payable (continued)

(b) $1,200,000 convertible notes payable (continued)

indexed

Series A

Series B

Financing

Closing date

to note

Warrants

$600,000 Face Value Convertible

Note Financing

October 23, 2007

29,881,302

958,805

140,910

$500,000 Face Value Convertible

Note Financing

February 15, 2008

36,913,319

757,304

75,758

$100,000 Face Value Convertible

Note Financing

October 23, 2007

2,404,891

151,502

15,152

Total

69,199,512

1,867,611

231,820

The convertible promissory notes were initially convertible into common shares based on a fixed conversion price of $6.60, and are subject to full-ratchet anti-dilution protection if we sell shares or share-indexed financing instruments at less than those prices. The conversion features were not afforded the exemption as conventional convertible, and the notes require liability classification under the FASB Accounting Standards Codification. We chose to value the entire hybrid instruments at fair value. We estimate the fair value of the hybrid contract as a common stock equivalent, enhanced by the forward elements (coupon, puts, and calls), because that technique embodies all of the assumptions (including credit risk, interest risk, stock price volatility and conversion behavior estimates) that are necessary to fair value complex, hybrid contracts.

The warrants issued in this financing arrangement did not meet the conditions for equity classification and are also required to be carried as a derivative liability, at fair value. We estimate the fair value of the warrants on the inception dates, and subsequently, using the Black-Scholes valuation technique, adjusted for dilution, because that technique embodies all of the assumptions (including, volatility, expected terms, dilution and risk free rates) that are necessary to fair value freestanding warrants. See also Note 6 – Derivative Liabilities.

The warrants and the convertible notes contain full-ratchet protection so the exercise price of the warrants and the conversion price of the notes were reduced to $3.30 when the Company issued additional convertible instruments with this conversion rate on December 18, 2008. On January 27, 2009, we entered into a modification of the agreement which reduced the maturity date from October 23, 2009 to July 1, 2009 and changed from a periodic debt payment schedule to full payment of principal and interest on July 1, 2009. In exchange for this modification, we issued 62,500 shares of restricted stock, and we agreed to reduce the conversion price of the notes and related warrants to $1.00. This modification resulted in a loss on extinguishment of $379,183. During the quarter ended June 30, 2009, $85,000 of principal balance on the notes and $8,723 of interest was converted into common shares of stock at a price of $1.00. During the quarter ended December 31, 2009, $105,000 of principal balance of the notes and $4,500 of interest were converted into common shares at the default conversion price of $.16 calculated pursuant to the notes default provisions. The conversion price was reduced again to $.494 when the Company issued additional convertible instruments with a lower conversion rate in November 2009. On January 10, 2010, we entered into a modification of the agreement with certain note holders, which extended the

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 4. Convertible Notes Payable (continued)

(b) $1,200,000 convertible notes payable (continued)

maturity date to June 30, 2010. In exchange for this modification, we issued convertible promissory notes in the amount of $100,000 (see Note 4(h)). Additionally, we agreed to (i) issue additional warrants to purchase 1,635,792 shares of common stock and (ii) reduce the price of certain warrants to $0.20. This modification resulted in an extinguishment loss of $395,249. During the quarter ended March 31, 2010, $100,500 of the principal balance of the notes was converted into common shares at the default conversion price of $.16 calculated pursuant to the notes default provisions. On January 28, 2010, certain warrants were re-priced to $0.16, and the expiration dates were extended to July 15, 2015. On February 11, 2010, the warrants which were re-priced to $0.20 on January 10, 2010 were re-priced to $0.16, and the expiration dates were extended to July 15, 2015. During the quarter ended June 30, 2010, $36,000 of the principal balance of the notes was converted into common shares at the default conversion price of $0.16 calculated pursuant to the notes default provisions. On July 14, 2010, we extended the due date to March 31, 2011 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $900,000. The conversion price for the convertible debt was changed to $.035. In addition, $221,608 of the outstanding balance plus $27,460 in accrued interest payable was assigned to new debt holders. During the quarter ended September 30, 2010, $20,000 of the principal balance of the notes was converted into common shares at a conversion price of $.04.

Information and significant assumptions embodied in our valuations (including ranges for certain assumptions during the subject periods that instruments were outstanding) as of December 31, 2010 and March 31, 2010 for this financing are illustrated in the following tables:

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 4. Convertible Notes Payable (continued)

(b) $1,200,000 convertible notes payable (continued)


	Hybrid Note						Warrants
	December			March			December			March
		31, 2010			31, 2010			31, 2010			31, 2010
Estimated fair value of underlying common share	$	0.02		$	1.00		$	0.02		$	1.00
Conversion or strike price	$	0.0123		$	0.16		$	0.0238		$	0.16
Volatility (based upon Peer Group)		0.00	%		--			115.00	%		101.35	%
Equivalent term (years)		--			--			4.54			5.29
Risk-free rate		--			--			1.80	%		2.55	%
Credit-risk adjusted yield		7.60	%		7.91	%		--			--
Dividends		--			--			--			--

$500,000 Convertible Promissory Note Financing
(Initial Closing)	Hybrid Note						Warrants
	December			March			December			March
		31, 2010			31, 2010			31, 2010			31, 2010
Estimated fair value of underlying common share	$	0.02		$	1.00		$	0.02		$	1.00
Conversion or strike price	$	0.0123		$	0.16		$	0.0238		$	0.16
Volatility (based upon Peer Group)		0.00	%		--			115.00	%		101.35	%
Equivalent term (years)		--			--			4.54			5.29
Risk-free rate		--			--			1.80	%		2.55	%
Credit-risk adjusted yield		7.60	%		7.91	%		--			--
Dividends		--			--			--			--

$100,000 Convertible Promissory Note Financing
(Initial Closing)	Hybrid Note						Warrants
	December			March			December			March
		31, 2010			31, 2010			31, 2010			31, 2010
Estimated fair value of underlying common share	$	0.02		$	1.00		$	0.02		$	1.00
Conversion or strike price	$	0.0123		$	0.16		$	0.0238		$	0.16
Volatility (based upon Peer Group)		0.00	%		--			115.00	%		101.35	%
Equivalent term (years)		--			--			4.54			5.29
Risk-free rate		--			--			1.80	%		2.55	%
Credit-risk adjusted yield		7.60	%		7.91	%		--			--
Dividends		--			--			--			--

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 4. Convertible Notes Payable (continued)

On September 29, 2008, for cash proceeds of $192,500, net of issuance costs of $7,500, we issued $243,333 face value convertible notes, due March 29, 2009, plus warrants to purchase (i) 28,384 shares of our common stock at an exercise price of $10.00 and (ii) additional warrants to purchase 28,384 shares of our common stock at an exercise price of $15.00, representing an aggregate 56,768 shares. The notes are convertible, only at the Company’s option, into Common Stock at $3.30 and are subject to full-ratchet anti-dilution protection if we sell shares or share-indexed financing instruments at less than that price. The notice of conversion must be given to the Holder on the first day following the twenty consecutive trading days during which the stock price is greater than $100.00 per share each trading day and the daily trading volume is greater than 100,000 shares. The Holder of the note does not have an option to convert the instrument. The note is secured by a security interest in all the tangible and intangible assets of the Company. According to the original terms of the note, fifty percent of the interest was due on December 28, 2008 and fifty percent due and payable on March 29, 2009; however, the Company modified the agreement on January 27, 2009 to require full payment of principal and interest on July 1, 2009 in exchange for a reduction of the conversion price of the note and exercise price of the warrants to $1.00. On January 27, 2009, the 28,333 warrants attached to this financing along with 7,083 similar warrants for the December, 2008 $60,833 financing (see note 4(d)) were redeemed in exchange for a convertible note in the amount of $70,835. Both exchanges resulted in an extinguishment loss of $82,484. See Note 4(e). On January 10, 2010, we entered into a modification of the agreement with certain note holders, which extended the maturity date to June 30, 2010. In exchange for this modification, we issued convertible promissory notes in the amount of $100,000 (See Note 4(h)). This modification resulted in an extinguishment loss of $113,768. On July 14, 2010, we extended the due date to March 31, 2011 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $900,000.

In originally evaluating the financing transaction, we concluded that the conversion feature was not clearly and closely related to the debt instrument since the risks are those of an equity security; however, we determined that the conversion feature met the paragraph 11(a) exemption and did not require liability classification under the FASB Accounting Standards Codification. Since the embedded conversion feature did not require liability classification, we were required to consider if the contract embodied a beneficial conversion feature (“BCF”). The conversion option is contingent on a future stock price so under the guidance of The FASB Accounting Standards Codification, the beneficial conversion feature was calculated at inception but will not be recognized until the contingency is resolved. The aggregate BCF at its intrinsic value amounted to $192,739. This amount gives effect to (i) the trading market price on the contract date and (ii) the effective conversion price after allocation of proceeds to the warrants. Notwithstanding, BCF was limited to the value ascribed to the note (using the relative fair value approach).

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 4. Convertible Notes Payable (continued)

The warrants and the convertible note contain full-ratchet protection so the exercise price of the warrants and the conversion price of the notes were reduced to $3.30 when the Company issued additional convertible instruments with a lower conversion rate on December 18, 2008. The conversion price was reduced again to $.494 when the Company issued additional convertible instruments with a lower conversion rate in November 2009. As part of extending the due date to March 31, 2011, the conversion price of the notes payable and the exercise price of the applicable warrants were changed to $.035 as part of the agreement for the July, 2010 financing of $900,000. In connection with the note, we issued a note payable in the amount of $20,000 under the same terms as the $243,333 note as consideration for finders’ fees. The finders’ fee note did not include warrants.

(d) $60,833 convertible notes payable

On December 18, 2008, we entered into a financing arrangement that provided for the issuance of $60,833 face value convertible note for a purchase price of $50,000, due March 29, 2009, plus warrants to purchase (i) 7,084 shares of our common stock at an exercise price of $10.00 and (ii) additional warrants to purchase 7,084 shares of our common stock at an exercise price of $15.00, representing an aggregate of 14,168 shares. The note was initially convertible into common shares, only at the Company’s option, a conversion price of $3.30 and is subject to full-ratchet anti-dilution protection if we sell shares or share-indexed financing instruments at less than that price. The notice of conversion must be given to the Holder on the first day following the twenty consecutive trading days during which the stock price is greater than $100.00 per share each trading day and the daily trading volume is greater than 100,000 shares. The Holder of the note does not have an option to convert the instrument. The note is secured by a security interest in all the tangible and intangible assets of the Company. According to the original terms of the note, fifty percent of the note was due on December 28, 2008 and fifty percent due and payable on March 29, 2009 and if the note was not paid by its maturity date; a default interest rate of 15% applied. The note was considered in default as of December 28, 2008 due to non-payment of the required principal payment, therefore, it is recorded at face value and default interest of 15% is being accrued. We modified the note agreement on January 27, 2009 to require full payment of principal and interest on July 1, 2009 in exchange for a reduction of the conversion price of the note and exercise price of the warrants to $1.00. On January 27, 2009, the 7,083 warrants attached to this financing along with 28,333 similar warrants for the September, 2008 $243,333 financing (see Note 4 (c)) were redeemed in exchange for a convertible note in the amount of $70,835. Both exchanges resulted in an extinguishment loss of $82,484 (See Note 4(e)). The conversion price was reduced again to $.494 when the Company issued additional convertible instruments with a lower conversion rate in November 2009. On January 10, 2010, we entered into a modification of the agreement with certain note holders, which extended the maturity date to June 30, 2010. In exchange for this modification, we issued convertible promissory notes in the amount of $100,000 (See Note 4(h)). This modification resulted in an extinguishment loss of $26,282. On July 14, 2010, we extended the due date to March 31, 2011 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $900,000. As part of this agreement, the conversion price for the notes payable was changed to $.035.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 4. Convertible Notes Payable (continued)

(d) $60,833 convertible notes payable

In originally evaluating the financing transaction, we concluded that the conversion feature was not clearly and closely related to the debt instrument; however, it did meet the paragraph 11(a) exemption and did not require liability classification. We considered if the contract embodied a beneficial conversion feature (“BCF”) however there was no beneficial conversion feature present, since the effective conversion price was greater than the market value of the stock. We also evaluated the warrants to determine if they required liability or equity accounting. The warrants issued in conjunction with the financing are redeemable for cash upon the occurrence of acquisition, merger or sale of substantially all assets of the Company in an all cash transaction; therefore, the FASB Accounting Standards Codification requires that they be recorded as derivative liabilities on our balance sheet and marked to fair value each reporting period.

(e) $947,224 convertible notes payable

On January 27, 2009 , March 30, 2009, and July 15, 2009, we entered into Subscription agreements with a group of accredited investors that provided for the sale of an aggregate of $892,224 face value secured convertible notes and warrants to purchase an aggregate 1,183,473 shares of our common stock. The notes and warrants are based on a fixed conversion price of $1.00 and are subject to full-ratchet anti-dilution protection if we sell shares or share-indexed financing instruments at less than those prices. The conversion price was reduced to $.494 when the Company issued additional convertible instruments with a lower conversion rate in November 2009. On January 10, 2010, we entered into a modification of the agreement with certain note holders, which extended the maturity date to June 30, 2010. In exchange for this modification, we issued convertible promissory notes in the amount of $50,000. Additionally, we agreed to reduce the price of certain warrants to $0.20. This modification resulted in an extinguishment loss of $309,740. On January 28, 2010, certain warrants were re-priced to $0.16, and the expiration dates were extended to July 15, 2015. On February 11, 2010, the warrants which were re-priced to $0.20 on January 10, 2010 were re-priced to $0.16, and the expiration dates were extended to July 15, 2015. On May 13, 2010, we executed an allonge to the March, 2009 secured convertible notes payable as well as issued 114,583 warrants at an exercise price of $0.16. On July 14, 2010, we extended the due date to March 31, 2011 as part of a subscription agreement for a convertible debt financing in the principal gross amount of $900,000. As part of this extension, the conversion price of the convertible notes payable and the exercise price of the applicable warrants were changed to $.035.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 4. Convertible Notes Payable (continued)

(e) $947,224 convertible notes payable (continued)

The following table provides the details of each of the financings:

					Shares		Shares
					indexed		indexed
Face Value			Closing date	Maturity Date	to note		to warrants
$	130,000	(1)	January 27, 2009	March 31, 2011		10,597,827		120,000
	70,835	(2)	January 27, 2009	March 31, 2011		5,774,511		--
	60,000		February 17, 2009	March 31, 2011		4,891,304		60,000
	200,000		March 30, 2009	March 31, 2011		16,304,348		416,667
	161,111		July 15, 2009	March 31, 2011		13,134,130		335,648
	27,778		October 1, 2009	March 31, 2011		2,264,511		--
	50,000		January 28, 2010	March 31, 2011		4,076,087		104,167
	55,000		February 19, 2010	March 31, 2011		4,483,696		104,167
	137,500		March 26, 2010	March 31, 2011		11,209,239		286,458
	55,000		May 13, 2010	March 31, 2011		4,483,696		114,584

$	947,224					77,219,349		1,541,691

(1)	The $130,000 convertible notes payable includes two $5,000 face value convertible notes issued as payment for finder’s fees.

(2)	The $70,835 convertible notes payable was issued in exchange for the redemption of 56,767 warrants shares issued in connection with the September 29, 2008 convertible note financing and 14,167 warrant shares issued in connection with the December 18, 2008 convertible note financing.

We received the following proceeds from the financing transactions:

			Debt
			Discount &		Net
	Gross Proceeds		Finance Costs		Proceeds

$130,000 Face Value Convertible Note Financing	$	120,000	$	23,750	$	96,250
$60,000 Face Value Convertible Note Financing		60,000		10,000		50,000
$200,000 Face Value Convertible Note Financing		200,000		41,900		158,100
$161,111 Face Value Convertible Note Financing		161,111		16,111		145,000
$27,778 Face Value Convertible Note Financing		27,778		-		27,778
$50,000 Face Value Convertible Note Financing		50,000		10,000		40,000
$55,000 Face Value Convertible Note Financing		55,000		-		55,000
$137,500 Face Value Convertible Note Financing		137,500		13,100		124,400
$55,000 Face Value Convertible Note Financing		55,000		5,000		50,000

Total	$	866,389	$	119,861	$	746,528

The holder has the option to redeem the convertible notes for cash in the event of defaults and certain other contingent events, including events related to the common stock into which the instrument was convertible, registration and listing (and maintenance thereof) of our common stock and filing of reports with the Securities and Exchange Commission (the “Default Put”). The conversion feature was not afforded the exemption as conventional convertible, and the notes require liability classification under the FASB Accounting Standards Codification. We chose to value the entire hybrid instrument at fair value. We estimate the fair value of the hybrid contract as a common stock equivalent, enhanced by the forward elements (coupon, puts, and calls), because that technique embodies all of the assumptions (including credit risk, interest risk, stock price volatility and conversion behavior estimates) that are necessary to fair value complex, hybrid contracts.

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 4. Convertible Notes Payable (continued)

(e) $947,224 convertible notes payable (continued)

$130,000 Convertible Promissory Note Financing
(Initial Closing)	Hybrid Note						Warrants
	December			March			December			March
		31, 2010			31, 2010			31, 2010			31, 2010
Estimated fair value of underlying common share	$	0.02		$	1.00		$	0.02		$	1.00
Conversion or strike price	$	0.0123		$	0.16		$	0.0238		$	0.16
Volatility (based upon Peer Group)		0.00	%		--			115.00	%		101.35	%
Equivalent term (years)		--			--			4.54			5.29
Risk-free rate		--			--			1.801	%		2.55	%
Credit-risk adjusted yield		7.54	%		7.91	%		--			--
Dividends		--			--			--			--

$60,000 Convertible Promissory Note Financing
(Initial Closing)	Hybrid Note						Warrants
	December			March			December			March
		31, 2010			31, 2010			31, 2010			31, 2010
Estimated fair value of underlying common share	$	0.02		$	1.00		$	0.02		$	1.00
Conversion or strike price	$	0.0123		$	0.16		$	0.0238		$	0.16
Volatility (based upon Peer Group)		0.00	%		--			115.00	%		101.35	%
Equivalent term (years)		--			--			4.54			5.29
Risk-free rate		--			--			1.801	%		2.55	%
Credit-risk adjusted yield		7.54	%		7.91	%		--			--
Dividends		--			--			--			--

$200,000 Convertible Promissory Note Financing
(Initial Closing)	Hybrid Note						Warrants
	December			March			December			March
		31, 2010			31, 2010			31, 2010			31, 2010
Estimated fair value of underlying common share	$	0.02		$	1.00		$	0.02		$	1.00
Conversion or strike price	$	0.0123		$	0.16		$	0.0238		$	0.16
Volatility (based upon Peer Group)		0.00	%		--			115.00	%		101.35	%
Equivalent term (years)		--			--			4.54			5.29
Risk-free rate		--			--			1.801	%		2.55	%
Credit-risk adjusted yield		7.54	%		7.91	%		--			--
Dividends		--			--			--			--

ATTITUDE DRINKS INCORPORATED AND SUBSIDIARY

(A Development Stage Company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED DECEMBER 31, 2010

Note 4. Convertible Notes Payable (continued)

(e) $947,224 convertible notes payable (continued)

$161,111 Convertible Promissory Note Financing
(Initial Closing)	Hybrid Note						Warrants
	December			March			December			March
		31, 2010			31, 2010			31, 2010			31, 2010
Estimated fair value of underlying common share	$	0.02		$	1.00		$	0.02		$	1.00
Conversion or strike price	$	0.0123		$	0.16		$	0.0238		$	0.16
Volatility (based upon Peer Group)		0.00	%		--			115.00	%		101.35	%
Equivalent term (years)		--			--			4.54			5.29
Risk-free rate		--			--			1.801	%		2.55	%
Credit-risk adjusted yield		7.54	%		7.91	%		--			--
Dividends		--			--			--			--

$27,778 Convertible Promissory Note Financing
(Initial Closing)	Hybrid Note						Warrants
	December			March			December			March
		31, 2010			31, 2010			31, 2010			31, 2010
Estimated fair value of underlying common share	$	0.02			--		$	0.02		$	1.00
Conversion or strike price	$	0.0123			--		$	0.0238		$	0.16
Volatility (based upon Peer Group)		0.00	%		--			115.00	%		101.35	%
Equivalent term (years)		--			--			4.54			5.29
Risk-free rate		--			--