FUN Technologies Inc.
TSX : FUN
AIM : FUN

FUN Technologies Inc.

November 13, 2006 20:06 ET

FUN Technologies Delivers Strong Third Quarter Revenue Growth

- third quarter revenue up 66% year over year - increase of third quarter revenue of 30.1% over second quarter 2006

TORONTO, ONTARIO--(CCNMatthews - Nov. 13, 2006) - - FUN Technologies Inc. ("FUN" or the "Company") (TSX:FUN)(AIM:FUN), one of the world's leading online and interactive casual games providers, announced today its results for the quarter ended September 30, 2006. The Company's quarterly financial statements and Management Discussion and Analysis are available through the System for Electronic Document Analysis and Retrieval at www.sedar.com. All currency amounts are stated in thousands of U.S. dollars ("US$") (except per share figures).

2006 Q3 Highlights

- For the three months ended September 30, 2006, revenue was $13.1 million, an increase of approximately 30.1% over the second quarter and 66% over Fun Technologies PLC 2005 third quarter revenue.

- FUN Technologies combined revenue for the nine months ended September 30, 2006 was $31.1 million, an increase of 107% over the nine months ended September 30, 2005 of FUN Technologies PLC(1).

- FUN Games revenue for the third quarter increased 187% year over year; FUN Sports revenue for the third quarter increased by 14% year over year.

- FUN Sports acquired the assets of C.B.C Distribution and Marketing, Inc. a direct to consumer fantasy sports game provider operating as CDM Fantasy Sports (CDM). CDM primarily focuses on serving customers in Fantasy MLB Baseball and Fantasy NFL Football.

- FUN Games launched its first massive multi-player online role playing game, Pox Nora with extremely positive industry reviews and strong player registrations.

- FUN's websites continue to experience strong user growth, averaging over 5 million unique visitors a month, up 194% from the third quarter of 2005 and 150% over the second quarter 2006.

(1) FUN Technologies PLC revenue from January 1, 2006 to March 8th plus FUN Technologies Inc revenue from March 9, 2006 to September 30, 2006 (for the combined nine months) was $31.1 million.

FUN Games:

During the quarter FUN games continued to realize benefits from its WorldWinner acquisition. WorldWinner further solidifies FUN's position in the fast-growing casual games market. Accordingly management is focused on maximizing the considerable operating efficiencies, leverage and synergies from the Company's skill games division. Subsequent to the third quarter, the Company launched SCRABBLE Cubes, a 3-D word game based on the classic crossword game. Customer feedback and traffic has been extremely positive and the Company launched an online and offline marketing campaign focusing on this branded content.

In the quarter, FUN launched Pox Nora, an innovative online, massive multi-player strategy game, with immediate commercial success. The game has registered over 7.5 million page views, and 160,000 players since August, with steady revenue growth. Management believes that Pox Nora, and its underlying multiplayer technology assets, represent a meaningful new business opportunity for FUN in the rapidly expanding massive multi-player online role playing game marketplace.

FUN Sports:

In the quarter, FUN Sports acquired substantially all of the assets of CDM, a leading provider of fee-based MLB baseball and other fantasy sports games (www.CDMSports.com). CDM enables FUN to expand its fantasy offering to its current customers by adding an industry leading MLB baseball product. FUN now offers its customers industry leading fantasy products in all core fantasy segments including business to consumer, commissioner and salary cap style products.

Adjusted EBITDA:

In addition to disclosing interim results in accordance with Canadian GAAP, FUN also provides supplementary non-GAAP measures as a method of evaluating the Company's operating performance.

Management uses Adjusted EBITDA as a measure of enterprise-wide performance. Adjusted EBITDA is defined as earnings before interest income, taxes, depreciation and amortization, stock based compensation, restructuring and impairment charges. Management believes Adjusted EBITDA is a useful measure that facilitates period-to-period operating comparisons and allows the Company to compare its operating results with its competitors. Adjusted EBITDA does not have any standardized meaning prescribed by GAAP and is not necessarily comparable to similar measures presented by other companies. Adjusted EBITDA is not a measure of performance under Canadian GAAP and should not be considered in isolation or as a substitute for net earnings (loss) prepared in accordance with Canadian GAAP. The Company has provided a reconciliation of Adjusted EBITDA to Canadian GAAP net earnings (loss) below.



Three months Nine months
ended September ended September
30, 2006 30, 2006

Loss for the period ($7,900,019) ($17,826,211)
Income taxes (1,613,338) (3,982,027)
Interest expense, net 65,368 16,518
Stock based compensation 146,399 146,399
Depreciation and amortization 4,734,369 11,801,951
Impairment of investments - 1,955,231
Restructuring 363,444 363,444
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Adjusted EBITDA ($4,203,777) ($7,524,695)
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Outlook

The Company continues to focus on integrating its businesses, including platforms and services offerings, developing new distribution channels and pursuing complementary acquisitions which are in-line with the Company's aggressive growth strategy.

Forward Looking Statements

This news release may contain forward-looking statements that are based on current projections, and that are not guarantees of future performance, and involve certain risks and uncertainties that are difficult to predict. The future results of the Company may differ materially from those expressed in the forward-looking statements contained in this news release, due to, among other factors, the risks and uncertainties inherent in the business of the Company, the risk factors discussed in FUN Technology PLC's 2005 Annual Information Form and in other documents published or filed by, or on behalf of, the Company from time to time with the Canadian securities regulators. The Company does not undertake any obligation to update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this news release or to reflect the occurrence of unanticipated events.

About FUN Technologies

FUN Technologies Inc. is one of the world's leading online casual games providers. FUN's strategy is to provide its cutting-edge games systems to top distribution partners around the world. FUN is 51% owned by Liberty Media Corporation, and FUN's common shares are listed on both the Toronto Stock Exchange and the Alternative Investment Market (AIM) of the London Stock Exchange under the symbol "FUN".



NOTICE TO READER OF THE UNAUDITED
INTERIM CONSOLIDATED FINANCIAL STATEMENTS


The unaudited interim consolidated balance sheet of FUN Technologies Inc. (the "Company") as at September 30, 2006 and the accompanying unaudited interim statements of operations and cash flows for the three and nine months ended September 30, 2006, are the responsibility of the Company's management. These consolidated financial statements have not been audited or reviewed on behalf of the shareholders by the independent external auditors of the Company, KPMG LLP.

The unaudited interim consolidated financial statements have been prepared by management and include the selection of appropriate accounting principles, judgments and estimates necessary to prepare these financial statements in accordance with accounting principles generally accepted in Canada.



Lorne K. Abony Stephen K. Tucker
Chief Executive Officer Chief Financial Officer

Toronto, Canada Toronto, Canada
November 13, 2006 November 13, 2006


FUN TECHNOLOGIES INC.
Consolidated Balance Sheets
(Expressed in U.S. dollars)

---------------------------------------------------------------------------
---------------------------------------------------------------------------
September 30, December 31,
2006 2005
---------------------------------------------------------------------------
(Unaudited)
Assets

Current assets:
Cash and cash equivalents $ 14,144,173 $ 1
Restricted cash 891,417 -
Short-term investments 50,733 -
Accounts receivable, net of allowance
for doubtful accounts of $448,629 1,997,670 -
Prepaid expenses and other 2,279,204 -
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19,363,197 1

Capital assets, net of accumulated
depreciation (note 4) 4,558,995 -
Intangibles, net of accumulated
amortization (note 5) 77,475,993 -
Goodwill and other indefinite lived
intangible assets (note 3) 279,122,566 -
Investments and other 3,353,484 -

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$ 383,874,235 $ 1
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Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $ 13,885,039 $ -
Customer deposits 1,247,349 -
Income taxes payable 272,452 -
Deferred revenue 5,899,587 -
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21,304,427 -

Future income taxes (note 3) 31,716,956 -
Long-term obligations and other 691,745 -

Shareholders' equity:
Common shares (note 6) 347,838,598 1
Contributed surplus 146,399 -
Foreign currency translation adjustment 2,321 -
Deficit (17,826,211) -
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330,161,107 1

Basis of presentation (note 2(a))
Commitments and contingencies (note 10)

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$ 383,874,235 $ 1
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See accompanying notes to unaudited consolidated financial statements.



FUN TECHNOLOGIES INC.
Consolidated Statements of Operations
(Expressed in U.S. dollars)

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---------------------------------------------------------------------------
Three months Nine months
ended September ended September
30, 2006 30, 2006
---------------------------------------------------------------------------
(Unaudited)

Revenue $ 13,154,161 $ 25,526,858

Cost of sales 6,283,648 10,057,114
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Gross profit 6,870,513 15,469,744

Operating expenses:
Software development 2,334,242 5,151,565
Selling, general and
administrative 8,740,048 17,842,874
Stock based compensation 146,399 146,399
Depreciation and amortization 4,734,369 11,801,951
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15,955,058 34,942,789
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Loss from operations (9,084,545) (19,473,045)

Other items:
Interest expense, net 65,368 16,518
Restructuring charges (note 12) 363,444 363,444
Impairment of investments - 1,955,231
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428,812 2,335,193
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Loss before income taxes (9,513,357) (21,808,238)

Future income tax recovery (1,613,338) (3,982,027)

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Loss for the period $ (7,900,019) $ (17,826,211)
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Loss per common share (note 11):
Basic and diluted $ (0.12) $ (0.28)

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See accompanying notes to unaudited consolidated financial statements.



FUN TECHNOLOGIES INC.
Consolidated Statements of Cash Flows
(Expressed in U.S. dollars)

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---------------------------------------------------------------------------
Three months Nine months
ended September ended September
30, 2006 30, 2006
---------------------------------------------------------------------------
(Unaudited)

Cash flows from (used in)
operating activities:
Loss for the period $ (7,900,019) $ (17,826,211)
Adjustments to reconcile earnings
to cash provided by (used in)
operating activities:
Depreciation and amortization 4,734,369 11,801,951
Stock compensation 146,399 146,399
Impairment of investments - 1,955,231
Future income taxes (1,613,338) (3,982,027)
Other 67,225 394,586
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(4,565,364) (7,510,071)
Change in non-cash operating
working capital:
Restricted cash (379,898) (426,992)
Accounts receivable (324,865) (322,013)
Prepaid expenses and other 41,989 (647,702)
Accounts payable and accrued
liabilities 2,583,020 47,652
Customer Deposits (362,697) (139,871)
Income taxes payable - (4,243,590)
Deferred revenue 1,823,344 1,448,224
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(1,184,471) (11,794,363)

Cash flows from financing activities:
Issuance of capital stock 810,968 200,505,799
Long-term obligations and other 11,429 583,421
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822,397 201,089,220

Cash flows from (used in) investing
activities:
Acquisitions, net of cash acquired (4,744,349) (173,062,181)
Purchase of capital assets (1,323,102) (2,158,724)
Redemption of short-term investments
and other (138,793) 70,220
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(6,206,244) (175,150,685)
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Increase (decrease) in cash and
cash equivalents (6,568,318) 14,144,172

Cash and cash equivalents, beginning
of period 20,712,491 1

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Cash and cash equivalents, end
of period $ 14,144,173 $ 14,144,173
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Supplemental cash flow information (note 9)

See accompanying notes to unaudited consolidated financial statements.


FUN TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars, unless otherwise indicated)

Three and nine months ended September 30, 2006
(Unaudited)


1. Nature of business:

The primary operation of FUN Technologies Inc. and its subsidiaries (the "Company") is the provision of online and interactive casual games. The Company provides the games through its FUN Games and FUN Sports divisions. The Company's FUN Games division operates its skill games business, operating and licensing a skill games offering which includes pay-for-play, person-to-person and tournament-based interactive skill games, free games, downloadable games and subscription games. The Company's FUN Sports division operates its fantasy sports services which include editorial content, sports data, games and leagues to consumers and corporate distributors.

2. Significant accounting policies:

The consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). The Company has considered The Committee of European Securities Regulators' ("CESR") technical advice issued in June 2005 on equivalence of certain third country GAAP, including Canadian GAAP, to International Financial Reporting Standards ("IFRS"), and determined there are no additional disclosures or information in respect of these consolidated financial statements which are required to satisfy the recommendations set out in the CESR advice, if that advice were to be applied.

The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the consolidated financial statements.

(a) Basis of presentation:

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

The Company was incorporated on November 18, 2005 and by virtue of a Scheme of Arrangement (the "Scheme") under Section 425 of the UK Companies Act 1985 sanctioned by the High Court of Justice in England and Wales, it acquired all the issued and outstanding shares of FUN Technologies plc ("Old FUN") on March 10, 2006 whereby Old FUN became a wholly-owned subsidiary of the Company. The acquisition has been accounted for using the purchase method of accounting, effective March 10, 2006. Prior to the acquisition of Old FUN, the Company had no operations.

(b) Use of estimates:

The preparation of financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the periods. The Company's significant management estimates include assessment of useful lives of tangible and intangible assets, determination of triggering events for impairment of goodwill and other indefinite lived intangible assets and realization of deferred tax assets. Actual amounts could differ from those estimates.

(c) Revenue recognition:

Revenue from skill games operations is generally recognized net of prizes and other promotions paid. Revenue from tournaments where the Company guarantees the prize pool is recognized as gross entry fees with the related prize expenses included in cost of sales. In either case, fees are recognized as revenue at the conclusion of the participants' game play. In addition, the Company may periodically host in-person tournaments for promotion purposes and such costs are included in selling, general and administrative expenses in the Consolidated Statement of Operations.

Fees for subscription services are generally received in advance and recognized as revenue rateably over the terms of the subscription. Advertising revenue is recognized over the period in which the ad is displayed. Advance payments for subscriptions and advertising are classified as deferred revenue on the Consolidated Balance Sheets.

The Company also derives revenue by providing customers with games or websites for end users, which are then customized to reflect the look and feel of each third-party customer. Revenue from these items is unbundled and recognized according to the relative fair value as each contractual element is delivered. If the fair value of the contractual elements is not available, revenue is recognized on a straight-line basis over the life of the contract.

(d) Cash and cash equivalents:

Cash and cash equivalents include cash and highly liquid investments with original maturities of less than three months. Included in cash and cash equivalents is $1,247,349 of user funds held on deposit.

(e) Investments:

Investments include long-term investments that are stated at cost less any provision for impairment. During the nine months ended September 30, 2006, the Company recorded an impairment on long-term investments of $1,955,231.

(f) Intangibles:

Intangibles consist of customer relationships, technology, customer agreements and other intangibles and are amortized over their useful lives, ranging from one to seven years.

(g) Goodwill:

Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the assets acquired, less liabilities assumed, based on their fair values.

Goodwill is not amortized and is tested for impairment annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount is compared with its fair value. When the fair value exceeds its carrying amount, goodwill is considered not to be impaired and the second step of the impairment test is unnecessary. The second step is carried out when the carrying amount exceeds its fair value, in which case, the implied fair value of the goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the value of goodwill is determined in a business combination described in the preceding paragraph, using the fair value as if it was the purchase price. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to the excess and is presented as a separate line item in the Consolidated Statements of Operations.

(h) Capital assets:

Capital assets are stated at cost less accumulated depreciation. Depreciation, based on the estimated useful lives of the assets, is provided on a straight-line basis as follows:



---------------------------------------------------------------------------
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Furniture and equipment 5 years
Leasehold improvements shorter of remaining lease term and 5 years
Computer hardware 3 years
Computer software and other 1 year

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Under Canadian GAAP, long-lived assets, including capital assets and intangibles with finite useful lives, are amortized over their useful lives. The Company reviews the useful lives and the carrying values of its long-lived assets for continued appropriateness. The Company performs an impairment assessment of long-lived assets held for use whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows expected to result from the use and eventual disposition of an asset is less than its carrying amount, it is considered to be impaired. An impairment loss is measured at the amount by which the carrying amount of the asset exceeds its fair value, which is estimated as the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset.

(i) Software development expenditures:

Costs related to the development of software, including games, websites and support platforms, are expensed as incurred unless such costs meet the criteria for deferral and amortization under Canadian GAAP. To date, no software development costs have been capitalized.

(j) Income taxes:

The Company uses the asset and liability method of accounting for income taxes. Future income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carryforwards. Future income tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to the taxable income in the periods in which those temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment or substantive enactment date.

In connection with business acquisitions where the Company acquires the shares of the acquired company, the Company is required under Canadian GAAP to recognize future income tax obligations for the excess book basis of identifiable intangibles with limited lives. As a result the Company has recognized $35.9 million of future income tax obligations in 2006 which will be recognized in the Consolidated Statement of Operations in conjunction with the amortization of the related intangibles.

(k) Foreign currencies:

Monetary items denominated in other than U.S. dollars are translated into U.S. dollars at the exchange rates in effect at the consolidated balance sheets dates, and non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligation incurred. Revenue and expenses are translated at rates in effect at the time of the transactions. Foreign exchange gains and losses are included in the Consolidated Statements of Operations.

(l) Loss per share:

The Company uses the treasury stock method in computing diluted loss per common share. The treasury stock method is a method of recognizing the use of proceeds that could be obtained upon the exercise of options and warrants in computing diluted loss per common share. It assumes that any proceeds would be used to purchase its common shares at the average market price during the period being reported on. At September 30, 2006, 5,362,002 potential common shares were outstanding. Potential common shares have been excluded from the calculation of diluted earnings per share because their inclusion would be anti-dilutive.

3. Business combinations:



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Old FUN WorldWinner CDM Other Total
(a) (b) (c) (d)
---------------------------------------------------------------------------

Assets acquired:
Current assets,
net of cash $ 3,586,394 $ 592,976 $ 241,076 $ 311,399 $ 4,731,845
Capital assets 2,724,229 288,422 100,000 3,857 3,116,508
Investments 5,134,219 - - - 5,134,219
Intangibles 78,100,000 14,947,134 2,400,000 4,413,083 99,860,217
Goodwill 246,238,832 16,054,294 2,903,827 2,627,104 267,824,057
Other assets 243,380 - - 682 244,062
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336,027,054 31,882,826 5,644,903 7,356,125 380,910,908

Liabilities
assumed:
Current
liabilities 14,322,736 2,694,733 1,756,928 1,068,205 19,842,602
Other 101,886 - 567,848 - 669,734
Future income
tax liabilities 30,090,000 5,815,564 - - 35,905,564
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44,514,622 8,510,297 2,324,776 1,068,205 56,417,900

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Total
consideration $291,512,432 $23,372,529 $3,320,127 $6,287,920 $324,493,008
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(a) As of November 21, 2005, Old FUN entered into a share purchase
agreement with Liberty Media Corporation ("Liberty") and others
pursuant to which Liberty was to acquire a majority indirect interest
in Old FUN. The transaction was structured as the Scheme and became
effective on March 10, 2006. Liberty subscribed, via its wholly-owned
subsidiary, Liberty Freedom, Inc. ("Liberty Freedom"), for
approximately 33.8 million common shares of the Company for aggregate
consideration of approximately $50 million, less share registration
fees of approximately $1.2 million (Cdn. $58.6 million) plus
approximately $146.8 million, payable in cash. Pursuant to the Scheme,
the Company acquired all of the issued and outstanding ordinary shares
in Old FUN (the "Ordinary Shares") in exchange for aggregate
consideration consisting of approximately $146.8 million in cash and
approximately 27.9 million common shares of the Company. The cash
consideration of approximately $146.8 million paid by the Company under
the Scheme was funded from the proceeds of the Liberty Freedom
subscription for the Company's shares. On February 17, 2006, the Scheme
received approval from shareholders of Old FUN. The Scheme was
sanctioned by the High Court of Justice in England and Wales on March
9, 2006. This transaction has been accounted for as a purchase
transaction, with the Company identified as the acquirer and Old FUN as
the acquiree.

(b) On March 17, 2006, the Company acquired 100% of the shares of
WorldWinner.com, Inc. for cash consideration of $22.5 million plus
transaction costs of approximately $0.9 million. The acquisition has
been accounted for by the purchase method with the results of
operations included in these financial statements from the date of
acquisition.

(c) On August 23, 2006, the Company acquired the nets assets of C.B.C
Distribution and Marketing, Inc. a fantasy sports game provider
operating as CDM Fantasy Sports ("CDM") for cash of $2.5 million
(including deal costs), assumption of approximately $2.1 million of
net obligations and the issuance of 146,279 common shares of the
Company. In addition, the agreement provides for the issuance of up to
approximately an additional 973,899 common shares to the extent the
revenue and EBITDA of the operations of CDM for the 15 months
subsequent to the acquisition exceed certain thresholds. The
acquisition has been accounted for by the purchase method with the
results of operations included in these consolidated financial
statements from the date of acquisition.

(d) On April 7, 2006, the Company acquired the net assets of Fantasy
Sports, Inc. for cash consideration of $3.9 million. The acquisition
has been accounted for by the purchase method with the results of
operations included in these consolidated financial statements from the
date of acquisition.


In addition, on August 9, 2006, the Company acquired 100% of the shares of Teagames Limited for cash consideration of approximately $2.2 million. The acquisition has been accounted for by the purchase method with the results of operations included in these consolidated financial statements from the date of acquisition.

The above purchase price allocations are preliminary and are based on management's best estimates of fair value. The preliminary allocations are subject to adjustments based on the final fair value estimates upon completion of certain third-party valuation reports and final purchase price adjustments.

4. Capital assets:



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September 30, December 31,
2006 2005
---------------------------------------------------------------------------
Accumulated Net book Net book
Cost depreciation value value
---------------------------------------------------------------------------
Furniture and
equipment $ 995,272 $ 98,511 $ 896,761 $ -
Leasehold
improvements 636,634 35,025 601,609 -
Computer hardware 3,365,410 560,244 2,805,166 -
Computer
Software and other 271,645 16,186 255,459 -

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$5,268,961 $ 709,966 $ 4,558,995 $ -
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5. Intangibles:

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September 30, December 31,
2006 2005
---------------------------------------------------------------------------
Accumulated Net book Net book
Cost depreciation value value
---------------------------------------------------------------------------

Customer
relationships $ 17,452,053 $ 2,545,997 $ 14,906,056 $ -
Technology 37,959,046 4,408,232 33,550,814 -
Customer
Agreements and
other intangibles 32,663,907 3,644,784 29,019,123 -

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$ 88,075,006 $ 10,599,013 $ 77,475,993 $ -
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The Company has $11.3 million in costs associated with trade names which are considered intangible assets with indefinite lives and accordingly are not amortized. The trade name assets are disclosed on the Consolidated Balance Sheet in the heading Goodwill and other indefinite lived intangible assets.

6. Share capital:

(a) Authorized:

Unlimited common shares

Unlimited preference shares, issuable in series

(b) Issued and outstanding:



---------------------------------------------------------------------------
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Common shares
----------------------
Number Amount
---------------------------------------------------------------------------

Balance, December 31, 2005 1 $ 1
Shares issued 61,632,270 342,151,649
Exercise of stock options 1,673,762 4,935,952
Shares issued in conjunction with business
combinations 146,279 750,996
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63,452,312 $ 347,838,598
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Nine months ended September 30, 2006 share capital transactions:

(i) During the period, the Company issued 33,764,972 common shares to Liberty Freedom for aggregate proceeds of $198,389,330.

(ii) During the period, the Company issued 27,867,298 common shares in exchange for all the issued and outstanding shares of Old FUN at a value of $5.16 (Pounds Sterling 2.94) per share pursuant to the Scheme for aggregate value of $143,762,319.

(iii) The Company issued 1,673,762 common shares as a result of the exercise of outstanding stock options for proceeds of $4,935,952.

7. Stock-based compensation:

At September 30, 2006, the Company has two stock-based compensation plans, which are described below. The company accounts for its grants under those plans in accordance with the fair value based method of accounting for stock-based compensation.

(a) Old FUN's Employee Share Option Scheme:

Old FUN's Employee Share Option Scheme has been assumed by the Company. Pursuant to that scheme, there are outstanding and fully vested stock options to certain employees, officers and directors of the Company, all of which expire on March 10, 2009. As the stock options were fully vested in conjunction with the Scheme becoming effective, there is no compensation expense recorded.

(b) 2006 Stock Option Plan:

Under the 2006 Stock Option Plan, the Company granted to certain employees, officers and directors 2,526,000 options at a weighted average exercise price of $4 (approximately Cdn. $5.15). The options' vest rateably over a 4 year period, and expire in the third quarter of 2013. The options were granted based on the market value of the shares on the day of the grants.

The Company determined the fair value of the options granted in 2006 using the Black-Scholes method, utilizing assumptions based on management's best estimates. The assumptions utilized in the Black-Scholes model include: an expected life of 4.75 years; no dividend yield; a risk free interest rate of 4.02%; and an estimated share price volatility of 63%. In addition, the Company has estimated a forfeiture rate of 15% for non-executive employees and 10% in respect of options granted to executives.

A summary of the status of the Company's two fixed share option plans as at September 30, 2006, and changes during the periods ending on those dates, is presented below:



---------------------------------------------------------------------------
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Old FUN Share 2006 Stock
Option Scheme Option Plan Total
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Weighted Weighted Weighted
average average average
Number exercise Number exercise Number exercise
of shares price of shares price of shares price
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Balance,
December
31, 2005 - $ - - $ - - $ -
Old FUN
options
assumed 4,573,514 2.00 - - 4,573,514 2.00
Granted - - 2,526,000 4.61 2,526,000 4.61
Exercised (1,673,762) 2.95 - - (1,673,762) 2.95
Forfeited (63,750) 3.61 - - (63,750) 3.61

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Outstanding
September
30, 2006 2,836,002 1.63 2,526,000 4.61 5,362,002 2.82
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The following table summarizes information about stock options outstanding
at September 30, 2006:

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Number Number
outstanding Weighted Weighted exercisable Weighted
Range of at average average at average
exercise September contractual exercise September exercise
price 30, 2006 life price 30, 2006 price
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Under $1.00 1,250,000 2.5 years $ 0.34 1,250,000 $ 0.34
$1.01 - $3.00 404,300 2.5 years 1.27 404,300 1.27
$3.00 to $4.00 1,151,702 2.5 years 3.54 1,151,702 3.54
$4.00 and
above 2,556,000 7.0 years 4.61 30,000 4.64

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5,362,002 2,836,002
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8. Segmented information:

The Company's chief operating decision maker ("CODM") has identified the Company's reportable segments based on: (i) financial information reviewed by the CODM and (ii) those operating segments that represent more than 10% of the Company's consolidated revenue or Adjusted EBITDA.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies and are consistent with GAAP.

The Company evaluates the performance of these operating segments based on the financial measures such as revenue and Adjusted EBITDA. The Company defines Adjusted EBITDA as earnings/loss before interest, taxes, depreciation of capital assets, amortization of intangible assets, stock based compensation, restructuring charges and impairment charges. The Company believes this is an important indicator of the operational strength and performance of the businesses. In addition, the measure allows management to view operating results and perform analytical comparisons and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock based compensation and restructuring charges and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted EBITDA should be considered in addition, and not a substitute for, operating income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP.



The following is a breakdown by reporting segment:

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Three months ended FUN FUN Corporate
September 30, 2006 Games Sports and other Total
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Revenue:
International $ 129,924 $ 31,016 $ - $ 160,940
United States 6,606,401 6,386,820 - 12,993,221

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$ 6,736,325 $6,417,836 $ - $13,154,161
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Adjusted EBITDA:
International $ (769,468) $ (717,150) $(1,092,580) $(2,579,198)
United States (2,797,862) 1,173,283 - (1,624,579)

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$(3,567,330) $ 456,133 $(1,092,580) (4,203,777)
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--------------------------------------------------------------

Interest expense, net (65,368)
Depreciation and
amortization (4,734,369)
Restructuring (363,444)
Stock based compensation (146,399)

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Loss before income taxes $(9,513,357)
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Nine months ended FUN FUN Corporate
September 30, 2006 Games Sports and other Total
---------------------------------------------------------------------------

Revenue:
International $ 311,931 $ 59,167 $ - $ 371,098
United States 13,551,362 11,604,398 - 25,155,760

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$ 13,863,293 $11,663,565 $ - $ 25,526,858
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Adjusted EBITDA:
International $ (1,083,766) $ (976,877) $(3,084,875) $ (5,145,518)
United States (4,616,809) 2,237,632 - (2,379,177)

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$ (5,700,575) $ 1,260,755 $(3,084,875) (7,524,695)
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-------------------------------------------------------------

Interest expense,
net (16,518)
Depreciation and
amortization (11,801,951)
Impairment of
investments (1,955,231)
Restructuring (363,444)
Stock-based
compensation (146,399)

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Loss before income
taxes $(21,808,238)
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FUN FUN
September 30, 2006 Games Sports Corporate Total
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Total assets:
Canada $ - $ - $ 13,559,030 $ 13,559,030
United Kingdom 2,598,287 597,901 1,844,730 5,040,918
United States 171,639,671 193,634,616 - 365,274,287

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$174,237,958 $194,232,517 $ 15,403,760 $383,874,235
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Goodwill:
United States $118,053,943 $149,770,114 $ - $267,824,057

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The allocation of goodwill to the operating segments is based on the preliminary purchase accounting and may change on the finalization of the purchase accounting.



9. Supplemental cash flow information:

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---------------------------------------------------------------------------
Three months Nine months
ended September ended September
30, 2006 30, 2006
---------------------------------------------------------------------------
Supplemental cash flow
information:
Interest received $ 30,000 $ 78,851
Income taxes paid - 3,011,000

Supplemental disclosure of
non-cash financing activities:
Shares issued for the acquisition
of Old FUN - 143,762,319
Shares issued for the acquisition
of CDM - 750,996

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10. Commitments and contingencies:

In conjunction with entering into certain partner agreements, the Company has minimum revenue and marketing commitments totalling $5.4 million, which amounts are primarily due in the next two years.

Pursuant to acquisition transactions structured with contingent earn-out obligations, FUN is contingently obligated to pay up to $12.6 million in additional cash purchase consideration over the next year to the extent the acquired businesses attain certain performance thresholds. Based on the operating performance of the businesses as compared to the performance thresholds, management does not currently anticipate any payments under these contingent obligations.

From time to time the Company may become involved in litigation relating to claims arising out of operations in the normal course of business. In management's opinion, the ultimate resolution of these legal proceedings would not likely have a material adverse effect on the Company business or operations or the accompanying consolidated financial statements.

11. Loss per common share:

Basic and diluted loss per common share were calculated using the weighted average common shares and weighted average potential common shares.



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Three months Nine months
ended September ended September
30, 2006 30, 2006
---------------------------------------------------------------------------

Weighted average number of common
shares outstanding:
Basic 63,264,870 62,562,701

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Loss for the period $ (7,900,019) $ (17,826,211)

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Loss per common share:
Basic $ (0.12) $ (0.28)

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12. Restructuring charges:
During the third quarter of 2006, the Company completed its analysis of the integration of the FUN Games division. Based on this analysis, the Company reduced its workforce by approximately 53 employees and incurred $363,444 of severance associated costs for employees that were terminated prior to September 30, 2006 or had severance obligations that were non-cancellable.

Contact Information

  • FUN Technologies
    Lorne Abony
    CEO
    (416) 840-0806
    or
    FUN Technologies
    Stephen Tucker
    CFO
    (416) 840-0453