**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C.   20549


___________________________________





**FORM
      10-Q**





(Mark
      One)





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





For
      the quarterly period ended September 30, 2008





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





For
      the transition period from _____________ to ___________


Commission
      file number   333-124829


**DRIFTWOOD
      VENTURES, INC.**


(Exact
      name of Registrant as Specified in Its Charter)





**Delaware**
            **71-1033391**(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification No.)





**2121
                Avenue of the Stars, Suite 2550, Los Angeles, CA**
            **90067**(Address
                of Principal Executive Offices)
            (Zip
                Code)**(310)
                601-2500**(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  ̈





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
      definition of  “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
                Accelerated filero
            Accelerated
                fileroNon-accelerated
                filero
              (do
                not check if a smaller reporting company)
            Smaller
                reporting companyx





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





As
      of November 14, 2008, there were 37,892,766 shares of the Registrant’s common
      stock, par value $.001 per share, issued and outstanding.










**DRIFTWOOD
      VENTURES, INC.**





**Table
      of Contents**


**PART
      I - FINANCIAL INFORMATION**





**Page**Item
                1.
            
            Financial
                Statements
            3Condensed
                Consolidated Balance Sheets September 30, 2008 (Unaudited) and December
                31, 2007
            3Condensed
                Consolidated Statements of Operations (Unaudited) For the Three Months
                Ended September 30, 2008 and 2007 and for the Nine Months Ended September
                30, 2008 and for the Period from March 23, 2007 to September 30,
                2007
            4Condensed
                  Consolidated Statements of Cash Flows (Unaudited) For the Nine
                  Months
                  Ended September 30, 2008 and the Period from March 23, 2007 to
                  September
                  30, 2007
            5Condensed
                Consolidated Statements of Stockholders’ Equity and Other Comprehensive
                Loss for the Nine Months Ended September 30, 2008
            6Notes
                  to Condensed Consolidated Financial Statements
            7Item
                2.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            28Item
                4T.
            
            Controls
                and Procedures
            40





**PART
      II - OTHER INFORMATION**





Item
                1.
            
            Legal
                Proceedings
            41Item
                1A.
            
            Risk
                Factors
            41Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            41Item
                3.
            
            Defaults
                Upon Senior Securities
            41Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            41Item
                5.
            
            Other
                Information
            42Item
                6.
            
            Exhibits
            42Signatures
            43





2





**PART
      I - FINANCIAL INFORMATION**


**Item
      1. Financial Information**


**Driftwood
                  Ventures, Inc.****Condensed
                  Consolidated Balance Sheets****As
                  of September 30, 2008 and December 31, 2007****(in
                  $000's except per share
                  amounts)**
  **September
                  30, 2008**
              
              **December
                  31, 2007 ***(unaudited)ASSETSCurrent
                  AssetsCash
              
              $
              1,055
              
              $
              169Accounts
                  receivable, net of allowances for
                returns
                  and discounts of $1,057 and $1,167
              
              
              5,772
              
              
              1,316Inventory
              
              
              2,038
              
              
              1,555Prepaid
                  expenses and other current assets
              
              
              8,728
              
              
              4,098Product
                  development costs - current
              
              
              9,989
              
              
              3,139Deferred
                  Tax Asset
              
              
              567
              
              
              1,438Total
                  Current Assets
              
              
              28,149
              
              
              11,715Fixed
                  assets, net
              
              
              310
              
              
              384Goodwill
              
              
              16,675
              
              
              16,204Intangible
                  Assets, net
              
              
              19,875
              
              
              17,535Long-term
                  product development costs
              
              
              -
              
              
              1,120Total
                  Assets
              
              $
              65,009
              
              $
              46,958LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  LiabilitiesAccounts
                  payable
              
              $
              5,442
              
              $
              3,274Financing
                  arrangements
              
              
              9,448
              
              
              2,893Accrued
                  expenses and other current liabilities
              
              
              4,928
              
              
              5,932Notes
                  payable - current portion
              
              
              2,233
              
              
              2,877Convertible
                  notes payable, netof
                  unamortized discount of $2,716
              
              
              8,434
              
              
              -Total
                  current liabilities
              
              
              30,485
              
              
              14,976Notes
                  payable - non current portion
              
              
              2,521
              
              
              4,032Deferred
                  tax liability
              
              
              2,840
              
              
              6,220Other
                  long-term liabilities
              
              
              620
              
              
              167Total
                  Liabilities
              
              
              36,466
              
              
              25,395Commitments
                  and ContingenciesStockholders'
                  EquityPreferred
                  Stock, par value $0.001, 5,000,000shares
                  authorized, none issued and outstanding
              
              
              -
              
              
              -Common
                  Stock, par value $0.001, 75,000,000shares
                  authorized, 37,425,756 issued and 37,074,585outstanding
                  Sept 30, 2008 and 15,684,845 issued andoutstanding
                  December 31, 2007
              
              
              37
              
              
              16Paid-in-capital
              
              
              52,031
              
              
              31,792Accumulated
                  deficit
              
              
              (22,910
              )
              
              (10,245
              )Treasury
                  Stock, at cost, 351,171 shares in 2008
              
              
              (527
              )
              
              -Other
                  comprehensive loss
              
              
              (88
              )
              
              -Total
                  Stockholders' Equity
              
              
              28,543
              
              
              21,563Total
                  Liabilities and Stockholders' Equity
              
              $
              65,009
              
              $
              46,958




*
      Derived from audited financials





*See
      notes to condensed consolidated financial statements.*




3


**Driftwood
                  Ventures, Inc.****Unaudited
                  Condensed Consolidated Statement of Operations****For
                  the Three Months Ended September 30, 2008 and 2007 and the Periods
                  from
                  January 1, 2008 to September 30, 2008 and****from
                  March 23, 2007 to September 30, 2007****(in
                  $000's)**
  **Three
                  months ended September 30,**
              
              **January
                  1, 2008 - September 30,**
              
              **March
                  23 2007 - September 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**Revenue
              
              $
              8,816
              
              $
              -
              
              $
              24,303
              
              $
              -Cost
                  of goods sold
              
              
              5,968
              
              
              -
              
              
              19,879
              
              
              -Gross
                  profit
              
              
              2,848
              
              
              -
              
              
              4,424
              
              
              -Operating
                  expenses:General
                  and administrative expenses
              
              
              4,232
              
              
              748
              
              
              7,742
              
              
              1,217Selling
                  and marketing expenses
              
              
              1,729
              
              
              -
              
              
              4,198
              
              
              -Research
                  and development expenses
              
              
              -
              
              
              -
              
              
              1,481
              
              
              -Depreciation
                  and amortization
              
              
              632
              
              
              24
              
              
              1,611
              
              
              31Total
                  Operating expenses
              
              
              6,593
              
              
              772
              
              
              15,032
              
              
              1,248Loss
                  from operations
              
              
              (3,745
              )
              
              (772
              )
              
              (10,608
              )
              
              (1,248
              )Interest
                  (expense) income, net
              
              
              (1,581
              )
              
              12
              
              
              (2,581
              )
              
              16Loss
                  from continuing operations beforeincome
                  tax benefit
              
              
              (5,326
              )
              
              (760
              )
              
              (13,189
              )
              
              (1,232
              )Income
                  tax benefit
              
              
              2,542
              
              
              -
              
              
              3,598
              
              
              -Loss
                  from continuing operations
              
              
              (2,784
              )
              
              (760
              )
              
              (9,591
              )
              
              (1,232
              )Loss
                  from discontinued operations, netof
                  tax benefit of $230 and $465 for the three
                and
                  nine months ended September 30, 2008
              
              
              (1,437
              )
              
              (374
              )
              
              (3,074
              )
              
              (482
              )Net
                  loss
              
              $
              (4,221
              )
              $
              (1,134
              )
              $
              (12,665
              )
              $
              (1,714
              )Loss
                  per share – basic and diluted:Continuing
                  operations
              
              $
              (0.10
              )
              $
              (0.09
              )
              $
              (0.46
              )
              $
              (0.23
              )Discontinued
                  operations
              
              
              (0.05
              )
              
              (0.04
              )
              
              (0.15
              )
              
              (0.09
              )Net
                  loss
              
              $
              (0.16
              )
              $
              (0.13
              )
              $
              (0.60
              )
              $
              (0.32
              )Weighted
                  average shares outstanding –basic
                  and diluted
              
              
              27,051,407
              
              
              8,427,935
              
              
              21,058,233
              
              
              5,369,327




*See
      notes to condensed consolidated financial statements.*





4


**Driftwood
                  Ventures, Inc.****Unaudited
                  Condensed Consolidated Statement of Cash Flow****For
                  the Nine Months Ended September 30, 2008 and the Period from March
                  23,
                  2007 to September 30, 2007****(in
                  $000's)**
  **January
                  1, 2008 -**
              
              **March
                  23, 2007 -****September
                  30,**
              
              **September
                  30,****2008**
              
              **2007**Operating
                  Activities:Net
                  loss
              
              $
              (12,665
              )
              $
              (1,714
              )Adjustments
                  to reconcile net loss to net cashused
                  in operating activities:Depreciation
                  & amortization
              
              
              1,611
              
              
              24Interest
                  arising from amortization of debt discount
              
              
              2,126
              
              
              15Deferred
                  income taxes
              
              
              (3,809
              )
              
              -Share
                  based compensation
              
              
              1,908
              
              
              -Loss
                  on disposition of assets from discontinued businesses
              
              
              1,007
              
              
              -Other
                  changes in assets and liabilities, net
              
              
              (10,965
              )
              
              262Net
                  cash used in operating activities
              
              
              (20,787
              )
              
              (1,413
              )Investing
                  activities:Capital
                  expenditures
              
              
              (85
              )
              
              (164
              )Cash
                  received from acquisition of Driftwood
              
              
              1,669Acquisition
                  of assets of Supervillain Studios, Inc., net of cash
                  acquired
              
              
              -
              
              
              (1,377
              )Investment
                  in Cyoob, Inc.
              
              
              -
              
              
              (847
              )Acquisition
                  of stock of Zoo Digital Publishing Ltd., net of cash
                  acquired
              
              
              (430
              )
              
              -Net
                  cash provided by (used in) investing activities
              
              
              1,154
              
              
              (2,388
              )Financing
                  activities:Proceeds
                  from sale of equity securities
              
              
              6,118
              
              
              5,000Proceeds
                  from Driftwood issuance of convertible notes - pre-merger
              
              
              7,823
              
              
              -Proceeds
                  from issuance of convertible notes - post-merger
              
              
              1,000
              
              
              -Net
                  proceeds from accounts payable and receivable financing
                  facilities
              
              
              5,578
              
              
              -Net
                  cash provided by financing activities
              
              
              20,519
              
              
              5,000Increase
                  in cash
              
              
              886
              
              
              1,199Cash
                  at beginning of period
              
              
              169
              
              
              0Cash
                  at end of period
              
              $
              1,055
              
              $
              1,199





*See
      notes to condensed consolidated financial statements.*




5





**Driftwood
                Ventures, Inc.****Unaudited
                Condensed Consolidated Statement of Stockholders' Equity and Other
                Comprehensive Loss****For
                the Nine Months Ended September 30, 2008****(in
                000's)**




AccumulatedPreferred
                Stock
            
            Common
                Stock
            
            Additional
            
            
            
            Treasury
                Stock
            
            Other
            
            
            
            OtherShares
            
            Par
              Value
            
            Shares
            
            Par
                Value
            
            Paid-in-
              Capital
            
            Accumulated
              Deficit
            
            Shares
            
            Par
              Value
            
            Comprehensive
              Loss
            
            Total
            
            Comprehensive
              LossBalance
                December 31, 2007
            
            
            -
            
            $
            -
            
            
            15,685
            
            $
            16
            
            $
            31,792
            
            $
            (10,245
            )
            
            -
            
            $
            -
            
            $
            -
            
            $
            21,563
            
            $
            -Stock
                issued in connection with private placement offering
            
            
            
            
            
            
            
            
            2,143
            
            
            2
            
            
            6,433
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,435Costs
                incurred in connection with private placement offering
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (317
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (317
            )Stock
                issued in connection with the acquisition of Zoo-UK
            
            
            
            
            
            
            
            
            1,581
            
            
            2
            
            
            4,084
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,086Exchange
                of promissory notes for common stock
              at fair value
            
            
            
            
            
            
            
            
            261
            
            
            -
            
            
            550
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            550Stock
                based compensation related to the issuance of profit incentive
                units
            
            
            
            
            
            
            
            
            -
            
            
            -
            
            
            354
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            354Beneficial
                conversion feature of debt issued
            
            
            
            
            
            
            
            
            -
            
            
            -
            
            
            200
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            200Shares
                issued for consulting services
            
            
            
            
            
            
            
            
            700
            
            
            -
            
            
            1,128
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,128Shares
                and options issued to employees
            
            
            
            
            
            
            
            
            16
            
            
            -
            
            
            426
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            426Conversion
                of promissory notes into common stock
              at fair value
            
            
            
            
            
            
            
            
            5,712
            
            
            6
            
            
            5,777
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,783Driftwood
                shares acquired upon the completion of the merger
            
            
            
            
            
            
            
            
            11,327
            
            
            11
            
            
            1,604
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,615Shares
                returned from sale of Supervillain
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            351
            
            
            (527
            )
            
            
            
            
            (527
            )Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (12,665
            )
            
            
            
            
            
            
            
            
            
            
            (12,665
            )
            
            (12,665
            )Adjustment
                for foreign currency translation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (88
            )
            
            (88
            )
            
            (88
            )Balance
                September 30, 2008
            
            
            -
            
            $
            -
            
            
            37,425
            
            $
            37
            
            $
            52,031
            
            $
            (22,910
            )
            
            351
            
            $
            (527
            )
            $
            (88
            )
            $
            28,543
            
            $
            (12,753
            )





*See
      notes to condensed consolidated financial statements.*





6




**DRIFTWOOD
                VENTURES, INC.****NOTES
                TO FINANCIAL STATEMENTS****SEPTEMBER
                30, 2008****(Unaudited)**





**1.
      DESCRIPTION OF ORGANIZATION AND REVERSE MERGER**





Driftwood
      Ventures, Inc., (the “Company”) was incorporated under the laws of the State of
      Nevada on February 13, 2003. On December 20, 2007, the Company reincorporated
      in
      Delaware and increased its authorized capital stock from 75,000,000 shares
      to
      80,000,000 shares, consisting of 75,000,000 shares of common stock, par value
      $0.001, per share, and 5,000,000 shares of preferred stock, par value $0.001,
      per share. No terms have been established for the preferred stock. The Company
      was engaged in acquiring and exploring mineral properties until September 30,
      2007, when this activity was abandoned, and the Company had been inactive until
      July 7, 2008 when Driftwood entered into an Agreement and Plan of Merger (the
      “Original Merger Agreement”) with DFTW Merger Sub, Inc., a Delaware corporation
      and a wholly-owned subsidiary of Driftwood (“Merger Sub”), Zoo Games, Inc. (“Zoo
      Games”) (formerly known as Green Screen Interactive Software, Inc.) and a
      stockholder representative (the “Stockholder Representative”), pursuant to which
      Merger Sub would merge with and into Zoo Games, with Zoo Games as the surviving
      corporation (the “Surviving Corporation”) through an exchange of common stock of
      Zoo Games for common stock of Driftwood (the “Merger”).





On
      September 12, 2008, Driftwood, Merger Sub, Zoo Games and the Stockholder
      Representative entered into an Amendment to the Merger Agreement (the
“Amendment”), which amended certain provisions of the Original Merger Agreement.
      Pursuant to the Amendment, upon the completion of the Merger, each outstanding
      share of Zoo Games common stock, $0.001 par value per share (the “Zoo Games
      Common Stock”) on a fully-converted basis, converted automatically into and
      became exchangeable for shares of Driftwood common stock, $0.001 par value
      per
      share (the “Driftwood Common Stock”) based on an exchange ratio equal to
      7.023274. In addition, as set forth in the Amendment and by virtue of the
      Merger, each of the 334,983 options to purchase shares of Zoo Games Common
      Stock
      (the “Zoo Games Options”) outstanding under Zoo Games’ 2008 Long-Term Incentive
      Plan were assumed by Driftwood, subject to the same terms and conditions as
      were
      applicable under such plan immediately prior to the Merger, and converted into
      243,040 options to purchase shares of Driftwood Common Stock at an exercise
      price of $2.58 per share, 421,396 options to purchase shares of Driftwood Common
      Stock at an exercise price of $2.25 per share and 1,688,240 options to purchase
      shares of Driftwood Common Stock at an exercise price of $1.52 per share. The
      246,243 warrants to purchase shares of Zoo Games Common Stock outstanding at
      the
      time of the Merger (the “Zoo Games Warrants”) were assumed by Driftwood and
      converted into 1,411,186 warrants to acquire shares of Driftwood Common Stock
      at
      an exercise price of $2.84 and 318,246 warrants to acquire shares of Driftwood
      Common Stock at an exercise price of $2.13 per share. The merger consideration
      consisted (i) 26,098,303 shares of Driftwood Common Stock, (ii) the reservation
      of 2,352,677 shares of Driftwood Common Stock that are required for the
      assumption of the Zoo Games Options and (iii) the reservation of 1,729,432
      shares of Driftwood Common Stock that are required for the assumption of the
      Zoo
      Games Warrants.


Zoo
        Games
        is treated as the acquirer for accounting purposes in this reverse merger
        and
        the financial statements of the Company for all periods presented represent
        the
        historical activity of Zoo Games and include the activity of Driftwood beginning
        on September 12, 2008, the date of the reverse merger. As a result of the
        reverse merger, the equity at December 31, 2007 has been adjusted to
        reflect a recapitalization.


Zoo
      Games, Inc. and its subsidiaries, a Delaware corporation, (“Zoo Games”, “we”,
“us” or similar pronouns) is a New York City-based developer, publisher and
      distributor of interactive entertainment software for use on all major platforms
      including Nintendo’s Wii and DS, Sony’s PSP and PlayStation 3, Microsoft’s Xbox
      360, and personal computers (PCs). Zoo Games sells primarily to major retail
      chains and video game distributors. Zoo Games began business in March 2007,
      acquired the assets of Supervillain Studios, Inc. (“SVS”) on June 13, 2007,
      acquired the stock of Destination Software, Inc. (“DSI”) on December 18, 2007
      and acquired the stock of Zoo Digital Publishing Limited (“Zoo-UK”) on April 4,
      2008. The consolidated financial statements include the results of their
      operations from their respective acquisition dates. We also acquired an interest
      in Cyoob, Inc., also known as Repliqa (“Repliqa”), on June 28, 2007. During
      January 2008, Zoo Games’ board of directors made a determination to discontinue
      its involvement with the operations of Repliqa. During September 2008, Zoo
      Games
      sold SVS back to the original sellers of SVS. Both Repliqa and SVS have been
      reflected as discontinued operations for all periods
      presented.





The
      Company has determined that it operates in one business segment, as described
      above.





On
      May
      16, 2008, the Zoo Games converted from a limited liability company to a
      C-corporation and changed its name to Green Screen Interactive Software, Inc.
      from Green Screen Interactive Software, LLC. In August 2008, it changed its
      name
      to Zoo Games, Inc.




7




**2** **.
      GOING CONCERN**


These
        financial statements have been prepared assuming the Company will continue
        as a going concern. The Company has incurred losses since inception, resulting
        in an accumulated deficit of approximately $22.9 million and a working
        capital deficiency of approximately $2.3 million at September 30, 2008. For
        the nine months ended September 30, 2008, the Company generated negative
        cash
        flows from operations of approximately $20.8 million. Further losses are
        anticipated in the development of its business raising substantial doubt
        about
        the Company's ability to continue as a going concern. Its ability to continue as
        a going concern is dependent upon the ability of the Company to generate
        cash
        flow from operations sufficient to maintain its daily business activities
        as
        well as acquiring financing from outside sources through the sale of equity
        or
        debt instruments. While management has plans to seek financing through
        additional sales of such instruments, there is no assurance that such financing
        can be obtained. These financial statements do not include any adjustments
        relating to the recoverability and classification of recorded assets, or
        the
        amounts of and classification of liabilities that might be necessary as a
        result
        of this uncertainty.




**3.
      BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES**




Principles
      of Consolidation and Interim Financial Information




The
        accompanying unaudited interim consolidated financial statements were prepared
        in accordance with accounting principles generally accepted in the United
        States
        and the interim financial statement rules and regulations of the Securities
        and
        Exchange Commission. Accordingly, they do not include all of the information
        and
        footnotes required by generally accepted accounting principles for complete
        financial statements. In the opinion of management, these statements include
        all
        adjustments (consisting only of normal recurring adjustments) necessary for
        a
        fair presentation of the Consolidated Financial Statements. The financial
        statements should be read in conjunction with the financial statements of
        the
        Company together with the Company’s management discussion and analysis in the
        Company’s Form 8-K filing dated September 18, 2008 and the Company’s Form 10KSB
        Annual Report for the period ended December 31, 2007 filed with the Securities
        and Exchange Commission on April 8, 2008. The results for the nine months
        ended
        September 30, 2008 might not be indicative of the results for the full year
        or
        any other future period.
  The
        consolidated financial statements of the Company include the accounts of
        Zoo
        Games and its wholly and majority owned subsidiaries, Supervillain Studios
        LLC,
        DSI, Zoo-UK and Repliqa during the periods that each subsidiary was directly
        or
        indirectly owned by Zoo Games. All intercompany accounts and transactions
        are
        eliminated in consolidation.


Use
      of
      Estimates




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      the disclosure of contingent assets and liabilities at the dates of the
      financial statements and the reported amounts of revenue and expenses during
      the
      reporting periods. The estimates affecting the consolidated financial statements
      that are particularly significant include the recoverability of product
      development costs, lives of intangibles, allocation of purchase price, valuation
      of inventories and the adequacy of allowances for returns, price concessions
      and
      doubtful accounts. Actual amounts could differ from these
      estimates.





Inventory


Inventory ,
        primarily consisting of finished goods, is stated at the lower of actual
        cost or
        market. We periodically evaluate the carrying value of our inventory and
        make
        adjustments as necessary. The estimated product returns, stated at the lower
        of
        cost or market, included in the inventory balance at September 30, 2008 and
        December 31, 2008 are $ 301,000 and $ 542,000, respectively.





8





Product
      Development Costs





We
      utilize both internal development teams and third party product developers
      to
      develop the titles we publish.





We
      capitalize internal product development costs (including stock-based
      compensation, specifically identifiable employee payroll expense and incentive
      compensation costs related to the completion and release of titles), third
      party
      production and other content costs, subsequent to establishing technological
      feasibility of a title. Technological feasibility of a product includes the
      completion of both technical design documentation and game design documentation.
      Amortization of such capitalized costs is recorded on a title-by-title basis
      in
      cost of goods sold using the proportion of current year revenues to the
      total
      revenues expected to be recorded over the life of the title.





We
      frequently enter into agreements with third party developers that require us
      to
      make advance payments for game development and production services. In exchange
      for our advance payments, we receive the exclusive publishing and distribution
      rights to the finished game title as well as, in some cases, the underlying
      intellectual property rights. Such agreements allow us to fully recover the
      advance payments to the developers at an agreed royalty rate earned on the
      subsequent retail sales of such product, net of any agreed costs. We capitalize
      all advance payments to developers as product development costs. On a
      product-by-product basis, we reduce product development costs and record a
      corresponding amount of research and development expense for any costs incurred
      by third party developers prior to establishing technological feasibility of
      a
      product as these advances are expended. We typically enter into agreements
      with
      third party developers after completing the technical design documentation
      for
      our products and therefore record the design costs leading up to a signed
      development contract as research and development expense. We also generally
      contract with third party developers that have proven technology and experience
      in the genre of the video game being developed, which often allows for the
      establishment of technological feasibility early in the development cycle.
      In
      instances where the documentation of the design and technology are not in place
      prior to an executed contract, we monitor the product development process and
      require our third party developers to adhere to the same technological
      feasibility standards that apply to our internally developed products.





We
      also
      capitalize advance payments as product development costs when advances are
      made
      subsequent to establishing technological feasibility of a video game title
      and
      amortize them, on a title-by-title basis, as royalties in cost of goods sold.
      Royalty amortization is recorded using the proportion of current year revenues
      to the total revenues expected to be recorded over the life of the
      title.





At
      each
      balance sheet date, or earlier if an indicator of impairment exists, we evaluate
      the recoverability of capitalized development costs, advance development
      payments and any other unrecognized minimum commitments that have not been
      paid,
      using an undiscounted future cash flow analysis, and charge any amounts that
      are
      deemed unrecoverable to cost of goods sold if the product has already been
      released. If the product is discontinued prior to completion, any prepaid
      unrecoverable advances are charged to research and development expense. We
      use
      various measures to estimate future revenues for our product titles, including
      past performance of similar titles and orders for titles prior to their release.
      For sequels, the performance of predecessor titles is also taken into
      consideration.




Prior
        to
        establishing technological feasibility, we expense research and development
        costs as incurred. During
        the first six months of 2008, we wrote-off approximately $1.3 million of
        expense
        relating to costs incurred for the development of two games that were abandoned
        and we expensed approximately $1.4 million for other costs incurred by our
        internal development studio prior to technological feasibility that could
        not be
        capitalized, all of which are included in the Statement of Operations under
        research and development expenses. None of these costs were incurred during
        the
        three months ended September 30, 2008.




Licenses




Licenses
      consist of payments and guarantees made to holders of intellectual property
      rights for use of their trademarks, copyrights, technology or other intellectual
      property rights in the development of our products. Agreements with rights
      holders generally provide for guaranteed minimum royalty payments for use of
      their intellectual property. Guaranteed minimum payments are initially recorded
      as an asset (licenses) and as a liability (accrued licenses) upon execution
      of a
      licensing agreement, provided that no significant performance remains to be
      completed by the licensor. When significant performance remains to be completed
      by the licensor, we record payments when actually paid.




9




Certain
      licenses extend over multi-year periods and encompass multiple game titles.
      In
      addition to guaranteed minimum payments, these licenses frequently contain
      provisions that could require us to pay royalties to the license holder, based
      on pre-agreed unit sales thresholds.




Capitalized
      licensing fees are amortized as royalties in cost of goods sold on a
      title-by-title basis at a ratio of current period revenues to the total revenues
      expected to be recorded over the remaining life of the title. Similar to product
      development costs, we review our sales projections quarterly to determine the
      likely recoverability of our capitalized licenses as well as any unpaid minimum
      obligations. When management determines that the value of a license is unlikely
      to be recovered by product sales, capitalized licenses are charged to cost
      of
      goods sold, based on current and expected revenues, in the period in which
      such
      determination is made. Criteria used to evaluate expected product performance
      and to estimate future sales for a title include: historical performance of
      comparable titles; orders for titles prior to release; and the estimated
      performance of a sequel title based on the performance of the title on which
      the
      sequel is based .




Impairment
      of Long-Lived Assets





We
      review
      all long-lived assets whenever events or changes in circumstances indicate
      that
      the carrying amount of an asset may not be recoverable, including assets to
      be
      disposed of by sale, whether previously held and used or newly acquired. We
      compare the carrying amount of the asset to the estimated undiscounted future
      cash flows expected to result from the use of the asset. If the carrying amount
      of the asset exceeds estimated expected undiscounted future cash flows, we
      record an impairment charge for the difference between the carrying amount
      of
      the asset and its fair value. The estimated fair value is generally measured
      by
      discounting expected future cash flows at our incremental borrowing rate or
      fair
      value, if available.




Revenue
      Recognition





We
      earn
      our revenue from the sale of internally developed interactive software titles
      and from the sale of titles developed by and/or licensed from third party
      developers ("Publishing revenue").





We
      recognize Publishing revenue upon the transfer of title and risk of loss to
      our
      customers. We apply the provisions of Statement of Position 97-2, "Software
      Revenue Recognition", in conjunction with the applicable provisions of Staff
      Accounting Bulletin No. 104, "Revenue Recognition." Accordingly, we recognize
      revenue for software titles when there is (1) persuasive evidence that an
      arrangement with the customer exists, which is generally a customer purchase
      order, (2) the product is delivered, (3) the selling price is fixed or
      determinable and (4) collection of the customer receivable is deemed
      probable. Our payment arrangements with customers typically provide net 30
      and
      60-day terms. Advances received for licensing and exclusivity arrangements
      are
      reported on the consolidated balance sheet as customer advances until we meet
      our performance obligations, at which point we recognize the
      revenue.





Revenue
      is recognized after deducting estimated reserves for returns, price concessions
      and other allowances. In circumstances when we do not have a reliable basis
      to
      estimate returns and price concessions or are unable to determine that
      collection of a receivable is probable, we defer the revenue until such time
      as
      we can reliably estimate any related returns and allowances and determine that
      collection of the receivable is probable.




Allowances
      for Returns, Price Concessions and Other Allowances





We
      may
      accept returns and grant price concessions in connection with our publishing
      arrangements. Following reductions in the price of our products, we grant price
      concessions that permit customers to take credits for unsold merchandise against
      amounts they owe us. Our customers must satisfy certain conditions to allow
      them
      to return products or receive price concessions, including compliance with
      applicable payment terms and confirmation of field inventory levels.




10




Although
      our distribution arrangements with customers do not give them the right to
      return titles or to cancel firm orders, we sometimes accept returns from our
      distribution customers for stock balancing and make accommodations to customers,
      which include credits and returns, when demand for specific titles fall below
      expectations.





We
      make
      estimates of future product returns and price concessions related to current
      period product revenue based upon, among other factors, historical experience
      and performance of the titles in similar genres, historical performance of
      a
      hardware platform, customer inventory levels, analysis of sell-through rates,
      sales force and retail customer feedback, industry pricing, market conditions
      and changes in demand and acceptance of our products by consumers.





Significant
      management judgments and estimates must be made and used in connection with
      establishing the allowance for returns and price concessions in any accounting
      period. We believe we can make reliable estimates of returns and price
      concessions. However, actual results may differ from initial estimates as a
      result of changes in circumstances, market conditions and assumptions.
      Adjustments to estimates are recorded in the period in which they become
      known.




Earnings
      (Loss) per Share




Basic
      earnings (loss) per share ("EPS") is computed by dividing the net income
      applicable to common stockholders for the period by the weighted average number
      of shares of common stock outstanding during the same period. Diluted EPS is
      computed by dividing the net income applicable to common stockholders for the
      period by the weighted average number of shares of common stock outstanding
      and
      common stock equivalents, which includes warrants and options outstanding during
      the same period. Since the inclusion of the warrants and options outstanding
      is
      anti-dilutive because of losses, the dilutive loss per share is the same as
      the
      basic loss per share. As a result, warrants and options to acquire shares of
      common stock were excluded from the EPS calculations for all periods
      presented.





Foreign
      Currency Translation




The
      functional currency for our foreign operations is primarily the applicable
      local
      currency, British pounds sterling and Euro. Accounts of foreign operations
      are
      translated into U.S. dollars using exchange rates for assets and liabilities
      at
      the balance sheet date and average prevailing exchange rates for the period
      for
      revenue and expense accounts. Adjustments resulting from translation are
      included in other comprehensive income (loss). Realized and unrealized
      transaction gains and losses are included in income in the period in which
      they
      occur, except on inter-company balances considered to be long term. Transaction
      gains and losses on inter-company balances considered to be long term are
      recorded in other comprehensive income (loss).




Comprehensive
      Income (Loss)




Comprehensive
      income (loss) is defined to include all changes in equity except those resulting
      from investments by owners and distributions to owners. The Company's items
      of
      other comprehensive income  (loss)
      are foreign currency translation adjustments, which relate to investments that
      are permanent in nature and therefore do not require tax adjustments.
      Comprehensive loss for the nine months ended September 30, 2008 was $88,000.





Tax
      Policy




The
      Company was a limited liability company from inception until May 16, 2008,
      when
      we converted to a corporation. As a limited liability company, we were not
      required to provide for any corporate tax. The loss from the Company’s
      operations was passed to the unit holders via Form K-1’s and the unit holders
      are responsible for any resulting taxes. One of our subsidiaries, DSI was not
      a
      limited liability company and we therefore were required to record a corporate
      tax provision upon the acquisition of DSI.





As
      a
      corporation, we recognize deferred taxes under the asset and liability method
      of
      accounting for income taxes. Under the asset and liability method, deferred
      income taxes are recognized for differences between the financial statement
      and
      tax bases of assets and liabilities at currently enacted statutory tax rates
      for
      the years in which the differences are expected to reverse. The effect on
      deferred taxes of a change in tax rates is recognized in income in the period
      that includes the enactment date. Valuation allowances are established when
      we
      determine that it is more likely than not that such deferred tax assets will
      not
      be realized.





With
      the
      acquisition of Zoo-UK in April 2008, we are now subject to the taxing authority
      of the United Kingdom and we will be filing corporate and all applicable taxes
      in that jurisdiction.




11


Recently
        Issued Accounting Pronouncements
 
 In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements” (SFAS No. 160), which is an amendment of
        Accounting Research Bulletin (“ARB”) No. 51. This statement clarifies that a
        noncontrolling interest in a subsidiary is an ownership interest in the
        consolidated entity that should be reported as equity in the consolidated
        financial statements. This statement changes the way the consolidated income
        statement is presented, thus requiring consolidated net income to be reported
        at
        amounts that include the amounts attributable to both parent and the
        noncontrolling interest. This statement is effective for the fiscal years,
        and
        interim periods within those fiscal years, beginning on or after December
        15,
        2008. Based on current conditions, we do not expect the adoption of SFAS
        No. 160
        to have a significant impact on our results of operations or financial
        position.


In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations” (SFAS No. 141R). This statement replaces FASB Statement No. 141,
“Business Combinations.” This statement retains the fundamental requirements in
      SFAS 141 that the acquisition method of accounting (which SFAS No. 141 called
      the purchase method) be used for all business combinations and for an acquirer
      to be identified for each business combination. This statement defines the
      acquirer as the entity that obtains control of one or more businesses in the
      business combination and establishes the acquisition date as the date that
      the
      acquirer achieves control. This statement requires an acquirer to recognize
      the
      assets acquired, the liabilities assumed, and any noncontrolling interest in
      the
      acquiree at the acquisition date, measured at their fair values as of that
      date,
      with limited exceptions specified in the statement. This statement applies
      prospectively to business combinations for which the acquisition date is on
      or
      after the beginning of the first annual reporting period beginning on or after
      December 15, 2008.





In
      February 2008, the FASB issued FSP FAS 157-2, “ *Effective
      Date of FASB Statement No. 157* ”.
      FSP FAS 157-2 delays the effective date of SFAS No. 157, “ *Fair
      Value Measurements* ”,
      for certain nonfinancial assets and nonfinancial liabilities, except those
      that
      are recognized or disclosed at fair value in the financial statements on a
      recurring basis (at least annually). SFAS No. 157 establishes a framework
      for measuring fair value and expands disclosures about fair value measurements.
      FSP FAS 157-2 defers the effective date of certain provisions of SFAS
      No. 157 to fiscal years beginning after November 15, 2008, and interim
      periods within those fiscal years, for items within the scope of this FSP.
      We do
      not expect the adoption of FSP FAS 157-2 to have a significant impact on our
      results of operations or financial position.




In
      March 2008, the FASB issued SFAS No. 161 *,* “ *Disclosures
      about Derivative Instruments and Hedging Activities - an amendment of SFAS
      No. 133* ”.
      SFAS No. 161 requires enhanced disclosures about an entity’s derivative and
      hedging activities, including how an entity uses derivative instruments, how
      derivative instruments and related hedged items are accounted for under SFAS
      No. 133, “ *Accounting
      for Derivative Instruments and Hedging Activities* ”,
      and how derivative instruments and related hedged items affect an entity’s
      financial position, financial performance, and cash flows. The provisions of
      SFAS No. 161 are effective for financial statements issued for fiscal years
      and interim periods beginning after November 15, 2008. We do not expect the
      adoption of SFAS No. 161 to have a significant impact on our results of
      operations or financial position.




In
      April 2008, the FASB issued FSP FAS 142-3, “ *Determination
      of the Useful Life of Intangible Assets* ”.
      FSP FAS 142-3 amends the factors an entity should consider in developing renewal
      or extension assumptions used in determining the useful life of recognized
      intangible assets under SFAS No. 142, “ *Goodwill
      and Other Intangible Assets* ”.
      This guidance for determining the useful life of a recognized intangible asset
      applies prospectively to intangible assets acquired individually or with a
      group
      of other assets in either an asset acquisition or business combination. FSP
      FAS
      142-3 is effective for fiscal years, and interim periods within those fiscal
      years, beginning after December 15, 2008, and early adoption is prohibited.
      We are currently evaluating the impact FSP FAS 142-3 will have on our results
      of
      operations and financial position.





In
      May 2008, the FASB issued SFAS No. 162, “ *The
      Hierarchy of Generally Accepted Accounting Principles* ”
      (“FAS 162”). FAS 162 is intended to improve financial reporting by identifying a
      consistent framework, or hierarchy, for selecting accounting principles to
      be
      used in preparing financial statements that are presented in conformity with
      GAAP for nongovernmental entities. FAS 162 is effective 60 days following
      the SEC’s approval of the Public Company Accounting Oversight Board amendments
      to AU Section 411, “The Meaning of Present Fairly in Conformity with
      Generally Accepted Accounting Principles.” We do not expect the adoption of this
      statement to have a significant impact on our results of operations or financial
      position.




12




On
      May 9,
      2008, the FASB issued Staff Position ("FSP") APB 14-1, Accounting for
      Convertible Debt Instruments That May Be Settled in Cash upon Conversion
      (Including Partial Cash Settlements), which clarifies that convertible debt
      instruments that may be settled in cash upon conversion (including partial
      cash
      settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting
      for Convertible Debt and Debt Issued with Stock Purchase Warrants. The FSP
      specifies that issuers of such instruments should separately account for the
      liability and equity components in a manner that will reflect the entity's
      nonconvertible debt borrowing rate when interest cost is recognized in
      subsequent periods. FSP APB 14-1 is effective for financial statements issued
      for fiscal years beginning after December 15, 2008 and interim periods within
      those fiscal years. The Company has not completed its evaluation of the impact
      of the effect, if any, the adoption of FSP APB 14-1would have on our results
      of
      operations or financial position.




In
      September 2008, the FASB issued FSP FAS 133-1 and FASB Interpretation
      (“FIN”) 45-4, “ *Disclosures
      about Credit Derivatives and Certain Guarantees — An Amendment of FASB Statement
      No. 133 and FASB Interpretation No.45; and Clarification of the Effective
      Date of FASB Statement No.161* ”. FSP
      FAS 133-1 and FIN 45-4 amends SFAS No. 133, “ *Accounting
      for Derivative Instruments and Hedging Activities* ”,
      to require disclosures by sellers of credit derivatives, including credit
      derivatives embedded in hybrid instruments. FSP FAS 133-1 and FIN 45-4 also
      amend FIN No. 45, “ *Guarantor’s
      Accounting and Disclosure Requirements for Guarantees, Including Indirect
      Guarantees of Indebtedness to Others* ”,
      to require additional disclosure about the current status of the
      payment/performance risk of a guarantee. The provisions of the FSP, which
      amend SFAS No. 133 and FIN No. 45, are effective for reporting periods
      (annual or interim) ending after November 15, 2008. FSP FAS 133-1 and FIN
      45-4 also clarifies the effective date in SFAS No. 161. Disclosures
      required by SFAS No. 161 are effective for any reporting period (annual or
      interim) beginning after November 15, 2008. We do not expect the adoption
      of FSP FAS 133-1 and FIN 45-4 to have a material impact on our results of
      operations or financial position.




**4.
      BUSINESS ACQUISITIONS AND DISPOSITIONS**








During
      the year ended December 31, 2007 and the nine months ended September 30, 2008,
      we consummated the acquisitions described below, which largely reflect our
      efforts to expand our business by adding development studios, established
      distribution systems, a seasoned sales team and talented personnel resources
      to
      our existing infrastructure. The acquisitions were accounted for under the
      purchase method of accounting in accordance with FASB 141 and the results of
      operations and financial position of these acquisitions are included in our
      consolidated financial statements from their respective acquisition dates.




Supervillain
      Studios (Discontinued Operation)





In
      June
      2007, the Company acquired the assets of Supervillain Studios, Inc.
      (“Supervillain” or “SVS”), a video game developer based in Santa Ana,
      California. The total purchase price consisted of the following:





(amounts
      in $000’s)


Cash
                at closing
            
            $
            1,400Promissory
                Notes, net of $989 debt discount
            
            
            1,111Fair
                value of 351,171 shares issued
            
            
            490Acquisition-related
                costs
            
            
            53Total
                purchase price
            
            $
            3,054







In
      addition, there was $333,000 to be paid to each of Supervillain’s three
      shareholders (an aggregate of up to $1.0 million) that remain employed by the
      Company or its affiliates on the third anniversary of the Supervillain closing.
      The $333,000 was accrued for as compensation on a straight-line basis over
      a
      three-year period. The Supervillain Promissory Note was payable in three
      installments; $500,000 of principal together with accrued interest at the rate
      of 5% per annum is payable on each of (A) the earlier of December 14, 2008
      or
      the date that the Company consummates a round of equity financing of $20.0
      million or more and (B) the earlier of December 14, 2008 or the date that the
      Company consummates a round of equity financing of $31.0 million or more. The
      balance of the Supervillain Promissory Note, together with any accrued interest,
      was due on June 14, 2010.




13


Effective
        September 16, 2008, the Company resold SVS back to its original owners. In
        connection with the sale, certain assets that were developed by SVS after
        its
        original acquisition remain with the Company. All unpaid obligations related
        to
        the acquisition were relieved and the SVS owners returned 351,171 shares
        of
        common stock of the Company. The Company reported a loss of approximately
        $ 528,000
        relating to the disposition of SVS and a loss of approximately $2.6 million
        for
        its discontinued operations for the nine months ended September 30, 2008.
        The
        assets disposed and liabilities relieved are (in $’000’s):
  Fixed
                  assets
              
              $
              112Goodwill
              
              
              1,500Intangibles
              
              
              1,057Accrued
                  expenses relieved
              
              
              (558
              )Notes
                  payable relieved ($2,100, net of $544 discount)
              
              
              (1,556
              )Shares
                  returned to Treasury at fair value
              
              
              (527
              )Additional liability
              
              
              500Net
                  assets disposed
              
              $
              528




Destination
      Software, Inc.





In
      December 2007, the Company acquired the shares of Destination Software, Inc.
      (“DSI”). The purchase price was paid as follows:




(amounts
      in $000’s)


Cash
                at closing
            
            $
            7,040Promissory
                Notes, net of $2,346 debt discount
            
            
            4,414Fair
                value of 3,160,874 shares issued
            
            
            8,173Fair
                value of 2,106,582 shares to be issued (issued July
                2008)
            
            
            5,447Acquisition-related
                costs
            
            
            69Total
                purchase price
            
            $
            25,143








The
      cash
      purchase price was approximately $7.0 million at closing, with approximately
      $1.8 million to be paid at the earlier of the Company’s completion of another
      round of financing or by December 2008 with the $5.0 million balance to be
      paid
      in two installments pursuant to a promissory note (the “DSI Note”). The first
      installment of $2.5 million of principal together with accrued interest at
      the
      rate of 3.9% per annum was due on the earlier of June 18, 2009 and the date
      on
      which the Company consummates a round of equity financing of $40.0 million
      or
      more. The balance of the DSI Note (including accrued interest) was payable
      December 18, 2010.





In
      July
      2008, the Company restructured the DSI Note and certain other amounts due so
      that approximately $3.5 million of debt due was converted to equity of the
      Company at the current market price of $10.65 per share (equivalent to $1.52
      per
      share after the reverse merger) and the remaining debt was restructured so
      that
      approximately $1.1 million is due on September 18, 2009 and approximately $2.1
      million is due December 18, 2010.




Cyoob,
      Inc. and Repliqa, LLC (Discontinued Operation)





In
      June
      2007, we acquired a 24.75% interest in the outstanding stock of Cyoob, Inc.
      (“Cyoob”). Cyoob’s assets were transferred to Repliqa, LLC (“Repliqa”) and the
      Company acquired a 35% membership interest in Repliqa, ultimately allowing
      the
      Company to own 51.09% of the operating business of Repliqa. Repliqa was
      developing a recommendation engine to be used on the internet. We paid
      approximately $1.2 million for the interest in Cyoob and we committed to pay
      approximately $1.2 million for the membership interest in Repliqa. Prior to
      December 31, 2007, the assets of Repliqa were impaired and we recorded $2.0
      million as a loss on impairment on this investment in the 2007 financial
      statements. This operation had no revenue. In January 2008, the Board and
      management decided to discontinue its involvement with the operations and this
      was recorded as a discontinued operation on the 2008 financial statements.
      During the nine months ended September 30, 2008, the Company sustained an
      additional $219,000 in losses that are included in the loss from discontinued
      operations.




14




Zoo
      Digital Publishing Limited





In
      April
      2008, the Company acquired the shares of Zoo Digital Publishing Limited
      (“Zoo-UK”). The purchase price was paid as follows:




(amounts
      in $000’s)


Cash
                due at closing
            
            $
            630Cash
                due by December 31, 2008
            
            
            370Promissory
                Notes, net of $547 debt discount
            
            
            1,953Fair
                value of 1,580,237 shares issued
            
            
            4,086Acquisition-related
                costs
            
            
            188Total
                purchase price
            
            $
            7,227








In
      addition, there is $500,000 to be paid to each of Zoo-UK’s two shareholders (an
      aggregate of up to $1.0 million) that remain employed by the Company or its
      affiliates on the third anniversary of the Zoo-UK closing. The full amount
      is
      being accrued for as compensation on a straight-line basis over a three-year
      period. The cash purchase price was $630,000 paid at closing, with $370,000
      to
      be paid within the next nine months. The $2.5 million promissory note is payable
      $1.5 million with the Company’s next round of financing and $1.0 million is due
      April 2009. In addition, the Company is obligated under the Purchase Agreement
      to remit to the sellers an amount equal to 80% of any resultant tax savings
      from
      the utilization of the UK loss carryforward existing at the time of the
      acquisition. The Company is in the process of obtaining a detailed valuation
      of
      the assets acquired and liabilities assumed from Zoo-UK; therefore, the
      allocation of the purchase price and the valuation of the assets and
      liabilities, including goodwill, are subject to refinement.




In
      July
      2008, the Company restructured the promissory note so that $2.0 million of
      debt
      due was converted to equity of the Company at the price of $10.65 per share
      (equivalent to $1.52 per share after the reverse merger) and the remaining
      $500,000 is due on December 31, 2008.




The
      following table summarizes the allocation of the purchase price based on the
      estimated value of the assets acquired and liabilities assumed as of the
      acquisition date:





(amounts
      in $000’s)


Cash
            
            $
            342Other
                current assets
            
            
            3,989Fixed
                Assets
            
            
            82Other
                assets
            
            
            78Goodwill
            
            
            1,971Content
            
            
            1,789Trademarks
            
            
            840Customer
                Relationships
            
            
            2,337Current
                liabilities assumed
            
            
            (2,811
            )Deferred
                tax liability
            
            
            (1,390
            )Net
                assets acquired
            
            $
            7,227


During
        November 2008, the Company agreed to sell Zoo-UK back to the original owners
        for
        terms still being negotiated. This sale is expected to close before the end
        of
        2008.




15




Pro
      forma results





The
      following unaudited summary pro forma information assumes the Zoo-UK acquisition
      had occurred on January 1, 2008. The pro forma information, as presented below,
      is not necessarily indicative of the results that would have been obtained
      had
      the Zoo-UK acquisition occurred on that date, nor is it necessarily indicative
      of the Company’s future results (in $000’s except per share and share
      data):




Nine
                Months Ended September 30,
                2008Revenue
            
            $
            26,593Loss
              from continuing operations
            
            
            (8,750
            )Basic
              and diluted loss per share from continuing
              operations
            
            
            ($0.41
            )Weighted
              average shares outstanding
            
            
            21,598,534




The
      pro forma net income reflects adjustments for amortization of intangibles,
      interest charges, accruals for additional compensation arising out of the
      acquisitions and income taxes




Loss
      From Discontinued Operations




The
      loss
      from discontinued operations is summarized as follows for the periods ended
      September 30, 2008 (in $000’s):





Three
                months
            
            Nine
                monthsEnded
                September 30, 2008Repliqa
            
            $
            -
            
            $
            (219
            )On-line
                concept
            
            
            -
            
            
            (146
            )Supervillain
                - operations
            
            
            (1,139
            )
            
            (2,646
            )Supervillain
                - loss on disposition of assets
            
            
            (528
            )
            
            (
                528
            )Total
                pretax loss from discontinued operations
            
            
            (1,667
            )
            
            (3,539
            )Credit
                for income taxes
            
            
            230
            
            
            465Loss
                from discontinued operations, net of tax benefit
            
            $
            (1,437
            )
            $
            (3,074
            )


The
        loss
        from discontinued operations for the three months ended September 30, 2007
        consists of $329,000 from Repliqa and the on-line concept and $45,000 from
        Supervillain operations. The loss from discontinued operations for the period
        from March 23, 2007 to September 30, 2007 consists of $329,000 from Repliqa
        and
        the on-line concept and $153,000 from Supervillain operations.




**5.
      PREPAID EXPENSES AND OTHER CURRENT ASSETS**




Prepaid
      expense and other current assets consisted of:







(amounts
                in $000’s)
            
            September
                30, 2008
            
            December
                31, 2007Vendor
                advances for inventory
            
            $
            5,842
            
            $
            2,424Prepaid
                royalties
            
            
            2,504
            
            
            1,321Income
                taxes receivable
            
            
            188
            
            
            188Other
                prepaid expenses
            
            
            194
            
            
            165Prepaid
                expenses and other current assets
            
            $
            8,728
            
            $
            4,098




**6.
      PRODUCT DEVELOPMENT COSTS**




Details
      of our capitalized product development costs were as follows:





(amounts
                in $000’s)September
                30, 2008
            
            December
                31, 2007Current
            
            Non-Current
            
            Current
            
            Non-CurrentProduct
                development costs, internallydeveloped,
                net of amortization
            
            $
            499
            
            $
            -
            
            $
            88
            
            $
            -Product
                development costs, externallydeveloped,
                net of amotrization
            
            
            9,490
            
            
            -
            
            
            3,051
            
            
            1,120Product
                development costs
            
            $
            9,989
            
            $
            -
            
            $
            3,139
            
            $
            1,120




Product
          development costs written off during the nine months ended September 30,
          2008
          was approximately $1.3 million.
  Amortization
            of product development costs expensed in the three and nine months ended
            September 30, 2008 were $407,000 and $1.6 million, respectively




16




**7.
      GOODWILL**





Goodwill
      was generated from the acquisitions of the assets of Supervillain and the stock
      of DSI during 2007, and the acquisition of the stock of Zoo-UK in 2008 as
      described in Note 4 as follows (in $000’s):




Supervillain
            
            $
            1,500DSI
            
            
            14,704Total
                Goodwill Dec. 31. 2007
            
            
            16,204Zoo-UK
            
            
            1,971Less
              Supervillain disposition
            
            
            (1,500
            )Total
                Goodwill September 30, 2008
            
            $
            16,675




**8.
      INTANGIBLE ASSETS, NET**




The
      following table sets forth the components of the intangible assets subject
      to
      amortization.




(amounts
                in $000’s)September
                30, 2008
            
            Dec.
                31, 2007EstimatedUseful
            
            GrossLives
            
            Carrying
            
            Accumulated
            
            Net
                Book
            
            Net
                Book(Years
            
            Amount
            
            Amortization
            
            Value
            
            ValueContent
            
            
            10
            
            $
            13,991
            
            $
            1,055
            
            $
            12,936
            
            $
            12,151Trademarks
            
            
            10
            
            
            2,350
            
            
            162
            
            
            2,188
            
            
            2,171Customer
                relationships
            
            
            10
            
            
            5,086
            
            
            335
            
            
            4,751
            
            
            3,213Total
                Intangible Assets
            
            
            
            
            $
            21,427
            
            $
            1,552
            
            $
            19,875
            
            $
            17,535




Amortization
        expense related to intangible assets for the three and nine months ended
        September 30, 2008 and the three months ended September 30, 2007 and for
        the
        period from March 23, 2007 to September 30, 2007 was $351,000, $1.5 million,
        $83,000 and $83,000, respectively.
  In
        connection with the disposition of Supervillain in September 2008, approximately
        $1.1 million of net intangibles were eliminated.


The
      following table presents the estimated amortization of intangible assets, based on our present intangible
      assets, for the next five years ending December 31 as follows:






(amounts
                in $000’s)
              Year
                ended Dec. 31,Balance
                of 2008
            
            $
            5362009
            
            
            2,1442010
            
            
            2,1442011
            
            
            2,1442012
            
            
            2,144Thereafter
            
            
            10,763Total
            
            $
            19,875




17




**9.
      CREDIT AND FINANCING ARRANGEMENTS**




In
      connection with the DSI acquisition, the Company entered into the following
      credit and finance arrangements:




The
      Company and DSI entered into a purchase order financing agreement with Transcap
      Trade Finance, LLC (“Transcap”) on December 19, 2007. This agreement made the
      Company a party to a Master Purchase Order Assignment Agreement dated August
      20,
      2001 pursuant to which Transcap agreed to provide purchase order financing
      to or
      for the benefit of DSI. Total advances under the factoring arrangement include
      letters of credit for purchase order financing and is limited to
      $10.0 million. The amounts outstanding as of September 30, 2008 and
      December 31, 2007 were approximately $6.5 million and $2.9 million,
      respectively. The interest rate is prime plus 1.5% on outstanding advances.
      As
      of September 30, 2008 and December 31, 2007, the effective interest rates were
      6.5% and 8.75%, respectively. The charges and interest expense on the advances
      are included in interest in the accompanying consolidated statement of
      operations. The Company’s obligations under such agreement have been personally
      guaranteed by the Zoo Games and DSI Presidents.





DSI
      uses
      a factor to approve credit and to collect the proceeds from a substantial
      portion of its sales. During 2008, the Company used two different factoring
      facilities:





·
            Under
                the terms of the first agreement, DSI assigns to the factor and the
                factor
                purchases from DSI eligible accounts receivable. In connection with
                these
                arrangements, the factor has a security interest in substantially
                all of
                the DSI assets. The factor, in its sole discretion, determines whether
                or
                not it will accept a receivable based on its assessment of credit
                risk.
                Once a receivable is accepted by the factor, the factor assumes
                substantially all of the credit risk associated with the receivable.
                The
                factor is required to remit payments to DSI for the assigned accounts
                receivable in accordance with the terms of the assigned invoice,
                regardless of whether the factor receives payment on the receivable,
                so
                long as the customer does not have a valid dispute related to the
                invoice.
                The amount remitted to DSI by the factor equals the invoiced amount
                adjusted for allowances and discounts DSI has provided to the customer.
                The factor charges 0.25% of invoiced amounts plus a fee for every
                10 days
                the amount is uncollected from the customer, subject to certain minimum
                charges per invoice and a monthly maintenance charge, for these credit
                and
                collection services. During 2008, the factor purchased $918,000 of
                eligible gross receivables. The factor’s charges and interest expense on
                the advances are included in interest in the accompanying consolidated
                statement of operations and amounted to approximately $44,000 for
                the
                period. This agreement was terminated in March 2008. At December
                31, 2007,
                accounts receivable included $175,000 due from the factor.




·
            In
                  August 2008, Zoo Publishing entered into a new factoring agreement
                  with
                  Working Capital Solutions, Inc., which utilizes existing accounts
                  receivable in order to provide working capital to fund all aspects
                  of our
                  continuing business operations. Under the terms of our factoring
                  and
                  security agreement, we sell our receivables to the factor, with
                  recourse.
                  The factor, in its sole discretion, determines whether or not it
                  will
                  accept each receivable based upon the credit risk factor of each
                  individual receivable or account. Once a receivable is accepted
                  by the
                  factor, the factor provides funding subject to the terms and conditions
                  of
                  the factoring and security agreement. The amount remitted to us
                  by the
                  factor equals the invoice amount of the receivable adjusted for
                  any
                  discounts or allowances provided to the account, less 20% which
                  is
                  deposited into a reserve account established pursuant to the agreement,
                  less allowances and fees. In the event of default, valid payment
                  dispute,
                  breach of warranty, insolvency or bankruptcy on the part of the
                  receivable
                  account, the factor can require the receivable to be repurchased
                  by us in
                  accordance with the agreement. The amounts to be paid by us to
                  the factor
                  for any accepted receivable include a factoring fee of 0.6% for
                  each ten
                  (10) day period the account is open. From August to September2008, the factor purchased approximately $3.4 million of eligible
                  gross
                  receivables.Since
                  the factor acquires the receivables with recourse, we record the
                  gross
                  receivables including amounts due from our customers to the factor
                  and we
                  record a liability to the factor for funds advanced to us from
                  the factor.At
                  September 30, 2008, accounts receivable included approximately
                  $2.0
                  million due from our customers to the factor and the factor advanced
                  approximately $1.8 million to the Company.This
                  facility is guaranteed by the Company’s
                  President.




18




In
      connection with the Zoo-UK acquisition, the Company entered into the following
      credit and finance arrangements:





·
            Zoo-UK
                maintains a committed overdraft financing facility through the Bank
                of
                Scotland in the amount of £700,000 (approximately U.S. $1.4 million).
                Interest on the overdraft facility is 3% over the Bank of Scotland
                base
                rate, from time to time. As of September 30, 2008, the Bank of Scotland
                base rate was 5% per annum. The facility will terminate on June 17,
                2009
                at which time all amounts will be due and payable, unless the facility
                is
                otherwise renewed.





·
            Zoo-UK
                is required to meet certain financial covenants in order to continue
                using
                the overdraft facility, of which the Company was in compliance. The
                bank
                requires that one of the principals of Zoo-UK provide a guarantee
                for
                £250,000 (approximately US $500,000) to secure this facility. As of
                September 30, 2008, Zoo-UK used £518,000 (approximately US$941,000) of the
                overdraft facility and had £182,000 (approximately US $331,000) available.
                The facility is used for general working capital of
                Zoo-UK.





·
            Zoo-UK
                also utilizes invoice financing through the Bank of Scotland.****The
                invoice financing allows Zoo-UK to finance 65% of the gross value
                of
                acceptable invoices up to a limit of £800,000 (approximately US$1.6
                million). The discount fee is 1.75% per annum above the Bank of Scotland’s
                base rate and there are minimal arrangement fees to set up the facility.
                Zoo-UK is required to meet certain financial covenants and provide
                certain
                documentation in order to continue using the invoice facility. The
                Company
                was in compliance with these covenants as of September 30, 2008.
                There are
                specific funding limits and requirements for financing debts from
                certain
                customers of Zoo-UK. As of September 30, 2008, Zoo-UK used £105,000
                (approximately US$191,000) and had available drawdown of £82,000
                (approximately US$149,000). This facility is reviewed annually by
                the Bank
                of Scotland for renewal.****


As
        of
        September 30, 2008, the total financing arrangements outstanding were (in
        $000’s):
 
 September
                  30, 2008
              
              December
                  31, 2007Purchase
                  order financing
              
              $
              6,482
              
              $
              2,893Receivable
                  factoring financing
              
              
              1,834
              
              
              -UK
                  overdraft facility
              
              
              941
              
              
              -UK
                  invoice financing
              
              
              191
              
              
              -Total
                  financing arrangements
              
              $
              9,448
              
              $
              2,893
 
 **10. ACCRUED EXPENSES AND OTHER CURRENT
      LIABILITIES**




Accrued
      expenses and other current liabilities
      consisted of:


(amounts
                    in $000’s)
                
                September
                    30, 2008
                
                December
                    31, 2007Customer
                    advances
                
                $
                571
                
                $
                1,671Obligation
                    arising from DSI acquisition
                
                
                254
                
                
                1,200Obligations
                    relating to Cyoob acquisition
                
                
                -
                
                
                977Obligations
                    arising from Supervillain sale
                
                
                335
                
                
                -DSI
                    pension plan (1)
                
                
                240
                
                
                425Commission
                    for equity raise
                
                
                -
                
                
                345Royalty
                
                
                1,134
                
                
                793Operating
                    expenses
                
                
                2,267
                
                
                437Interest
                
                
                127
                
                
                84Total
                
                $
                4,928
                
                $
                5,932
  (1)
                  The
                      DSI pension plan liability was assumed with the acquisition
                      of DSI. The
                      plan was subsequently cancelled and there is no additional
                      DSI pension
                      plan liability.
  **11.
          NOTES PAYABLE**


The
      following table lists all outstanding Notes
      Payable (in $000’s):




September
                30,
              2008
            
            December
                31,
              2007Note
                DescriptionDriftwood
                convertible notes, net of discounts attributable to the warrant value
                of
                $2,716
            
            $
            8,434
            
            $
            -5.0% SVS
                sellers note
            
            
            -
            
            
            1,3043.9% DSI
                notes, net of discount of $1,309
            
            
            2,211
            
            
            4,4572.95%
                note due June 2012 assumed from DSI acquisition
            
            
            400
            
            
            4908.25%
                Wachovia demand note assumed from DSI acquisition
            
            
            50
            
            
            50Note
                assumed from DSI acquisition, 12% interest
            
            
            200
            
            
            200Zoo
                Digital Publishing Limited Note due April 2009, net of discount of
                $27
            
            
            473
            
            
            -Employee
                loans, payable on demand
            
            
            331
            
            
            408DSI
                Employee loans at 4% interest
            
            
            498
            
            
            -Zoo-UK
                shareholder note due April 2009
            
            
            591
            
            
            -Total
            
            
            13,188
            
            
            6,909Current
                portion
            
            
            10,667
            
            
            2,877Non-current
                portion
            
            $
            2,521
            
            $
            4,032





19





The
      Notes
      Payable are due as follows:





(amounts
                in 000’s)Twelve
                Months Ending
            
            Amount
                DueSeptember
                2009
            
            $
            10,667September
                2010
            
            
            120September
                2011
            
            
            2,331September
                2012
            
            
            70Thereafter
            
            
            -Total
            
            $
            13,188





*Driftwood
      Notes*




On
      July
      7, 2008 and as amended on July 15, 2008 and July 31, 2008, the Company entered
      into a note purchase agreement under which the purchasers agreed to provide
      loans to the Company up to an the aggregate principal amount of up to $9.0
      million, in consideration for the issuance and delivery of senior secured
      convertible promissory notes. As partial inducement to purchase the notes,
      the
      Company issued to the purchasers warrants to purchase 8,181,818 shares of common
      stock of the Company. The notes bear an interest rate of five percent (5%)
      for
      the one year term of the note commencing from issuance, unless extended. Upon
      the
      occurrence of an investor sale, as defined in the notes, the entire outstanding
      principal amount of the notes and any accrued interest thereon will be
      automatically converted into shares of common stock of the Company determined
      by dividing the note balance by the lesser of (i) an amount equal to the price
      per share of investor stock paid by the purchasers of such shares in connection
      with the investor sale, or (ii) $2.00; provided, that in the event that the
      investor sale is for less than $1.00 per share, then the notes will only be
      automatically convertible with the consent of the Company.  In
      connection with the note purchase agreement, the Company satisfied a management
      fee obligation by issuing additional senior secured convertible promissory
      notes
      in the principal amount of $750,000 and warrants to purchase 681,818 shares
      of
      common stock of the Company. All of the warrants are exercisable at $0.01 per
      share.




On
      September 26, 2008, the Company entered into a note purchase agreement pursuant
      to which the purchasers agreed to provide a loan to the Company in the aggregate
      principal amount of $1.4 million, in consideration for the issuance and delivery
      of senior secured convertible promissory notes. As partial inducement to
      purchase the notes, the Company issued to the purchasers warrants to purchase
      shares of common stock of the Company. The note purchase agreement provides
      for
      subsequent closings whereby the Company may issue additional notes and warrants
      to one or more additional purchasers at any time and from time to time on or
      before October 15, 2008. The notes bear an interest rate of five percent (5%)
      for the time period beginning on September 26, 2008 and ending on September
      26,
      2009, unless extended. Upon the occurrence of an investor sale, as defined
      in
      the notes, the entire outstanding principal amount of the notes and any accrued
      interest thereon will be automatically converted into shares of common stock
      of
      the Company determined
      by dividing the note balance by the lesser of (i) an amount equal to the price
      per share of investor stock paid by the purchasers of such shares in connection
      with the investor sale, or (ii) $2.00; provided, that in the event that the
      investor sale is for less than $1.00 per share, then the notes will only be
      automatically convertible with the consent of the Company .
      In
      connection with the note purchase agreement, the Company issued 1,272,726
      warrants to purchase 1,272,726 shares of common stock of the Company. The
      warrants have a five year term and an exercise price of $0.01 per share.
      Pursuant to a security agreement, by and among the Company and the purchasers,
      dated September 26, 2008, the Company granted a security interest in all of
      its
      assets to each of the purchasers to secure the Company’s obligations under the
      notes.




The
      total
      principal amount of all of the notes described above is approximately $11.2
      million. The warrants issued with all the notes were valued at approximately
      $5.9 million by an independent valuation firm. The total deferred debt discount
      of $5.9 million is amortized over the one year life of the notes. Prior to
      September 12, 2008, 4,545,455 warrants were exercised and the interest expense
      related to the discount of these warrants was accelerated. As of September
      12,
      2008, the deferred debt discount of the existing notes was approximately $2.4
      million and the net value of the notes recorded as of September 12, 2008 was
      approximately $7.8 million. On September 26, 2008, we issued $1.0 million of
      the
      notes and 909,090 of the warrants which were valued at $527,000 using consistent
      valuation methodologies as those used for all the previously issued notes.
      As of
      September 30, 2008, the net deferred debt discount of all the notes is $2.7
      million and the net value of the notes recorded as of September 30, 2008 is
      approximately $8.4 million.




20




*Supervillain
      Notes*




In
      connection with the purchase of the Supervillain assets, the Company’s
      subsidiary Supervillain Studios LLC issued a promissory note (“Supervillain
      Note”) in the amount of $2.1 million. The Supervillain Note was payable in three
      installments; $500,000 of principal together with accrued interest at the rate
      of 5% per annum is payable on each of (A) the earlier of December 14, 2008
      or
      the date that the Company consummates a round of equity financing of $20.0
      million or more and (B) the earlier of December 14, 2008 or the date that the
      Company consummates a round of equity financing of $31.0 million or more. The
      balance of the Supervillain Note, together with any accrued interest, was due
      on
      June 14, 2010. In connection with the aforementioned note, the Company recorded
      a debt discount of $989,000. For the nine months ended September 30, 2008,
      amortization of deferred debt discount and interest expense were $265,000 and
      $80,000, respectively. All obligations under the Supervillain Note were
      terminated effective September 16, 2008 with the sale of SVS back to the
      original owners.




*DSI
      Notes*





In
      connection with the acquisition of DSI, the Company issued various promissory
      notes (“DSI Note”) in aggregate of approximately $6.8 million. Approximately
      $1.8 million of principal is payable at the earlier of the Company’s completion
      of another round of financing or by December 2008 with the $5.0 million balance
      to be paid in two installments pursuant to the “DSI Note”. The first installment
      of $2.5 million of principal together with accrued interest at the rate of
      3.9%
      per annum would be due on the earlier of June 18, 2009 and the date on which
      the
      Company consummates a round of equity financing of $40.0 million or more. The
      balance of the DSI Note (including accrued interest) would be payable December
      18, 2010. In
      connection with the aforementioned note, the Company recorded a debt discount
      of
      approximately $2.3 million. For the nine months ended September 30, 2008,
      amortization of deferred debt discount and interest expense were $754,000 and
      $163,000, respectively. In July 2008, approximately $3.5 million of this debt
      was converted to common stock of the Company based on fair value and of the
      remaining $3.25 million, $1.1 million is due September 18, 2009 and $2.1 million
      is due December 18, 2010.




In
      connection with the acquisition of DSI, the Company also assumed a liability
      of
      $1.2 million as part of the DSI purchase price. Other notes payable assumed
      from
      the DSI acquisition included:





·
            $200,000
                Demand note with 12.0% percent interest per annum, callable in 6
                months,
                minimum guaranteed interest per renewal is $ 12,000. The note is
                guaranteed by the DSI President.





·
            DSI
                purchased treasury stock from a former employee in December 2006
                for the
                amount of $650,000. The balance on the note as of September 30, 2008
                was
                $400,000; $120,000 is classified as current and $310,000 is classified
                as
                long-term. The payments are due monthly and the amount of the payment
                is
                $10,000 per month.





*Zoo-UK
      Notes*




In
      connection with the acquisition of Zoo-UK, the Company issued a promissory
      note
      (“Zoo Note”) in the amount of $2.5 million. The Zoo Note stated that $1.5
      million was to be paid upon the completion of the next round of financing and
      $1.0 million to be paid April 4, 2009.  In
      connection with the aforementioned note, the Company recorded a debt discount
      of
      $548,000. For the nine months ended September 30, 2008, amortization of deferred
      debt discount was $158,000.  In
      July
      2008, $2 million of this debt was converted to common stock of the Company
      based
      on fair value and the remaining $500,000 note is due December 31, 2008.





Zoo-UK
      had an outstanding loan in the amount of £325,000 (approximately U.S.
      $591,000) from I.C. Stewart 2001 Trust.   The loan bears interest at
      an annual rate of 1.75% over the base lending rate of the Bank of
      England.  The entire loan is currently outstanding.  Zoo-UK is
      required to pay interest quarterly in arrears, and the entire amount
      outstanding must be repaid on April 4, 2009.





21





*Other
      Notes*




On
      May
      16, 2008, the Company entered into a Letter of Intent with Mandalay Media,
      Inc.
      to merge. In conjunction with this merger, the Company received $2.0 million
      from Mandalay Media and issued a 10% convertible note to Mandalay that was
      due
      October 15, 2008. The beneficial conversion feature in this note was $200,000
      and this is amortized over the five-month term of the note. The letter of intent
      was terminated on June 16, 2008 and the Company repaid the note in full,
      including approximately $29,000 of interest on July 7, 2008. The remaining
      unamortized portion of the beneficial conversion feature in the amount of
      $140,000 was expensed upon the repayment of the note.




**12.
      INCOME TAXES**




Through
        May 15, 2008, the Company and certain of its consolidated subsidiaries are
        taxed
        as a partnership under the provisions of the Internal Revenue Code. Accordingly,
        the losses incurred by the Company and those subsidiaries through May 15,
        2008
        will be allocated to the respective members and reported on their individual
        tax
        returns. Effective May 16, 2008, the Company changed its tax status from
        a
        partnership to a corporation and, as a result, will begin filing consolidated
        corporate tax returns with its domestic subsidiaries. The provision for income
        taxes is based on income recognized for financial statement purposes and
        includes the effects of temporary differences between such income and that
        recognized for tax return purposes as well as the deferred tax assets and
        liabilities recognized for existing timing items relating to the Company's
        change in tax status.




For
        financial reporting purposes, income (loss) before income taxes for the nine
        months and three months ended September 30, 2008 include the following
        components (in $000’s):




Nine
                  Months Ended
              
              Three
                  Months EndedSeptember
                  30,
                2008
              
              September
                  30,
                2008Pretax
                  (loss):United
                  States
              
              
              ($15,537
              )
              
              ($6,465
              )Foreign
              
              
              (1,191
              )
              
              (528
              )($16,728
              )
              
              ($6,993
              )
  The
          United States pretax loss includes approximately $5.6 million for the period
          through May 15, 2008 attributable to entities that are taxed as
          partnerships.
  22
  The
          components of income tax (benefit) for the nine months and three months
          ended
          September 30, 2008 are as follows (in $000’s):
  Nine
                  Months Ended
              
              Three
                  Months EndedSeptember
                  30,
                2008
              
              September
                  30,
                2008Current:Federal
              
              $
              -
              
              $
              -State
              
              
              2
              
              
              -Foreign
              
              
              (256
              )
              
              (90
              )Total
                  Current
              
              
              (254
              )
              
              (90
              )Deferred:Federal
              
              
              (2,440
              )
              
              (1,630
              )State
              
              
              (1,300
              )
              
              (1,002
              )Foreign
              
              
              (69
              )
              
              (50
              )Total
                  Deferred
              
              
              (3,809
              )
              
              (2,682
              )$
              (4,063
              )
              $
              (2,772
              )Income
                  tax (benefit) allocated to:Continuing
                  operations
              
              
              ($3,598
              )
              
              ($2,542
              )Discontinued
                  operations
              
              
              (465
              )
              
              (230
              )Total
                  income tax (benefit)
              
              $
              (4,063
              )
              $
              (2,772
              )
  No
          income
          taxes were paid during the nine months ended September 30,
          2008.
  The
          reconciliation of income tax expense (benefit) computed at the U.S. statutory
          tax rates to income tax expense (benefit) for the nine months ended September
          30, 2008 is:
  Tax
                  at U.S. federal income tax rates
              
              
              (34.0
              )%State
                  taxes, net of federal income tax benefit
              
              
              (8.9
              )Impact
                  of foreign tax rates and credits
              
              
              0.7Deferred
                  taxes related to change in tax status
              
              
              5.3Nondeductible
                  expenses and other
              
              
              0.6(36.3
              )%
  23
  Deferred
          income taxes reflect the net tax effects of temporary differences between
          the
          carrying amounts of assets and liabilities for financial reporting purposes
          and
          the amounts used for income tax purposes. Significant components of the
          Company's deferred tax assets and liabilities as of September 30,2008 are
          as
          follows (in $000’s):
  Deferred
                  tax assets:
              
              Current
              
              Long-termNet
                  operating loss carryforwards
              
              $
              -
              
              $
              3,659Capital
                  loss carryforwards
              
              
              -
              
              
              515Allowance
                  for doubtful accounts
              
              
              335
              
              
              -Inventory
                  reserve
              
              
              19
              
              
              -Bonuses
                  payable
              
              
              461
              
              
              185Bonus
                  and vacation accruals
              
              
              228
              
              
              -Non-qualified
                  options
              
              
              -
              
              
              179Gross
                  deferred tax assets
              
              
              1,043
              
              
              4,538Valuation
                  allowance
              
              
              (98
              )
              
              (417
              )Net
                  deferred tax assets
              
              
              945
              
              
              4,121Deferred
                  tax liabilities:Property
                  and equipment
              
              
              -
              
              
              (9
              )Intangibles
              
              
              -
              
              
              (6,710
              )Discount
                  on notes
              
              
              (378
              )
              
              (242
              )Total
                  deferred tax liabilities
              
              
              (378
              )
              
              (6,961
              )Net
                  deferred tax asset (liability)
              
              $
              567
              
              $
              (2,840
              )
  The
          Company has approximately $1.2 million of available capital loss carryforwards
          which expire in 2013. A valuation allowance of approximately $515,000 has
          been
          recognized to offset the deferred tax assets related to these carryforwards.
          The
          Company currently does not have any capital gains to utilize against this
          capital loss. When realized, the tax benefit of this item will be applied
          to
          reduce future capital gains of the Company.
  As
          of
          September 30, 2008, the Company has U.S. federal net operating loss (NOL)
          carryforwards of approximately $8.4 million which will be available to
          offset
          taxable U.S. income during the carryforward period and are expected to
          be fully
          realized. The federal NOL will begin to expire in 2023. The Company has
          state
          net operating loss carryforwards of approximately $8.4 million which will
          be
          available to offset taxable state income during the carryforward period.
          The
          state NOL will also begin to expire in 2023. The tax benefit of these items
          is
          reflected in the above table of deferred tax assets and liabilities. The
          Company
          is assessing the potential utilization of approximately $5.0 million of
          foreign
          loss carryforwards. As a result, no deferred tax assets have been included
          in
          the above table as of September 30, 2008, subject to any additional purchase
          accounting adjustments.
  24




**13.
      STOCKHOLDERS EQUITY**




The
        Company has authorized 75,000,000 shares of Common Stock, par value $0.001
        and
        5,000,000 preferred shares, par value $0.001. As of September 30, 2008, there
        are 37,425,756 common shares issued, with 351,171 returned to Treasury in
        connection with the sale of Supervillain.
  There
        are
        7,320,341 warrants outstanding. All are currently exercisable and have a
        five-year life:
  ·
              5,590,909
                  have an exercise price of $0.01
 ·
              1,411,186
                  have an exercise price of $2.84 and
 ·
              318,246
                  have an exercise price of $2.13.
 
 There
        are
        2,352,676 options outstanding under the Zoo Games, Inc. 2008 Long-Term Incentive
        Plan dated September 12, 2008. No additional awards may be granted from this
        plan. 2,001,513 options vest immediately and the balance of the options vest
        over a three-year period:
  ·
              243,040
                  have an exercise price of $2.58 (all issued in
                  2007)
 ·
              421,396
                  have an exercise price of $2.25 and (all issued during
                  2008)
 ·
              1,688,240
                  have an exercise price of $1.52. (all issued during
                  2008)
 
 As
        of
        September 30, 2008, an aggregate of 975,000 shares of restricted common stock
        of
        the Company are outstanding under the Company’s 2007
        Employee, Director and Consultant Stock Plan, and
        25,000 shares of Common Stock are reserved for future issuance under this
        plan.
 
 In
        connection with the Merger on September 12, 2008, each share of common stock
        of
        Zoo Games was converted into 7.0232737 shares of the Company’s common stock. All
        references to shares are at the converted amount.
 
 During
        2008, the following activity transpired relating to the Company’s common
        stock:
  ·
              Issued
                  2,143,000 shares of common stock in connection with raising $6.4
                  million
                  from a private placement offering from January 2008 to April 2008.
                  We
                  incurred costs of $317,000 in connection with the offering.
 ·
              Issued
                  1,581,000 shares of common stock as partial payment for the acquisition
                  of
                  Zoo-UK in April 2008.
 ·
              Converted
                  various promissory notes totaling $5.7 million into 6,325,000 shares
                  of
                  the Company’s common stock based on fair
                  value.
 ·
              Exchanged
                  promissory notes totaling $550,000 into 261,000 shares of the Company’s
                  common stock.
 ·
              Issued
                  702,440 shares of the Company’s common stock to a consultant as
                  compensation for consulting services provided to the Company valued
                  at
                  approximately $1.1 million.
 ·
              Issued
                  16,484 shares of the Company’s stock to an employee in lieu of a $25,000
                  cash bonus.
 ·
              Combined
                  the 26,098,000 shares of stock from Zoo Games shareholders with
                  the
                  11,327,000 existing shares of the Company’s common stock on September 12,
                  2008. The paid-in-capital amount relating to the 11.3 million existing
                  shares was approximately $2.3
                  million.
  Prior
          to
          the conversion to a C-corporation in May 2008, the company had issued membership
          common units, incentive units and incentive profit units. Upon the conversion
          to
          a C-corporation, each common unit and incentive unit was converted to one
          share
          of common stock; each incentive profit unit was converted to a combination
          of
          common stock and rights to receive options. We expensed the unamortized
          portion
          of the value of the incentive profit units in May 2008. The total amount
          of
          expense recorded for the nine months ended September 30, 2008 relating
          to these
          incentive profit units was $354,000.
  In
        May
        2008, Zoo Games received
        a $2.0 million loan and issued a 10% convertible note. The beneficial conversion
        feature in this note was $200,000 and is recorded as additional
        paid-in-capital.






25




**14.
      SUPPLEMENTAL CASH FLOW INFORMATION**




Supplemental
      cash flow information for the nine months ended September 30, 2008 and the
      period from March 23, 2007 to September 30, 2007 is as follows:




(amounts
                in $000’s)Jan
                1, 2008 -
            
            Mar
                23, 2007 -September
                30, 2008
            
            June
                30, 2007Changes
                in other assets and liabilitiesAccounts
                receivable
            
            $
            (1,488
            )
            $
            210Inventory
            
            
            506Prepaid
                expenses and other current assets
            
            
            (3,982
            )
            
            (19
            )Product
                development costs
            
            
            (6,384
            )Accounts
                payable
            
            
            (477
            )
            
            22Accrued
                expenses and other current liabilities
            
            
            860
            
            
            49Net
                changes in other assets and liabilities
            
            $
            (10,965
            )
            $
            262Cash
                paid during the period for interest
            
            $
            92
            
            $
            -Cash
                paid during the period for taxes
            
            $
            6
            
            $
            -Non
                Cash Investing and Financing Activities:Issuance
                of 1,580,237 shares in connection with the acquisition of
                Zoo-UK
            
            $
            4,086
            
            $
            -Exchange
                of debt for equity at original face value
            
            $
            6,266
            
            $
            -Issuance
                of 351,171 shares in connection with the acquisition of net
                assets of Supervillain
            
            $
            -
            
            $
            490




**15.
      SEGMENT REPORTING**




With
      the
      acquisition of Zoo-UK in April 2008, the Company now has operations outside
      the
      United States.




Certain
      summary financial information for the three months and nine months ended
      September 30, 2008 and Balance Sheet data as of September 30, 2008 is broken
      down by geographic segment below:




(amounts in $000’s)
            
            Three
                Months Ended Sept. 30, 2008
            
            Nine
                Months Ended September 30,
                2008Domestic
            
            United
                Kingdom
            
            Total
            
            Domestic
            
            United
                Kingdom
            
            TotalRevenues
            
            $
            7,662
            
            $
            1,154
            
            
            8,816
            
            $
            22,269
            
            $
            2,034
            
            $
            24,303Loss
                from continuing operations
            
            
            (2,397
            )
            
            (387
            )
            
            (2,784
            )
            
            (8,723
            )
            
            (868
            )
            
            (9,591
            )Total
                assets
            
            
            
            
            
            
            
            
            
            
            $
            55,555
            
            $
            9,454
            
            $
            65,009Capital
                expenditures
            
            $
            0
            
            $
            4
            
            $
            4
            
            $
            65
            
            $
            20
            
            $
            85




26




**16.
      RELATED PARTY TRANSACTIONS**





We leased
      office space in New York from 575 Broadway Associates, LLC, a company owned
      principally by one of our principal investors. We paid rent expense of $209,000
      for the nine months ended September 30, 2008 for this office.





Mark
      Seremet, President of the Company, received $549,000 in connection with the
      sale
      of a portion of his shares in Cyoob, Inc to Zoo Games during 2007. This amount
      is included in general and administrative expenses. The agreement entitled
      Mr.
      Seremet to receive an additional $549,000 from Zoo Games for such shares;
      however this debt was converted to Zoo Games equity. Of such amount, $647,000
      was recorded as compensation and included in General and administrative expenses
      in the 2007 Statement of Operations.


In
        July
        2008, Mark Seremet, President of the Company, received 700,000 options to
        purchase shares of the Company’s common stock at an exercise price of $1.52 to
        compensate him for a providing a personal guaranty for the Company’s receivable
        factoring facility. These options are immediately exercisable.


A
      few DSI
      employees loaned the Company an aggregate of up to $765,000 in 2008 on a
      short-tem basis. The employees were paid interest at a 4% rate and all amounts
      are expected to be repaid in full.





**17.
      SUBSEQUENT EVENTS**


On
        October 13, 2008, the third party warehouse in San Bernardino California
        that we
        use for packing our product from Zoo Publishing and shipping finished goods
        to
        our customers was consumed by fire, destroying our entire inventory stored
        at
        that location, with an approximate cost of $3.0 million. We collected on
        our
        property insurance policy in the amount of approximately $2.1 million and
        we are
        in the process of quantifying our exposure for our business income insurance
        policy whereby we expect to collect an additional amount to cover our carrying
        value. We were unable to ship product to our customers for a few weeks and
        in
        order to provide adequate cash flow for our operations, we entered into a
        s ales
        agreement with Atari, Inc. (“Atari”). This sales agreement became effective on
        October 24, 2008 and provided for Zoo Publishing to sell all its products
        to
        Atari and Atari will resell the products to wholesalers and retailers in
        the
        United States, Mexico and Canada for sales to ultimate end users. The agreement
        expires on March 31, 2009.
  During
        November 2008, the Company agreed in principle to sell Zoo-UK back to the
        original owners for terms still being negotiated. This sale is expected to
        close
        before the end of 2008.


****


27




**Item
      2.**  **Management’s
      Discussion and Analysis of Financial Condition and Results of Operations.**





In
      this section, references to “we,” “us,” “our,” “ours,” and “the Company” refer
      to Driftwood Ventures, Inc.and
      itssole
      operating and wholly-owned subsidiary, Zoo Games.





The
      following discussion should be read in conjunction with, and is qualified in
      its
      entirety by, the financial statements and the notes thereto included in this
      report. This discussion contains certain forward-looking statements that involve
      substantial risks and uncertainties. When used in this report, the words
      "anticipate," "believe," "estimate," "expect” and similar expressions as they
      relate to our management or us are intended to identify such forward-looking
      statements. Our actual results, performance or achievements could differ
      materially from those expressed in, or implied by, these forward-looking
      statements. Historical operating results are not necessarily indicative of
      the
      trends in operating results for any future period.





This
      Qarterly Report on Form 10-Q for the quarter ended September 30, 2008 includes
      a
      number of forward-looking statements that reflect our current views with respect
      to future events and financial performance. Forward-looking statements are
      often
      identified by words like: “believe,” “expect,” “estimate,” “anticipate,”
“intend,” “project” and similar expressions, or words which, by their nature,
      refer to future events. You should not place undue certainty on these
      forward-looking statements, which apply only as of the date of this report.
      These forward-looking statements are subject to certain risks and uncertainties
      that could cause actual results to differ materially from historical results
      or
      our predictions.


On
        July
        7, 2008, Driftwood entered into an Agreement and Plan of Merger (the “Original
        Merger Agreement”) with DFTW Merger Sub, Inc., a Delaware corporation and a
        wholly-owned subsidiary of Driftwood (“Merger Sub”), Zoo Games, Inc. (“Zoo
        Games”) (formerly known as Green Screen Interactive Software, Inc.) and a
        stockholder representative (the “Stockholder Representative”), pursuant to which
        Merger Sub would merge with and into Zoo Games, with Zoo Games as the surviving
        corporation through an exchange of common stock of Zoo Games for common stock
        of
        Driftwood (the “Merger”).


On
      September 12, 2008, Driftwood, Merger Sub, Zoo Games and the Stockholder
      Representative completed the Merger and each outstanding share of Zoo Games
      common stock, $0.001 par value per share (the “Zoo Games Common Stock”) on a
      fully-converted basis, converted automatically into and became exchangeable
      for
      shares of Driftwood common stock, $0.001 par value per share (the “Driftwood
      Common Stock”) based on an exchange ratio equal to 7.023274. In addition, each
      of the 334,983 options to purchase shares of Zoo Games Common Stock (the “Zoo
      Games Options”) outstanding under Zoo Games’ 2008 Long-Term Incentive Plan were
      assumed by Driftwood, subject to the same terms and conditions as were
      applicable under such plan immediately prior to the Merger, and converted into
      243,040 options to purchase shares of Driftwood Common Stock at an exercise
      price of $2.58 per share, 421,396 options to purchase shares of Driftwood Common
      Stock at an exercise price of $2.25 per share and 1,688,240 options to purchase
      shares of Driftwood Common Stock at an exercise price of $1.52 per share. The
      246,243 warrants to purchase shares of Zoo Games Common Stock outstanding at
      the
      time of the Merger (the “Zoo Games Warrants”) were assumed by Driftwood and
      converted into 1,411,186 warrants to acquire shares of Driftwood Common Stock
      at
      an exercise price of $2.84 and 318,246 warrants to acquire shares of Driftwood
      Common Stock at an exercise price of $2.13 per share. The merger consideration
      consisted (i) 26,098,303 shares of Driftwood Common Stock, (ii) the reservation
      of 2,352,677 shares of Driftwood Common Stock that are required for the
      assumption of the Zoo Games Options and (iii) the reservation of 1,729,432
      shares of Driftwood Common Stock that are required for the assumption of the
      Zoo
      Games Warrants.





Zoo
      Games is treated as the acquirer for accounting purposes in this reverse merger
      and the financial statements of the Company represent the historical activity
      of
      Zoo Games and consolidate the activity of Driftwood beginning on September
      12,
      2008, the date of the reverse merger.





The
      financial statements of Zoo Games include operations of each division from
      the
      date that they were acquired. The 2007 financial statements include operations
      of each division as follows:


·
              Corporate
                  and Publishing - includes nine months of activity beginning on
                  March 23,
                  2007. This division oversees the corporate and video game publishing
                  operations of the Company.
 ·
              Supervillain
                  - a video game development studio acquired in June 2007 that was
                  discontinuedduring
                  September 2008.
 ·
              Cyoob
                  (Repliqa) - a group developing a recommendation engine to be used
                  on the
                  internet that was acquired in June 2007 and discontinued during
                  January
                  2008.
 ·
              Zoo
                  Publishing - a publisher, developer and distributor of video games
                  for the
                  casual market that was acquired on December 18, 2007, so we include
                  thirteen days of activity beginning December 19,
                  2007.




The
      2008
      financial statements include operations of Zoo Digital Publishing beginning
      on
      April 4, 2008, and the operations of Driftwood beginning on September 13, 2008.
      The operations of Supervillain and Repliqa are classified as discontinued
      operations in the 2008 and 2007 financial statements.




28




**Results
      of Operations**





**For
      the three months ended September 30, 2008 as compared to the three months ended
      September 30, 2007**





The
      following table sets forth, for the period indicated the amount and percentage
      of net revenue for significant line items in our statement of
      operations:





(amounts
      in $000’s)


For
                The Three Months Ended September 30,2008
            
            2007Revenue
            
            $
            8,816
            
            
            100
            %
            $
            -Cost
                of goods sold
            
            
            5,968
            
            
            68
            %
            
            -Gross
                profit
            
            
            2,848
            
            
            32
            %
            
            -Operating
                expenses:General
                and administrative expenses
            
            
            4,232
            
            
            48
            %
            
            748Selling and
                marketing expenses
            
            
            1,729
            
            
            20
            %
            
            -Depreciation
                and amortization
            
            
            632
            
            
            7
            %
            
            24Total
                Operating expenses
            
            
            6,593
            
            
            75
            %
            
            772Loss
                from operations
            
            
            (3,745
            )
            
            
            
            
            (772
            )Interest
                (expense) income
            
            
            (1,581
            )
            
            
            
            
            12Loss
                from continuing operations before benefit for income tax
            
            
            (5,326
            )
            
            
            
            
            (760
            )Income
                tax benefit
            
            
            (2,542
            )
            
            
            
            
            -Loss from
              continuting operations
            
            
            (2,784
            )
            
            
            
            
            (760
            )Loss
              from discontinued operations, net of tax
              benefit
            
            
            (1,437
            )
            
            
            
            
            (374
            )Net
                loss
            
            $
            (4,221
            )
            
            
            
            $
            (1,134
            )




*Net
      Revenues* .
      Net
      revenues for the period ended September 30, 2008 were approximately $8.8
      million, consisting of approximately $7.6 million from casual game sales in
      the
      United States and approximately $1.2 million from casual game sales in Europe.
      The breakdown of gross sales by platform is:


US
              
              EuropeNintendo
                  DS
              
              
              44%
              
              
              45%Nintendo
                  Wii
              
              
              52%
              
              
              4%Nintendo
                  GBA
              
              
              1%
              
              
              -SONY
                  PSP
              
              
              1%
              
              
              4%SONY
                  PS2
              
              
              2%
              
              
              28%PC
              
              
              -
              
              
              18%Other
              
              
              -
              
              
              1%




The
      biggest seller during this period on the Nintendo DS platform was Deal or No
      Deal. The biggest sellers during this period on the Nintendo Wii platform were
      the M&M Kart Racing, Chicken Shoot and Showtime Boxing.





We
      had no
      revenues during the three months ended September 30, 2007.


*Gross
        Profit.* Gross
        profit for the three months ended September 30, 2008 was approximately $2.8
        million, or 32% of net revenue. The costs included in the cost of goods sold
        consist of manufacturing and packaging costs, royalties due to licensors
        relating to the current period’s revenues and the amortization of product
        development costs relating to the current period’s revenues. The gross margin of
        the U.S. sales was 35%, while the gross margin of the European revenues was
        23%
        for the 2008 period. The product specific gross margins during this period
        were
        reflective of lower customer allowances charged during this period, resulting
        in
        a high gross margin for this three month period.




29


*General
        and Administrative Expenses.* General
        and administrative expenses for the three months ended September 30, 2008
        were
        approximately $4.2 million as compared to $748,000 for the three months ended
        September 30, 2007. The 2008 period includes $1.7 million for the operations
        of
        the corporate and publishing group, including salary and related costs,
        professional fees and rent expenses, approximately $242,000 for Zoo Publishing
        expenses and $230,000 for Zoo Digital Publishing. The 2008 period also included
        approximately $2.0 million in consulting, audit and legal fees for services
        performed in connection with our merger. The 2007 period includes three months
        of corporate and publishing expenses for Zoo Games.




*Selling
      and Marketing Expenses.* Selling
      and marketing expenses for the three months ended September 30, 2008 were
      approximately $1.7 million as compared to $0 for the period ended September
      30,
      2007. The 2008 costs were approximately $1.3 million relating to the sales
      of
      casual games in the U.S. market and approximately $380,000 for sales in Europe
      during the 2008 period.





*Depreciation
      and Amortization Expenses.* Depreciation
      and amortization costs for the three months ended September 30, 2008 was
      $632,000 as compared to $24,000 in the prior period. The 2008 period includes
      $590,000 resulting form the amortization of intangibles acquired from the Zoo
      Publishing and Zoo Digital acquisitions. The balance of $42,000 relates to
      depreciation of fixed assets during the period.





*Interest
      Expense/Income.* Interest
      expense for the 2008 period was approximately $1.6 million as compared to
      interest income of $12,000 for the 2007 period. The 2008 period includes
      $922,000 of non-cash interest expense relating to the accelerated amortization
      of the debt discount resulting from the early extinguishment of debt and
      $320,000 of interest on the various promissory notes due to the sellers of
      Zoo
      Publishing and Zoo Digital of which $262,000 is non-cash interest imputed at
      the
      market rate.


*Loss
        from Discontinued Operations* .
        In
        September 2008, the Company sold Supervillain back to the original owners,
        incurring a loss for the three-month period of approximately $1.7 million,
        consisting of an operating loss for the period of approximately $1.1
        million and a loss on the disposition of net assets of $528,000. In the
        2007 period, $329,000 of the loss relates to the Repliqa and on-line operations
        that were discontinued in 2008 and $45,000 of the loss relates to the
        Supervillain operations. The 2008 period includes a tax benefit of
        $230,000.


**For
      the nine months ended September 30, 2008 as compared to the period from March
      23, 2007 to September 30, 2007**





The
      following table sets forth, for the period indicated the amount and percentage
      of net revenue for significant line items in our statement of
      operations:





(amounts
      in $000’s)


For
                The PeriodsNine
                Months Ended September 30, 2008
            
            March
                23, 2007 to September 30, 2007Revenue
            
            $
            24,303
            
            
            100
            %
            $
            -Cost
                of goods sold
            
            
            19,879
            
            
            82
            %
            
            -Gross
                profit
            
            
            4,424
            
            
            18
            %
            
            -Operating
                expenses:General
                and administrative expenses
            
            
            7,742
            
            
            32
            %
            
            1,217Selling
                and marketing expenses
            
            
            4,198
            
            
            17
            %
            
            -Research
                and development expenses
            
            
            1,481
            
            
            6
            %
            
            -Depreciation
                and amortization
            
            
            1,611
            
            
            7
            %
            
            31Total
                Operating expenses
            
            
            15,032
            
            
            62
            %
            
            1,248Loss
                from operations
            
            
            (10,608
            )
            
            
            
            
            (1,248
            )Interest
                (expense) income
            
            
            (2,581
            )
            
            
            
            
            16Loss
                from continuing operations before benefit for income taxes
            
            
            (13,189
            )
            
            
            
            
            (1,232
            )Income
                tax benefit
            
            
            3,598
            
            
            
            
            
            -Loss
                from continuing operations
            
            
            (9,591
            )
            
            
            
            
            (1,232
            )Loss
                from discontinued operations, net of tax benefit
            
            
            (3,074
            )
            
            
            
            
            (482
            )Net
                loss
            
            $
            (12,665
            )
            
            
            
            $
            (1,714
            )




30




*Net
      Revenues* .
      Net
      revenues for the period ended September 30, 2008 were approximately $24.3
      million, consisting of approximately $22.3 million from casual game sales in
      the
      United States and approximately $2.0 million from casual game sales in Europe
      since the acquisition of Zoo Digital in April 2008. The breakdown of gross
      sales
      by platform is:


US
              
              EuropeNintendo
                  DS
              
              
              60%
              
              
              56%Nintendo
                  Wii
              
              
              35%
              
              
              8%Nintendo
                  GBA
              
              
              2%
              
              
              -SONY
                  PSP
              
              
              2%
              
              
              4%SONY
                  PS2
              
              
              1%
              
              
              20%PC
              
              
              -
              
              
              12%Other
              
              
              -
              
              
              -





The
      biggest sellers during this period on the Nintendo DS platform were (i) the
      compilation of Battle Ship, Connect 4, Sorry & Trouble, (ii) the compilation
      of Clue, Perfection & Aggravation, and (iii) Deal or No Deal. The biggest
      sellers during this period on the Nintendo Wii platform were the M&M Kart
      Racing, Chicken Shoot and Order Up.





We
      had no
      revenues during the period from March 23, 2007 to September 30,
      2007.





*Gross
      Profit.* Gross
      profit for the nine months ended September 30, 2008 was approximately $4.4
      million, or 18% of net revenue. The costs included in the cost of goods sold
      consist of manufacturing and packaging costs, royalties due to licensors
      relating to the current period’s revenues and the amortization of product
      development costs relating to the current period’s revenues. The gross margin of
      the U.S. sales was 18%, while the gross margin of the European revenues was
      19%
      for the 2008 period.




31




*General
      and Administrative Expenses.* General
      and administrative expenses for the nine months ended September 30, 2008 were
      approximately $7.7 million as compared to $1.2 million for the period ended
      September 30, 2007. The 2008 period includes $4.7 million for the operations
      of
      the corporate and publishing group, including salary and related costs,
      professional fees and rent expenses, approximately $659,000 for Zoo Publishing
      expenses and $306,000 for Zoo Digital Publishing. The 2008 period also included
      approximately $2.0 million in consulting, audit and legal fees for services
      performed in connection with our merger. The 2007 period includes six months
      of
      corporate and publishing expenses for Zoo Games.





*Selling
      and Marketing Expenses.* Selling
      and marketing expenses for the nine months ended September 30, 2008 were
      approximately $4.2 million as compared to $0 for the period ended September
      30,
      2007. The 2008 costs were approximately $3.3 million relating to the sales
      of
      casual games in the U.S. market and approximately $930,000 for sales in Europe
      during the 2008 period.





*Research
      and Development Expenses.* Research
      and development expenses for the nine months ended September 30, 2008 were
      approximately $1.5 million as compared to $0 for the period ended September
      30,
      2007. The 2008 expenses consist of approximately $1.3 million relating to
      products that were discontinued during the period and approximately $136,000
      of
      miscellaneous research and development costs.





*Depreciation
      and Amortization Expenses.* Depreciation
      and amortization costs for the nine months ended September 30, 2008 was
      approximately $1.6 million as compared to $31,000 in the prior period. The
      2008
      period includes approximately $1.5 million resulting form the amortization
      of
      intangibles acquired from the Zoo Publishing and Zoo Digital acquisitions.
      The
      balance of $130,000 relates to depreciation of fixed assets during the period.





*Interest
      Expense/Income.* Interest
      expense for the 2008 period was approximately $2.6 million as compared to
      interest income of $16,000 for the 2007 period. The 2008 period includes
      $922,000 of non-cash interest expense relating to the accelerated amortization
      of the debt discount resulting from the early extinguishment of debt and $1.4
      million of interest on the various promissory notes due to the sellers of Zoo
      Publishing and Zoo Digital of which $1.2 million is non-cash interest imputed
      at
      the market rate.


*Loss
        from Discontinued Operations* .
        In
        September 2008, the Company sold Supervillain back to the original owners,
        incurring a loss for the nine-month period of approximately $3.2 million,
        consisting of an operating loss for the period of approximately $2.6 million
        and
        a loss on the disposition of net assets of $528,000. In January 2008, management
        determined to discontinue Zoo Games’ involvement in the operations of Repliqa
        and recorded a loss from discontinued operations of $219,000. Also during
        2008,
        the Company discontinued the operations of an on-line concept and incurred
        a
        loss from discontinued operations of $146,000. In the 2007 period, $329,000
        of
        the loss relates to the Repliqa and on-line operations that were discontinued
        in
        2008 and $153,000 of the loss relates to the Supervillain operations. The
        2008
        period includes a tax benefit of $465,000.




32




**Liquidity
      and Capital Resources**





We
      incurred a loss from continuing operations of $9.6 million for the nine months
      ended September 30, 2008 and a net loss of $1.2 million from continuing
      operations for the period from March 23, 2007 to September 30, 2007. Our
      principal source of cash is from sales of our debt and equity securities and
      the
      use of our purchase order financing and factor arrangements. Net cash used
      in
      operating activities for the first nine months of 2008 was $20.8 million and
      for
      the period from March 23, 2007 to September 30, 2007 was $1.4
      million.




We
      raised
      an aggregate of $21.4 million, net, from various debt and equity financings
      from
      our inception to September 2008, as follows:





·
            $5.0
                million, net in the initial sale of our common equity in May and
                June
                2007;





·
            $2.8
                million, net from October 2007 through December 2007 in the sale
                of a 12%
                debt security that was converted into the common equity we sold in
                December 2007;





·
            $7.5
                million, net in December 2007 from the sale of our common equity;
                and





·
            $6.1
                million, net during the first nine months of 2008 from the sale of
                our
                common equity.


On
        May
        16, 2008, Mandalay Media, Inc. (“Mandalay”) provided a bridge loan to us of $2.0
        million (the “Mandalay Note”) in connection with the potential acquisition by
        Mandalay of Zoo Games. The Mandalay Note bore interest at 10% per annum.
        The
        acquisition agreements between Mandalay and Zoo Games were terminated, and
        the
        Mandalay Note was paid in full on July 7, 2008.
  On
        July
        7, 2008 and as amended on July 15, 2008 and July 31, 2008, Driftwood entered
        into a note purchase agreement under which the purchasers agreed to provide
        loans to the Company up to an the aggregate principal amount of up to $9.0
        million, in consideration for the issuance and delivery of senior secured
        convertible promissory notes. As partial inducement to purchase the notes,
        the
        Company issued to the purchasers warrants to purchase 8,181,818 shares of
        common
        stock of the Company. The notes bear an interest rate of five percent (5%)
        for
        the one year term of the note commencing from issuance, unless extended. Upon
        the
        occurrence of an investor sale, as defined in the notes, the entire outstanding
        principal amount of the notes and any accrued interest thereon will be
        automatically converted into shares of common stock of the Company determined by dividing the note balance by the lesser of (i) an amount equal
        to
        the price per share of investor stock paid by the purchasers of such shares
        in
        connection with the investor sale, or (ii) $2.00; provided, that in the event
        that the investor sale is for less than $1.00 per share, then the notes will
        only be automatically convertible with the consent of the Company.  All of
        the warrants are exercisable at $0.01 per share.   On
          July
          7, 2008, Driftwood provided a bridge loan of up to $7.0 million to Zoo
          Games
          (the “Driftwood Loan”). The Driftwood Loan matures on September 30, 2008, and
          initially bears interest at a rate of 10% per annum (increasing upon default).
          Under the terms of the Driftwood Loan, Zoo Games may borrow on a weekly
          basis,
          repay without penalty or premium and continue to borrow amounts until September
          30, 2008, provided that any advance made by Driftwood to Zoo Games is contingent
          upon a mutually approved budget for the use of such advance by Zoo Games,
          which
          approval will not be unreasonably withheld by Driftwood. The Driftwood
          Loan and
          all accrued interest were automatically extinguished upon the closing of
          the
          Merger. We used $2.029 million of the amounts we borrowed to repay all
          amounts
          outstanding under the Mandalay Note on July 7, 2008. The additional advances
          were used for working capital purposes.
  On
          September 26, 2008, the Company entered into a note purchase agreement
          with four
          investors, pursuant to which the purchasers agreed to provide a loan to
          the
          Company in the aggregate principal amount of $1.4 million, in consideration
          for
          the issuance and delivery of senior secured convertible promissory notes.
          As
          partial inducement to purchase the notes, the Company issued to the purchasers
          warrants to purchase shares of common stock of the Company. The note purchase
          agreement provides for subsequent closings whereby the Company may issue
          additional notes and warrants to one or more additional purchasers at any
          time
          and from time to time on or before October 15, 2008. The notes bear an
          interest
          rate of five percent (5%) for the time period beginning on September 26,
          2008
          and ending on September 26, 2009, unless extended. Upon the occurrence
          of an
          investor sale, as defined in the notes, the entire outstanding principal
          amount
          of the notes and any accrued interest thereon will be automatically converted
          into shares of common stock of the Company determined by dividing the note balance by the lesser of (i) an amount
          equal to
          the price per share of investor stock paid by the purchasers of such shares
          in
          connection with the investor sale, or (ii) $2.00; provided, that in the
          event
          that the investor sale is for less than $1.00 per share, then the notes
          will
          only be automatically convertible with the consent of the Company. In
          connection with the note purchase agreement, the Company issued warrants
          to
          purchase 1,272,726 shares of common stock of the Company. The warrants
          have a
          five year term and an exercise price of $0.01 per share. Pursuant to a
          security
          agreement, by and among the Company and the purchasers, dated September
          26,
          2008, the Company granted a security interest in all of its assets to each
          of
          the purchasers to secure the Company's obligations under the notes.
  33
  A
          significant portion of our cash was used during 2007 and the first nine
          months
          of 2008 in connection with o ur
          acquisitions.  We used $7.4 million of our cash during 2007 in the
          acquisitions of the assets of Supervillain, and the stock of Zoo
          Publishing . 
          We used approximately $626,000 of our cash during the first nine months
          of
          2008 with respect to the outstanding obligations in connection with our
          prior acquisition of Zoo Publishing. We used
          approximately $191,000 of our cash in 2007 and $450,000 cash in the first
          nine
          months of 2008 towards the investments in Cyoob and Repliqa LLC. We used
          $335,000 cash in 2007 and $85,000 cash in the first nine months of 2008
          for
          capital expenditures.


*Zoo
      Publishing*





In
      connection with Zoo Games’ acquisition of its Zoo Publishing subsidiary, there
      is an outstanding 3.9% promissory note for the benefit of the former
      shareholders of Destination Software in the aggregate principal amount of
      $2,957,500. Of that amount, $1,137,500 of the principal plus accrued and unpaid
      interest must be paid on or before September 18, 2009 and the remaining
      $1,820,000 plus accrued and unpaid interest must be paid on or before December
      18, 2010. As part of that acquisition transaction, Zoo Games also has a
      remaining obligation to two employees of Zoo Publishing in connection with
      that
      acquisition transaction. Zoo Games is required to pay one of those individuals
      $1,200,000. Of that amount, Zoo Games paid $200,000 in February 2008 and is
      paying $380,000 in equal monthly installments over a six-month period beginning
      July 2008, and $620,000 will be paid on July 31, 2011, in cash or Driftwood
      Common Stock based on the fair market value of the Driftwood Common Stock as
      of
      July 31, 2011, at the election of Zoo Games. Zoo Games is required to pay the
      other individual an aggregate of $608,400. Of that amount, $292,500 is due
      on
      December 18, 2010 and $315,900 will be paid on July 31, 2011, in cash or
      Driftwood Common Stock based on the fair market value of the Driftwood common
      stock as of July 31, 2011, at the election of Zoo Games.





Zoo
      Publishing has additional debt outstanding which debt was outstanding prior
      to
      Zoo Games’ acquisition of that subsidiary.  As of September 30, 2008, Zoo
      Publishing owes an aggregate of approximately $1.5 million to various
      individuals.  Of this amount, $400,000 is owing as a result of the
      repurchase of certain stock from a former stockholder.  This amount is
      being repaid by its terms in monthly increments of $10,000.  In addition,
      this amount includes a loan to Zoo Publishing from its President in the
      aggregate amount of $507,000.  Of that amount, $363,000 remains
      outstanding. The note bears interest at an annual rate of 4% and is due in
      full
      on October 31, 2008.





Zoo
      Publishing also takes advances from our factor, Working Capital Solutions,
      Inc.,
      which utilizes existing accounts receivable in order to provide working capital
      to fund all aspects of our continuing business operations. Under the terms
      of
      our factoring and security agreement, we sell our receivables to the factor,
      with recourse. The factor, in its sole discretion, determines whether or not
      it
      will accept each receivable based upon the credit risk factor of each individual
      receivable or account. Once a receivable is accepted by the factor, the factor
      provides funding subject to the terms and conditions of the factoring and
      security agreement. The amount remitted to us by the factor equals the invoice
      amount of the receivable adjusted for any discounts or allowances provided
      to
      the account, less 20% which is deposited into a reserve account established
      pursuant to the agreement, less allowances and fees. In the event of default,
      valid payment dispute, breach of warranty, insolvency or bankruptcy on the
      part
      of the receivable account, the factor can require the receivable to be
      repurchased by us in accordance with the agreement. The amounts to be paid
      by us
      to the factor for any accepted receivable include a factoring fee of 0.6% for
      each ten (10) day period the account is open.





In
      addition to the receivable financing, Zoo Publishing also utilizes purchase
      order financing with Transcap Trade Finance, LLC, to fund the manufacturing
      of
      video game products. Under the terms of our agreement, we assign purchase orders
      received to Transcap Trade Finance, LLC, which may accept or decline the
      assignment of specific purchase orders. The purchase order financing allows
      us
      to order manufactured video game product from the manufacturer. Upon receipt
      of
      a purchase order, Transcap Trade Finance, LLC opens a letter of credit to the
      video game product manufacturer. The letter of credit permits us to order the
      video game product to satisfy the purchase orders and projected purchase orders
      submitted by our accounts. The interest rate is prime plus 1.5% on outstanding
      advances.




34




*Zoo
      Digital Publishing (UK)*




In
      connection with Zoo Games’ April 4, 2008 purchase of Zoo Digital Publishing, the
      shareholders of Zoo Digital Publishing agreed to accept $364,000, a portion
      of
      the purchase price that was originally due in cash at closing, over a 5
      month period, beginning on July 25, 2008.  Of that amount, $218,000 remains
      outstanding.   In addition, Zoo Games entered into a Loan Note
      Instrument with the sellers in connection with the same transaction for the
      aggregate principal amount of $2,500,000.  The Loan Note Instrument was
      amended on July 30, 2008, to provide that $1,250,000, or the entire
      amount due and owing to one seller, was converted into 117,370
      shares of common stock of Zoo Games, and $750,000 of the $1,250,000 due and
      owing to the other seller, was converted into 70,422 shares of common stock
      of Zoo Games, and the remaining $500,000 outstanding will become
      due and payable on December 31, 2008.  We are also obligated to pay the
      sellers an earnout during each of the three years beginning on April 4,
      2008 and ending on March 31, 2011 (the earnout period) based on certain net
      revenue targets.  If the net revenue targets are met, the
      applicable earnout amounts, to be shared equally by the sellers, would
      be $250,000.  In addition, pursuant to the acquisition agreement, Zoo
      Games agreed to pay $500,000 to each of the two sellers in April 2011
      provided that (i) Zoo Digital Publishing has, in the aggregate through the
      earnout period, at least £1 of profit on ordinary activities and
      (ii) the applicable individual has not resigned, or been terminated for
      cause from, Zoo Digital Publishing.  If Zoo Digital Publishing terminates
      the services of either individual for any reason other than cause, the amount
      due must be paid to such individual within twelve months of such
      termination.





Zoo
      Digital Publishing has an outstanding loan facility in the amount
      of £325,000 (approximately U.S. $591,000) from I.C. Stewart 2001
      Trust.   The facility bears interest at an annual rate of 1.75%
      over the base lending rate of the Bank of England.  The entire facility is
      currently outstanding.  Zoo Digital Publishing is required to pay
      interest quarterly in arrears, and the entire amount outstanding must be
      repaid on April 4, 2009.




Zoo
        Digital Publishing maintains a committed overdraft financing facility through
        the Bank of Scotland in the amount of £700,000 (approximately US $1.3 million).
        Interest on the overdraft facility is 3% over the Bank of Scotland base rate,
        from time to time. The facility will terminate on June 17, 2009 at which
        time
        all amounts will be due and payable, unless the facility is otherwise renewed.
        Zoo Digital Publishing is required
        to meet certain financial covenants in order continue using the overdraft
        facility. The bank requires that one of the principals of Zoo Digital Publishing
        provides a guarantee for £250,000 (approximately US$ 455,000) to secure this
        facility. As of September 30, 2008, Zoo Digital Publishing used £518,000
        (approximately US$ 943,000) of the overdraft facility and had £182,000
        (approximately US$ 331,000) available. The facility is used for general working
        capital of Zoo Digital Publishing.
 
 Zoo
        Digital Publishing also utilizes invoice financing through the Bank of Scotland.
        The invoice financing allows Zoo Digital Publishing to finance 65% of the
        gross
        value of acceptable invoices up to a limit of £800,000 (approximately US $1.5
        million). The discount fee is 1.75% per annum above the Bank of Scotland’s base
        rate and there are minimal arrangement fees to set up the facility. Zoo Digital
        Publishing is required to meet certain financial covenants and provide certain
        documentation in order to continue using the invoice facility. There are
        specific funding limits and requirements for financing debts from certain
        customers of Zoo Digital Publishing. As of September 30, 2008, Zoo Digital
        Publishing used £105,000 (approximately US $191,000) and had available drawdown
        of £82,000.




35


We
        believe the existing cash and cash generated from operations, will be sufficient
        to meet our immediate operating requirements. However, given our strategic
        plan,
        working capital requirements, capital expenditures and potential future
        acquisitions, we will need to raise additional capital within the short-term.
        We
        believe that we require at least an additional $5 million to $10 million
        in
        financing in order to fund our operating requirements and strategic plan
        for the
        following 12 months. However, there can be no assurances that we will be
        able to
        secure any such financing on favorable terms, if at all. If we do not secure
        such financing on a timely basis, it will have a material adverse effect
        on our
        financial condition.
 
 In
        addition, we may choose at any time to raise additional capital to strengthen
        our cash position, facilitate expansion, pursue strategic investments or
        to take
        advantage of business opportunities as they arise.
 
 The
        report of our independent auditors on our financial statements for the fiscal
        year ended December 31, 2007 included an explanatory paragraph raising doubt
        about Zoo Games’ and Driftwood’s ability to continue as a going
        concern.




**Critical
      Accounting Policies and Estimates**




The
      preparation of financial statements in conformity with generally accepted
      accounting principles in the United States of America ("GAAP") requires
      management to make estimates and assumptions about future events and apply
      judgments that affect the reported amounts of assets and liabilities and the
      disclosure of contingent assets and liabilities at the dates of the financial
      statements and the reported amounts of net revenues and expenses during the
      reporting periods. We base our estimates and judgments on historical experience
      and current trends and other assumptions that management believes to be
      reasonable at the time our consolidated financial statements are prepared.
      On a
      regular basis, management reviews the accounting policies, assumptions,
      estimates and judgments to ensure that our financial statements are fairly
      presented in accordance with GAAP. However, because future events and their
      effects cannot be determined with certainty, actual amounts could differ
      significantly from these estimates.




We
      have
      identified the policies below as critical to our business operations and the
      understanding of our financial results and they require management's most
      difficult, subjective or complex judgments, resulting  from
      the need to make estimates about the effect of matters that are inherently
      uncertain. The impact and any associated risks related to these policies on
      our
      business operations is discussed throughout Management's Discussion and Analysis
      of Financial Condition and Results of Operations where such policies affect
      our
      reported and expected financial results.




*Revenue
      Recognition*




We
      recognize revenue upon the transfer of title and risk of loss to our customers.
      We apply the provisions of Statement of Position 97-2, "Software Revenue
      Recognition" in conjunction with the applicable provisions of Staff Accounting
      Bulletin No. 104, "Revenue Recognition." Accordingly, we recognize revenue
      for software when (1) there is persuasive evidence that an arrangement with
      our customer exists, which is generally a customer purchase order, (2) the
      product is delivered, (3) the selling price is fixed or determinable,
      (4) collection of the customer receivable is deemed probable and (5) we do
      not have any continuing obligations. Our payment arrangements with customers
      typically provide net 30 and 60-day terms. Advances received for licensing
      and
      exclusivity arrangements are reported on the balance sheet as deferred revenue
      until we meet our performance obligations, at which point we recognize the
      revenue.




36




Revenue
      is recognized after deducting estimated reserves for returns and price
      concessions. In specific circumstances when we do not have a reliable basis
      to
      estimate returns and price concessions or are unable to determine that
      collection of receivables is probable, we defer the revenue until such time
      as
      we can reliably estimate any related returns and allowances and determine that
      collection of the receivables is probable.




*Allowances
      for Returns and Price Concessions*




We
      accept returns and grant price concessions in connection with our publishing
      arrangements. Following reductions in the price of our products, we grant price
      concessions to permit customers to take credits against amounts they owe us
      with
      respect to merchandise unsold by them. Our customers must satisfy certain
      conditions to entitle them to return products or receive price concessions,
      including compliance with applicable payment terms and confirmation of field
      inventory levels.




Our
      distribution arrangements with customers do not give them the right to return
      titles or to cancel firm orders. However, we sometimes accept returns from
      our
      distribution customers for stock balancing and make accommodations to customers,
      which includes credits and returns, when demand for specific titles falls below
      expectations.




We
      make estimates of future product returns and price concessions related to
      current period product revenue. We estimate the amount of future returns and
      price concessions for published titles based upon, among other factors,
      historical experience and performance of the titles in similar genres,
      historical performance of the hardware platform, customer inventory levels,
      analysis of sell-through rates, sales force  and
      retail customer feedback, industry pricing, market conditions and changes in
      demand and acceptance of our products by consumers.




Significant
      management judgments and estimates must be made and used in connection with
      establishing the allowance for returns and price concessions in any accounting
      period. We believe we can make reliable estimates of returns and price
      concessions. However, these estimates are inherently subjective and actual
      results may differ from initial estimates as a result of changes in
      circumstances, market conditions and assumptions. Adjustments to estimates
      are
      recorded in the period in which they become known.




*Inventory*




Inventory,
      which consists principally of finished goods, is stated at the lower of actual
      cost or market. We estimate the net realizable value of slow-moving inventory
      on
      a title-by-title basis and charge the excess of cost over net realizable value
      to cost of sales.




*Product
      Development Costs*




We
      utilize both internal development teams and third party product developers
      to
      develop the titles we publish.




We
      capitalize internal product development costs (including stock-based
      compensation, specifically identifiable employee payroll expense and incentive
      compensation costs related to the completion and release of titles), third
      party
      production and other content costs, subsequent to establishing technological
      feasibility of a video game title. Technological feasibility of a product
      includes the completion of both technical design documentation and game design
      documentation. Amortization of such capitalized costs is recorded on a
      title-by-title basis in cost of goods sold using the proportion of current
      year
      revenues to the total revenues expected to be recorded over the life of the
      title.




37




We
      frequently enter into agreements with third party developers that normally
      require us to make advance payments for game development and production
      services. In exchange for our advance payments, we receive the exclusive
      publishing and distribution rights to the finished game title. Such agreements
      allow us to fully recover the advance payments to the developers at an agreed
      royalty rate earned on the subsequent retail sales of such games, net of any
      agreed costs. We capitalize all advance payments to developers as product
      development. On a product-by-product basis, we reduce product development costs
      and record a corresponding amount of research and development expense for any
      costs incurred by third party developers prior to establishing technological
      feasibility of a product. We typically enter into agreements with third party
      developers after completing the technical design documentation for our products
      and therefore record the design costs leading up to a signed developer contract
      as research and development expense. We also generally contract with third
      party
      developers that have proven technology and experience in the genre of the video
      game being developed, which often allows for the establishment of technological
      feasibility early in the development cycle. In instances where the documentation
      of the design and technology are not in place prior to an executed contract,
      we
      monitor the product development process and require our third party developers
      to adhere to the same technological feasibility standards that apply to our
      internally developed products.




We
      capitalize advance payments as product development costs subsequent to
      establishing technological feasibility of a video game title and amortize them,
      on a title-by-title basis, as royalties in cost of goods sold. Royalty
      amortization is recorded using the proportion of current year revenues to the
      total revenues expected to be recorded over the life of the title.




At
      each
      balance sheet date, or earlier if an indicator of impairment exists, we evaluate
      the recoverability of capitalized product development costs, advance development
      payments and any other unrecognized minimum commitments that have not been
      paid,
      using an undiscounted future cash flow analysis, and charge any amounts that
      are
      deemed unrecoverable to cost of goods sold if the product has already been
      released. If the product is discontinued prior to completion, any prepaid
      unrecoverable advances are charged to research and development expense. We
      use
      various measures to estimate future  revenues
      for our video game titles, including past performance of similar titles and
      orders for titles prior to their release. For sequels, the performance of
      predecessor titles is also taken into consideration.




Prior
      to establishing technological feasibility, we expense research and development
      costs as incurred.




*Licenses*




Licenses
      consist of payments and guarantees made to holders of intellectual property
      rights for use of their trademarks, copyrights, technology or other intellectual
      property rights in the development of our products. Agreements with rights
      holders generally provide for guaranteed minimum royalty payments for use of
      their intellectual property. Guaranteed minimum payments are initially recorded
      as an asset (licenses) and as a liability (accrued licenses) upon execution
      of a
      licensing agreement, provided that no significant performance remains to be
      completed by the licensor. When significant performance remains to be completed
      by the licensor, we record payments when actually paid.




Certain
      licenses extend over multi-year periods and encompass multiple game titles.
      In
      addition to guaranteed minimum payments, these licenses frequently contain
      provisions that could require us to pay royalties to the license holder, based
      on pre-agreed unit sales thresholds.




Capitalized
      licensing fees are amortized as royalties in cost of goods sold on a
      title-by-title basis at a ratio of (1) current period revenues to the total
      revenues expected to be recorded over the remaining life of the title or
      (2) the contractual royalty rate based on actual net product sales as
      defined in the licensing agreement, whichever is greater. Similar to software
      development costs, we review our sales projections quarterly to determine the
      likely recoverability of our capitalized licenses as well as any unpaid minimum
      obligations. When management determines that the value of a license is unlikely
      to be recovered by product sales, capitalized licenses are charged to cost
      of
      goods sold, based on current and expected revenues, in the period in which
      such
      determination is made. Criteria used to evaluate expected product performance
      and to estimate future sales for a title include: historical performance of
      comparable titles; orders for titles prior to release; and the estimated
      performance of a sequel title based on the performance of the title on which
      the
      sequel is based.




38




*Asset
      Impairment*




*Business
      Combinations—Goodwill and Intangible Assets.* The
      purchase method of accounting requires that assets acquired and liabilities
      assumed be recorded at their fair values on the date of a business acquisition.
      Our consolidated financial statements and results of operations reflect an
      acquired business from the completion date of an acquisition. The costs to
      acquire a business, including transaction, integration and restructuring costs,
      are allocated to the fair value of net assets acquired upon acquisition. Any
      excess of the purchase price over the estimated fair values of the net tangible
      and intangible assets acquired is recorded as goodwill.




We
      evaluate our goodwill annually for impairment or more frequently if indicators
      of potential impairment exist. The determination of whether or not goodwill
      has
      become impaired involves a significant level of judgment in the assumptions
      underlying the approach used to determine the value of our reporting units.
      We
      generally use either the income, cost or market approach to aid in our
      conclusions of such fair values and asset lives. The income approach presumes
      that the value of an asset can be estimated by the net economic benefit to
      be
      received over the life of the asset, discounted to present value. The cost
      approach presumes that an investor would pay no more for an asset than its
      replacement or reproduction cost. The market approach estimates value based
      on
      what other participants in the market have paid for reasonably similar assets.
      Although each valuation approach is considered in valuing the assets acquired,
      the approach ultimately selected is based on the characteristics of the asset
      and the availability of information. Changes in our strategy and/or market
      conditions could significantly impact these judgments and require reductions
      to
      recorded intangible asset balances.




*Long-lived
      assets.*We
      review long-lived assets for impairment whenever events or changes in
      circumstances indicate that the related carrying amounts may not be recoverable.
      Determining whether impairment has occurred typically requires various estimates
      and assumptions, including determining which cash flows are directly related
      to
      the potentially impaired asset, the useful life over which cash flows will
      occur, their amount and the asset's residual value, if any. In turn, measurement
      of an impairment loss requires a determination of fair value, which is based
      on
      the best information available. We use internal discounted cash flow estimates,
      quoted market prices when available and independent appraisals, as appropriate,
      to determine fair value. We derive the required cash flow estimates from our
      historical experience and our internal business plans and apply an appropriate
      discount rate.




*Stock-based
      Compensation*




We
      account for stock-based compensation in accordance with SFAS No. 123(R),
      Share-Based Payment. Under the fair value recognition provisions of this
      statement, share-based compensation expense is measured at the grant date based
      on the fair value of the award and is recognized as expense over the vesting
      period. Determining the fair value of share-based awards at the grant date
      requires judgment, including, in the case of stock option awards, estimating
      expected stock volatility. In addition, judgment is also required in estimating
      the amount of share-based awards that are expected to be forfeited. If actual
      results differ significantly from these estimates, stock-based compensation
      expense and our results of operations could be materially impacted.




*Income
      Taxes*




We
      were a limited liability company (“LLC”) from inception until May 16, 2008 and
      followed all applicable US tax regulations for an LLC. Effective May 16, 2008
      when we became incorporated, it became necessary for us to make certain
      estimates and assumptions to compute the provision for income taxes including
      allocations of certain transactions to different tax jurisdictions, amounts
      of
      permanent and temporary differences, the likelihood of deferred tax assets
      being
      recovered and the outcome of contingent tax risks. These estimates and
      assumptions are revised as new events occur, more experience is acquired and
      additional information is obtained. The impact of these revisions is recorded
      in
      income tax expense or benefit in the period in which they become known.




39





**Off-Balance
      Sheet Arrangements**





We
      do not have any relationships with unconsolidated entities or financial
      partners, such as entities often referred to as structured finance or special
      purpose entities, which would have been established for the purpose of
      facilitating off-balance sheet arrangements or other contractually narrow or
      limited purposes. In addition, we do not have any undisclosed borrowings or
      debt, and we have not entered into any synthetic leases. We are, therefore,
      not
      materially exposed to any financing, liquidity, market or credit risk that
      could
      arise if we had engaged in such relationships.




**Fluctuations
      in Operating Results and Seasonality**




We
      experience fluctuations in quarterly and annual operating results as a result
      of: the timing of the introduction of new titles; variations in sales of titles
      developed for particular platforms; market acceptance of our titles; development
      and promotional expenses relating to the introduction of new titles, sequels
      or
      enhancements of existing titles; projected and actual changes in platforms;
      the
      timing and success of title introductions by our competitors; product returns;
      changes in pricing policies by us and our competitors; the size and timing
      of
      acquisitions; the timing of orders from major customers; order cancellations;
      and delays in product shipment. Sales of our products are also seasonal, with
      peak shipments typically occurring in the fourth calendar quarter as a result
      of
      increased demand for titles during the holiday season. Quarterly and annual
      comparisons of operating results are not necessarily indicative of future
      operating results.





**Item
      4T. Controls and Procedures.**





As
      required by Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act
      of
      1934, as amended (the “Exchange Act”) as of September 30, 2008, the end of the
      period covered by this report, our management concluded its evaluation of the
      effectiveness of the design and operation of our disclosure controls and
      procedures. Disclosure controls and procedures are controls and procedures
      designed to reasonably assure that information required to be disclosed in
      our
      reports filed under the Exchange Act, such as this report, is recorded,
      processed, summarized and reported within the time periods prescribed by SEC
      rules and regulations, and to reasonably assure that such information is
      accumulated and communicated to our management, including our Chief Executive
      Officer and Chief Financial Officer, to allow timely decisions regarding
      required disclosure.





40




Our
      management does not expect that our disclosure controls and procedures will
      prevent all error and fraud. A control system, no matter how well designed
      and
      operated, can provide only reasonable, not absolute, assurance that the control
      system's objectives will be met. Further, the design of a control system must
      reflect the fact that there are resource constraints, and the benefits of
      controls must be considered relative to their costs. Because of the inherent
      limitations in all control systems, no evaluation of controls can provide
      absolute assurance that all control issues and instances of fraud, if any,
      have
      been detected. These inherent limitations include the realities that judgments
      in decision-making can be faulty and that breakdowns can occur because of simple
      error or mistake. The design of any system of controls is based in part upon
      certain assumptions about the likelihood of future events, and there can be
      no
      assurance that any design will succeed in achieving its stated goals under
      all
      potential future conditions.





As
      of the date of this report, our Chief Executive Officer and Chief Financial
      Officer concluded that our disclosure controls and procedures are effective
      in
      providing reasonable assurance that information required to be disclosed in
      our
      reports under the Exchange Act is recorded, processed, summarized and reported
      within the time periods prescribed by SEC rules and regulations, and that such
      information is accumulated and communicated to our management, including our
      Chief Executive Officer and Chief Financial Officer, to allow timely decisions
      regarding required disclosure.





There
      have been no changes in our internal control over financial reporting during
      the
      period covered by this report that has materially affected, or is reasonably
      likely to materially affect our internal control over financial reporting.





**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**





The
      Company is not a party to any pending legal proceedings. Management is not
      aware
      of any threatened litigation, claims, or assessments.





**Item
      1A. Risk Factors.**





There
      have been no material changes in our risk factors from those disclosed in Form
      8-K filed on September 18, 2008 except that the current economic
      conditions may cause a decline in business and consumer spending which could
      adversely affect our business and financial performance.





Our
      operating results are impacted by the health of the North American and European
      economies.  Our business and financial performance, including collection of
      our accounts receivable, realization of inventory, recoverability of assets
      including investments, may be adversely affected by current and future economic
      conditions, such as a reduction in the availability of credit, financial market
      volatility, recession, etc.





Additionally,
      we may experience difficulties in scaling our operations to react to economic
      pressures in the U.S.




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





None.





**Item
      3.****Defaults
      Upon Senior Securities.**





None.





**Item
      4. Submission of Matters to a Vote of Security Holders.**





None.




41




**Item
      5. Other Information.**





None.





**Item
      6. Exhibits.**





10.1
            
            Sales
                Agreement, by and between Zoo Publishing, Inc. and Atari, Inc. dated
                October 24, 2008. +*31.1
            
            Certification
                of Robert Ellin, Chief Executive Officer, pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002. +31.2
            
            Certification
                of Charles Bentz, Chief Financial Officer, pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002.+32.1
            
            Certification
                of Robert Ellin, Principal Executive Officer, pursuant to 18 U.S.C.
                Section 1350 +32.2
            
            Certification
                of Charles Bentz, Principal Financial Officer, pursuant to 18 U.S.C.
                Section 1350 +





+Filed
      herewith


*Confidential
      treatment has been requested for certain
      portions of this exhibit.




42




**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.








Driftwood
                Ventures, Inc.November
                19, 2008
            By:
            /s/ Robert
                EllinRobert
                Ellin
              President
                and Chief Executive Officer
              (Principal
                Executive Officer)





November
                19, 2008
            By:
            /s/ Charles
                BentzCharles
                Bentz
              Chief
                Financial Officer
              (Principal
                Financial Officer)