**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington, D.C.
      20549**




**FORM
      10-K**




**ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**




**For
      the fiscal year ended June 30, 2008**




**Commission
      File Number 000-51869**




**SOUTHPEAK
      INTERACTIVE CORPORATION**


*(Exact
      Name of Registrant as Specified in Its Charter)*




**Delaware**
            
            **20-3290391***(State
                or Other Jurisdiction of*
            
            *(I.R.S.
                Employer**Incorporation
                or Organization)*
            
            *Identification
                No.)*




**2900
      Polo Parkway**


**Midlothian,
      Virginia 23113**


**(804)
      378-5100**


*(Address
      including zip code, and telephone number, including area code, of principal
      executive offices)*




**Securities
      registered pursuant to Section 12(g) of the Act:**




**None**




**Securities
      registered pursuant to Section 12(b) of the Act:**




Common
      stock, par value $.0001 per share


Class
      W
      warrants, each to purchase one shares of common stock


Class
      Z
      warrants, each to purchase one shares of common stock


Series
      A
      units, each consisting of two shares of common stock and ten Class Z
      warrants


*(Title
      of Class)*




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.  Yes o No þ




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the
      Act.  Yes o No þ




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 (the
“Exchange Act”) during the preceding 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been
      subject to such filing requirements for the past
      90 days.  Yes þ No o




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the
      best of the registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-K or
      any amendment to this Form 10-K. o




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




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




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




The
      aggregate market value of the common stock held by nonaffiliates of the
      registrant (4,733,940 shares) based on the $1.70 closing
      price of the registrant’s common stock as reported on the Over-the-Counter
      bulletin board on October 3 ,
      2008,
      was approximately $8,047,698 .
      For
      purposes of this computation, all officers, directors and 10% beneficial owners
      of the registrant are deemed to be affiliates. Such determination should not
      be
      deemed to be an admission that such officers, directors or 10% beneficial owners
      are, in fact, affiliates of the registrant.




As
      of
      September 30, 2008, there were 36,019,100 outstanding shares of the registrant’s
      common stock.
















**TABLE
      OF CONTENTS**




**Page****PART
                I**Item
                1.  Business
            
            3Item
                1A.  Risk Factors
            
            9Item 1B.  Unresolved
                Staff Comments
            
            19Item 2.  
                Properties
            
            19Item 3.  
                Legal Proceedings
            
            19Item 4.  
                Submission of Matters to a Vote of Security Holders
            
            19**PART
                II**Item
                5.  Market for Registrant’s Common Equity, Related Stockholder
                Matters and Issuer Purchases of Equity Securities
            
            20Item
                6.  Management’s Discussion and Analysis of Financial Condition
                and Results of Operations
            
            21Item
                7.  Quantitative and Qualitative Disclosures About Market
                Risk
            
            21Item
                7A.  Quantitative and Qualitative Disclosures about Market
                Risk
            
            31Item
                8.  Financial Statements and Supplementary Data
            
            32Item
                9.  Changes in and Disagreements with Accountants on Accounting
                and Financial Disclosure
            
            32Items
                9A(T).  Controls and Procedures
            
            32Item
                9B.  Other Information
            
            32**PART
                III**Item
                10.  Directors, Executive Officers and Corporate
                Governance
            
            33Item
                11.  Executive Compensation
            
            36Item
                12.  Security Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters
            
            41Item
                13.  Certain Relationships and Related Transactions, and
                Director Independence
            
            42Item
                14.  Principal Accounting Fees and Services
            
            45**PART
                IV**Item
                15.  Exhibits and Financial Statement Schedules
            
            46


1


**CAUTIONARY
      NOTES REGARDING FORWARD-LOOKING STATEMENTS**




We
      believe that some of the information contained in this report on Form 10-K
      constitutes forward-looking statements within the definition of the Private
      Securities Litigation Reform Act of 1995. You can indentify these statements
      by
      forward-looking words such as “may,” “expect,” “anticipate,” “contemplate,”
“believe,” “estimate,” “intend,” “plan,” and “continue” or similar words. You
      should read statements that contain these words carefully because
      they:




·
            discuss
                future expectations;




·
            contain
                projections of future results of operations or financial condition;
                or




·
            state
                other “forward-looking”
information.




We
      believe it is important to communicate our expectations to our stockholders.
      However, there may be events in the future that we are not able to accurately
      predict or over which we have no control. The risk factors and cautionary
      language discussed in this report provide examples of risks, uncertainties
      and
      events that may cause actual results to differ materially from the expectations
      described by us in our forward-looking statements, including among other
      things:




·
            our
                potential inability to compete with larger businesses in our
                industry;




·
            the
                limitations of our business model;




·
            our
                potential inability to anticipate and adapt to changing
                technology;




·
            the
                possibility that we may not be able to enter into publishing arrangements
                with some developers;




·
            our
                dependence on vendors to meet our commitments to
                suppliers;




·
            our
                dependence on hardware manufactures to publish new
                videogames;




·
            our
                potential inability to recuperate the up-front license fees paid
                to
                console manufacturers;




·
            our
                dependence on a limited number of
                customers;




·
            our
                potential dependence on the success of a few
                videogames;




·
            our
                dependence on developers to deliver their videogames on
                time;




·
            the
                potential of litigation;




·
            interference
                with our business from the adoption of governmental regulations;
                and




·
            the
                inability to obtain additional financing to grow our
                business.




You
      are
      cautioned not to place undue reliance on these forward-looking statements,
      which
      speak only as of the date of this report. Forward-looking statements involve
      known and unknown risks and uncertainties that may cause our actual future
      results to differ materially from those projected or contemplated in the
      forward-looking statements.




All
      forward-looking statements included herein attributable to us or any person
      acting on our behalf are expressly qualified in their entirety by the cautionary
      statements contained or referred to in this section. Except to the extent
      required by applicable laws and regulations, we undertake no obligation to
      update these forward-looking statements to reflect events or circumstances
      after
      the date of this report or to reflect the occurrence of unanticipated events.
      You should be aware that the occurrence of the events described in the “Risk
      Factors” section and elsewhere in this report could have a material adverse
      effect on us.


2


**PART****I**




**Item
      1.**  ***Business***




**Overview**




We
      are an
      independent developer and publisher of interactive entertainment software.
      We
      develop, market and publish videogames for all leading gaming and entertainment
      hardware platforms, including Sony’s PLAYSTATION®3, or PS3, and PlayStation®2,
      or PS2, computer entertainment systems; Sony’s PSP® (PlayStation®Portable)
      system, or PSP; Microsoft’s Xbox 360® video game and entertainment system, or
      Xbox 360, Nintendo’s WiiTM, or Wii, DSTM, or DS, and Game Boy® Advance, or GBA,
      and for the PC and Games for Windows®. Our titles span a wide range of
      categories and target a variety of consumer demographics ranging from casual
      players to hardcore game enthusiasts.




Our
      business model is primarily based on utilizing a network of third-party software
      developers and independent studios to develop our products. We are positioned
      as
      an “indie” label videogame developer and publisher working with independent
      developers to create and publish our videogames. We have cultivated
      relationships with independent videogame studios and developers in the United
      States, Europe, Australia and Asia, that provide us with innovative and
      compelling videogame concepts.




We
      have
      produced strong historical results with growing net revenues of approximately
      $6.2 million, $12.5 million and $40.2 million for the fiscal years ended June
      30, 2006, 2007 and 2008, respectively. Management expects its growth strategy
      will drive continued performance above industry averages for 2009 and beyond.
      We
      plan to leverage our business model and the expanding universe of independent
      developers to accelerate investment in new and creative products in order to
      serve a rapidly expanding base of global consumers.




We
      incorporated in Delaware on August 10, 2005 under the name Global Services
      Partners Acquisition Corp. to serve as a vehicle to effect an acquisition,
      through a merger, capital stock exchange, asset acquisition or other similar
      business combination with a then-unidentified operating business. On May 12,
      2008, we acquired all of the outstanding membership interests of SouthPeak
      Interactive LLC, or SouthPeak, pursuant to a Membership Interest Purchase
      Agreement. SouthPeak was originally formed in 1996 as an independent business
      unit of SAS Institute, Inc. We refer to the acquisition of SouthPeak herein
      as
      the “Acquisition.” We are headquartered in Midlothian, Virginia, and have
      offices in Grapevine, Texas and London, England.




**Our
      Industry**




We
      operate in a growing industry with highly favorable industry dynamics. 2007
      marked a year of transition and growth in videogame sales based on the
      introduction of the next generation of videogame consoles in 2005 and 2006
      and
      the expanding demographic of videogame users. Particularly, the
      introduction of Microsoft’s Xbox 360, Sony’s PS3 and Nintendo’s Wii consoles are
      driving demand for new videogames with increasing sophistication and graphics
      given the enhanced functionality of the consoles including high definition
      capability and the ability to access the internet. New handhelds, such as
      Nintendo’s DS and Sony’s PSP, are also expanding the market for new
      content.




The
      Entertainment Software Association reported that sales of computer and videogame
      software grew to $9.5 billion in 2007 in the US. With all three next
      generation platforms available in major markets, better than expected demand
      for
      Nintendo formats, a strong list of highly anticipated new videogame releases,
      continued strength from handhelds, and continuing demand from the PlayStation
      2
      audience, the global videogame market is expected to rise to $47 billion by
      2009 from $33 billion in 2006, according to DFC Intelligence. Videogame
      platforms and software now incorporate social networking applications which
      have
      further stimulated growth in consumer demand. In addition, revenue opportunities
      from in-game advertising are expected to grow to $400 million in 2009 from
      $80 million in 2005, according to Parks Associates, a market research firm
      covering the interactive entertainment industry.




The
      expanding demographic of the videogame consumer is also driving demand across
      the sector and resulting in videogames becoming an alternative to other
      mainstream entertainment products. In a June 2007 consumer survey, conducted
      by
      Ipsos-Insight for Entertainment Software Association, the following key insights
      reveal how the market for videogames has become increasingly
      entrenched:




·
            33%
                of homes (45 million households) in America own a videogame
                console;


3


·
            Women
                age 18 or older represent a significantly greater portion of the
                game-playing population (31%) than boys age 17 or younger (20%);
                and




·
            The
                average videogame player age is 33 years (28.2% under 18 years, 47.6%
                18-49 years, and 24.2% 50+ years), and the average number of years
                adult
                gamers have been playing computer or videogames is
                13.




**Our
      Strategy**




Our
      strategy is to establish a portfolio of successful proprietary content for
      the
      major hardware platforms, and to capitalize on the growth of the interactive
      entertainment market. We currently work exclusively with third-party software
      developers and independent studios to develop our products. This strategy
      enables us to source and create highly innovative videogames while avoiding
      the
      high fixed costs and risk of having a large internal development studio. Through
      outsourcing, we are also able to access videogame concepts and content from
      emerging studios in Eastern Europe, Scandinavia and Asia, providing us with
      significant new product opportunities with limited initial financial
      outlay.




Our
      approach is to identify and secure new videogame products and intellectual
      property rights that focus on delivering profitable, high quality videogames
      developed by talented and reputable professionals. We approach each videogame
      concept with a disciplined focus on delivering high contribution margin based
      on
      the anticipated market opportunity.




We
      will
      continue to strengthen our position as a leading “indie” video game publisher
      and attract additional independent developers and studios to develop products
      for us. Our platform is a unique channel for independent developers to bring
      their videogames to market and allow them the creative freedom to maximize
      the
      gaming experience. We provide our developers substantial latitude in the
      creative process which has historically resulted in more innovative products.
      We
      work collaboratively with these developers to evaluate emerging trends and
      original videogame concepts in an effort to identify new and unique products
      that meet continuously evolving consumer trends.




We
      recently signed a studio license agreement with Epic Games for use of the Unreal
      Engine 3, or UE3, in the worldwide development of upcoming videogames. UE3
      is a
      state of the art complete videogame development framework providing the vast
      array of core technologies, content creation tools, and support infrastructure
      required by sophisticated videogame developers. This license gives us a distinct
      advantage in attracting top independent developers that would otherwise find
      it
      cost prohibitive to have access to this award winning videogame
      engine.




We
      have
      developed a growth strategy that is designed to capitalize on our fundamental
      business strengths and growth characteristics of the videogame industry. Since
      fiscal year 2005, we have grown our business in excess of 100% annually
      year-over-year and believe our business model can sustain a very high growth
      rate in the future. Elements of this growth strategy include:




·
            Focus
                on the most current and popular hardware
                platforms;




·
            Develop
                innovative and compelling content;




·
            Develop
                sequels to successful titles;




·
            Pursue
                digital content opportunities; and




·
            Expand
                our international business.




**Our
      Strengths**




*Strong
      relationships with all of the major videogame retailers and expertise in
      understanding consumer demand*




Our
      management team has significant experience in selling and marketing videogame
      products to consumers through mass market and specialty retailers. Our
      management team understands customers’ needs, price points and shifting tastes,
      allowing us to capitalize by developing videogames in specialized niches and
      genres. Our management team has long-standing relationships with all of the
      videogame retailers and distributors and has valuable insight into retail
      distribution and a track record of successfully securing product placement
      and shelf space. Specifically, Mr. Terry Phillips, our chairman, and Ms. Melanie
      Mroz, our president and chief executive officer, worked for Phillips Sales
      as
      sales agents for 17 and 11 years, respectively. In those positions they
      represented numerous videogame publishers such as Sony Computer Entertainment
      America, Take-Two, Midway, Konami, Capcom and Eidos. They were involved in
      the
      sales launch of hundreds of videogames, some of which included well known
      franchises such as Grand Theft Auto, Metal Gears Solid, Mortal Kombat, Gran
      Turismo and others.  Their experience also included the launch of  the
      Playstation, Playstation 2 and Playstation Portable.  The customer base
      they worked with include Gamestop, Circuit City, Walmart, and
      Blockbuster.


4


*Extensive
      worldwide network of content developers*




We
      are
      positioned as an “indie” videogame company and are recognized by many
      independent videogame studios and developers as a good alternative to the major
      videogame publishers. We have relationships with many independent studios and
      developers across North America, Europe, Australia and Asia who present us
      with
      compelling videogame publishing opportunities. We maintain contacts with such
      developers to review new videogame concepts and proposals, and are constantly
      initiating new relationships with emerging creative talent.




In
      particular, our product development and production teams, regularly participates
      in videogaming conferences and conventions around the world and visits with
      independent studios to discuss videogame concepts and vet their capabilities.
      Additionally, we actively share information with studios regarding videogame
      market trends and the current buying preferences and emerging tastes of our
      customers, positioning us as a valuable resource to studios in developing
      creative videogame concepts. We collaborate with these studios and developers
      in
      identifying niche opportunities not yet exploited to develop and publish
      content.




*Developer-friendly
      mindset and vision providing the developer with creative
      freedom*




Our
      business model allows us flexibility in negotiating with and structuring
      development agreements with independent developers and studios. Our
      developer-friendly approach fosters an environment that allows developers to
      exercise their creative freedom in conceptualizing and designing a videogame
      experience. The flexibility afforded to developers is a key component in
      attracting developers to work with us and enables us to continue the growth
      in
      our pipeline of products. We currently have a pipeline of approximately 17
      titles in development, including and several of which are specifically
      targeted to emerging videogamer demographics.




**Our
      Products**




We
      have
      published videogames on many platforms for a variety of genres including
      action/adventure, role playing, racing, puzzle strategy, fighting and combat.
      Our product pipeline is mostly focused on next generation hardware platforms,
      and targets a broad consumer demographic. The following titles were released
      during the fiscal years ended June 30, 2008, 2007 and 2006:






**2008**
            
            **2007**
            
            **2006***Two
                Worlds*
              *Pool
                Party*
              *Iridium
                Runners*
              *Imperium
                Roman*
              *Dream
                Pinball 3D*
              *Grid*
              *Overlord*
              *Roogoo*
            
            *Dance
                Factory*
              *Juka
                - the monaphonic menace*
              *Scurge
                Hive*
              *The
                Con*
              *Monster
                Madness*
            
            *Combat
                Elite*
              *ATV
                  Offroad Fury Blazin'  Trails*
                *State
                  of
                  Emergency*


In
      order
      to maintain general access to the console systems and hand-held devices
      marketplace, we have maintained licenses for the PS2, PS3, Wii, and Xbox360
      console systems and PSP and NDS hand-held devices with the owners of each such
      platform. Each license allows us to create multiple products for the applicable
      platform, subject to certain approval rights which are reserved by each
      licensor. Each license also requires that we pay the licensor a per unit royalty
      for each unit manufactured. In contrast, we are not required to obtain any
      license for the development and production of products for PCs.




**Our
      Software/Product Development Process**




We
      currently develop our products exclusively by contracting with third-party
      software developers and independent studios. We enter into comprehensive
      development agreements with these parties, that outline financial terms,
      development milestones, completion dates and final product delivery dates.
      Our
      product development and production teams carefully select third parties to
      develop video games based on their capabilities, suitability, availability
      and
      cost. We usually have broad rights to commercially utilize products created
      by
      the third party developers with which we work. Development contracts are
      structured to provide developers with incentives to provide timely and
      satisfactory performance by associating payments with the achievement of
      substantive development milestones, and by providing for the payment of
      royalties to them based on sales of the developed product, only after we our
      recoup development costs. Our agreements with developers generally provide
      us
      with the right to monitor development efforts and cease advance payments if
      specified development milestones are not achieved.


5


The
      development cycle for new videogames depends on the platform and the complexity
      and scope of the videogame. The development cycle for console and PC videogames
      ranges from 12 to 24 months and the development cycle for handheld videogames
      ranges from six to 18 months. Although historically we developed our titles
      for
      a single platform release, many of our new title releases will be released
      simultaneously on several game platforms.




**Manufacturing
      Our Products**




Other
      than videogames that we release for sale on PCs, videogames are manufactured
      for
      us by the platform manufacturers or their authorized vendors. We contract with
      various PC replicators for the manufacturing of our PC products.




The
      platform game manufacturing process begins with our placing a purchase order
      with a manufacturer. We then send the approved software code to the manufacturer
      (together with related artwork, user instructions, warranty information,
      brochures and packaging designs) for manufacturing. We occasionally experience
      difficulties or delays in the manufacture of our titles; however such delays
      have not significantly harmed our business to date.




We
      have
      not experienced material delays due to manufacturing defects. Our videogames
      titles typically carry a 90-day limited warranty. We are required by our
      platform licenses to provide a standard defective product warranty on all of
      the
      products sold. Generally, we are responsible for resolving, at our own expense,
      any warranty or repair claims. We have not experienced any material warranty
      claims, but there is no guarantee that we will not experience such claims in
      the
      future.




**Platform
      License Agreements**




We
      have
      entered into license agreements with Sony, Microsoft and Nintendo to develop
      and
      publish software in North America, Europe and Australia. We are not required
      to
      obtain any licenses to develop titles for the PC.




*Microsoft.* Under
      the terms of the license agreements that we have entered into with Microsoft
      Corporation and its affiliates, Microsoft granted us the right and license
      to
      develop, market, publish and distribute software titles for the Xbox 360.
      The agreements require us to submit products to Microsoft for approval and
      for
      us to make royalty payments to Microsoft based on the number of units
      manufactured. In addition, products for the Xbox 360 are required to be
      manufactured by Microsoft approved manufacturers.




*Sony.* Under
      the terms of the license agreements that we have entered into with Sony Computer
      Entertainment, Inc., Sony granted us the right and license to develop,
      market, publish and distribute software titles for the PS3, PS2 and PSP hardware
      platforms. The agreements require us to submit products to Sony for approval
      and
      for us to make royalty payments to Sony based on the number of units
      manufactured. In addition, products for the PS3, PS2 and PSP are required to
      be
      manufactured by Sony approved manufacturers.




*Nintendo.* Under
      the terms of the license agreements that we have entered into with Nintendo
      Co., Ltd. and its affiliates, Nintendo granted us the right and license to
      develop, market, publish and distribute software for Wii, DS and GBA. The
      agreements require us to submit products to Nintendo for approval and for us
      to
      make royalty payments to Nintendo based on the number of units manufactured.
      In
      addition, products for such platforms are required to be manufactured by
      Nintendo approved manufacturers.




**Our
      Customers**




Our
      products are available for sale or rental in thousands of retail outlets in
      North America. In North America, our products are primarily sold directly to
      mass merchandisers, consumer electronics stores, discount warehouses, national
      retail chain stores and game specialty stores. Our products are also sold to
      smaller, regional retailers, as well as distributors who, in turn, sell our
      products to retailers that we do not service directly, such as grocery and
      drug
      stores. Our North American customers include Best Buy, Blockbuster, Circuit
      City, Gamestop, Target, Toys R Us and Walmart.




We
      utilize electronic data interchange with most of our major customers in order
      to
      (i) efficiently receive, process, and ship customer product orders, and
      (ii) accurately track and forecast sell-through of products to consumers in
      order to determine whether to order additional products from the manufacturers.
      We believe that the direct relationship model we use allows us to better manage
      inventory, merchandise and communications. We ship all of our products to our
      North American customers from a distribution center located in
      Indiana.


6


We
      conduct our international activities via our office in the United Kingdom.
      This
      office manages sales, marketing and distribution operations for our European,
      Asian and Australian customers. In the United Kingdom, we sell directly to
      several key retail accounts, and work with a distributor partner to call on
      other accounts. In each of the other 11 key European territories, plus Australia
      and Asia, our products are sold through third-party distribution and licensing
      arrangements. These parties are responsible for all marketing and consumer
      press
      within their respective territory. We seek to maximize our worldwide revenues
      and profits by continuing to expand the number of selling relationships we
      maintain in major territories. We ship all of our products to our foreign
      customers from a distribution center located in London.




For
      the
      fiscal year ended June 30, 2008, we generated 87% of our net revenues in North
      America and 14% of our net revenues internationally. On a worldwide basis,
      our largest customers, Wal-Mart and SVG Distribution, accounted for
      approximately 12% and 11%, respectively, of consolidated gross revenues for
      the
      year ended June 30, 2008 and approximately 22% and 13%, respectively, of
      consolidated gross accounts receivable at June 30, 2008.




**Sales
      and** **Marketing**




Our
      marketing and promotional efforts are intended to maximize exposure and broaden
      distribution of our videogames, promote brand name recognition, assist retailers
      and properly position, package and merchandise our videogames. We implement
      a
      range of promotional sales and marketing activities to help to increase
      awareness among retailers, including public relations campaigns; demo
      distributions, promotions and cross-promotional activities with third parties
      (through trailers, demo discs, standees, posters, pre-sell giveaways at retail
      stores, and videogame kiosks at sporting and outdoor events); print and online
      advertising, television and radio advertisement, and outdoor advertising.
      Additionally, we customize public relations programs so that awareness is
      created with all relevant audiences, including core gamers and mass
      entertainment consumers.




We
      employ
      various other marketing methods designed to promote consumer awareness,
      including in-store promotions and point-of-purchase displays, direct mail,
      co-operative advertising, as well as attendance at trade shows. We host media
      events throughout the year at which print, broadcast and online journalists
      can
      preview, review and evaluate our products prior to their release. In addition
      to
      regular face-to-face meetings and communications with our sales force, we employ
      extensive trade marketing efforts including: direct marketing to buyers and
      store managers; trade shows; various store manager shows; and distribution
      and
      sales incentive programs. We label and market our products in accordance with
      ESRB principles and guidelines.




We
      market
      and sell our products in North America and internationally via sales offices
      in
      Grapevine, Texas and London, England respectively.




**Competition**




The
      videogame industry is intensely competitive and new videogame products and
      platforms are regularly introduced. Our competitors vary in size from small
      companies with limited resources to large corporations with greater financial,
      marketing, and product development resources than we have. Due to their
      different focuses and allocation of resources, certain of our competitors spend
      more money and time on developing and testing products, undertake more extensive
      marketing campaigns, adopt more aggressive pricing policies, pay higher fees
      to
      licensors for desirable motion picture, television, sports and character
      properties, and pay more to third-party software developers. In addition,
      competitors with large product lines and popular titles typically have greater
      leverage with retailers, distributors, and other customers who may be willing
      to
      promote titles with less consumer appeal in return for access to such
      competitor’s most popular titles. We believe that the main competitive factors
      in the videogame industry include: product features and playability; brand
      name
      recognition; compatibility of products with popular platforms; access to
      distribution channels; quality of products; ease of use; price; marketing
      support; and quality of customer service.




We
      compete primarily with other publishers of videogames for consoles and PCs.
      Significant third-party videogame competitors currently include, among others:
      Activision, INC.; Atari, Inc.; Capcom Co. Ltd.; Eidos PLC;
      Electronic Arts Inc.; Konami Company Ltd.; Midway Games Inc.;
      Namco Bandai Games Ltd.; Sega Enterprises, Ltd.; Take-Two Interactive
      Software, Inc.; THQ Inc.; Ubisoft Entertainment; Viacom/MTV; Vivendi
      Games Publishing; Warner Bro’s Interactive; and the Walt Disney Company. In
      addition, integrated videogame console hardware and software companies such
      as
      Sony, Nintendo, and Microsoft compete directly with us in the development of
      software titles for their respective platforms.




**Seasonality**




The
      videogame publishing industry is highly seasonal, with sales typically higher
      during the fourth calendar quarter, due primarily to increased demand for
      videogames during the holiday buying season. The Christmas selling season
      accounts for about half of the industry’s yearly sales of video and computer
      videogames. We historically have not been materially impacted by the industry
      seasonality; primarily because we have produced a limited number of videogame
      titles.


7


**Industry
      Regulation**




Videogame
      entertainment has come under increased scrutiny from politicians and consumer
      advocacy groups many of which are calling for increased regulation/oversight
      of
      the content and sale of said products. Such potential regulation could raise
      costs or limit the market for videogames, in general, and for our products
      in
      particular.




Consumer
      advocacy groups have opposed sales of videogame software containing graphic
      violence or sexually explicit material or other objectionable content by
      pressing for legislation in these areas, including legislation prohibiting
      the
      sale of certain “M” rated videogames to minors, and by engaging in public
      demonstrations and media campaigns, and various governmental bodies have
      proposed regulation aimed at our industry to prohibit the sale to minors of
      software containing such material. Additionally, retailers may decline to sell
      videogames containing graphic violence or sexually explicit material that they
      deem inappropriate for their businesses.




Currently,
      the videogame publishing industry is rated by the Entertainment Software Rating
      Board, or ESRB, a self-regulated volunteer videogame rating organization. The
      ESRB, through its ratings system, requires videogame publishers to provide
      consumers with information relating to videogame content, including graphic
      violence, profanity or sexually explicit material contained in software
      videogames. The ESRB system uses a rating symbol that suggests the appropriate
      player age group, and content descriptor information, such as graphic violence,
      profanity, or sexually explicit material. The ESRB rating is printed on each
      videogame package and retailers may use the rating to restrict sales to the
      recommended age groups. Retail customers take the ESRB rating into consideration
      when deciding which videogames they will purchase.




We
      claim
      compliance with rating system requirements and to the proper display of the
      designated rating symbols and content descriptors. In some instances, however,
      we may have to modify certain videogames in order to market them under the
      expected rating, which could delay or disrupt the release of said videogames.
      In
      the US, we expect our videogames to receive ESRB ratings of “E” (age 6 and
      older), “E10+” (age 10 and older), “T” (age 13 and over) or “M” (age 17 and
      over). In addition to these ratings, the ESRB may also rate a videogame as
“AO”
(age 18 and over). A few of our published videogames have been rated “M” by the
      ESRB.




**Government
      Regulation**




Legislation
      has been introduced at the local, state and federal levels for the establishment
      of a government-mandated rating and governing system in the US and in foreign
      countries for the videogame software publishing industry.




In
      the
      US, proposals have been made by numerous state legislators to regulate the
      sale
      of videogames containing violent or sexually explicit material by prohibiting
      the sale of such products to under 17 or 18 audiences and proposing penalties
      for non-compliance, and certain states have recently sought to adopt laws
      regulating “M” or “AO” rated products or products otherwise depicting violent or
      sexually explicit materials. While such legislation has been successfully
      enjoined by industry and retail groups, the adoption into law of such
      legislation could severely limit the retail market for “M” rated
      videogames.




Furthermore,
      a US Senate bill, referred to as The Family Entertainment Protection Act,
      proposes to adopt a common rating system for videogame software, television
      and
      music containing violence or sexually explicit material and proposes to prohibit
      the sale of “M” rated, “AO” rated and “Rating Pending” products to under-17
      audiences. The Federal Trade Commission has issued reports with respect to
      the
      marketing of such material to minors. If the bill is adopted into law, it may
      further limit the potential market for “M” rated products.




**Foreign
      Regulation**




Legislation
      has been introduced for the establishment of a government-mandated rating and
      governing system in foreign countries for the videogame software publishing
      industry. Various foreign countries already allow government censorship of
      videogames.




Certain
      countries have also established similar rating systems as those in the US as
      prerequisites for sales of videogame software in such countries. In some
      instances, US videogame publishers may be required to modify certain of their
      videogames to comply with the requirements of these rating systems. Other
      countries, such as Germany, have adopted laws regulating content both in
      packaged videogames and those transmitted over the Internet that are stricter
      than current US laws.




**Intellectual
      Property**




We
      have
      obtained licenses for videogame software developed by third parties in
      connection with our publishing business, and we regard these licenses, including
      the trademarks, copyrights, patents and trade secrets related to such videogame
      software, as proprietary intellectual property. The underlying trademarks,
      copyrights, trade secrets and patents often are separately protected by the
      third party developers of the software by enforcement of intellectual property
      laws. To protect our proprietary licenses from unauthorized use and infringement
      we maintain employee or third-party nondisclosure and confidentiality
      agreements, contractual restrictions on copying and distribution, as well as
      “shrink-wrap” or “click-wrap” license agreements or limitations-on-use of
      software included with our products.


8


We
      obtain
      rights to publish and distribute videogames developed by third parties. We
      endeavor to protect our developers’ software and production techniques under
      copyright, trademark and trade secret laws as well as through contractual
      restrictions on disclosure, copying and distribution. Although we generally
      do
      not hold any patents, we obtain trademark and copyright registrations for our
      products.




As
      the number of videogames in the market increases, so may the likelihood
      that videogame publishers will increasingly become the subject of claims that
      their software infringes the copyrights of others. Although we believe that
      the
      videogames and technologies of third-party developers and publishers with whom
      we have contractual relationships do not and will not infringe or violate
      proprietary rights of others, it is possible that infringement of proprietary
      rights of others may occur. Any claims of infringement, with or without merit,
      could be time consuming, costly and difficult to defend.




**Employees**




As
      of
      June 30, 2008, we employed approximately 36 people, of whom two were outside
      the
      United States. We believe that our ability to attract and retain qualified
      employees is a critical factor in the successful development of our products
      and
      that our future success will depend, in large measure, on our ability to
      continue to attract and retain qualified employees. None of our employees are
      represented by a labor union or covered by a collective bargaining agreement
      and
      we consider our relations with employees to be favorable.




**Executive
      Officers and Key Employees**




Information
      regarding our executive officers and key employees is set forth under the
      heading “Directors, Executive Officers and Corporate Governance” contained in
      Part III, Item 10 of this report.




**Available
      Information**




We
      make
      available free of charge on or through our internet website our annual reports
      on Form 10-K, quarterly reports on Form 10-Q, current reports on
      Form 8-K and all amendments to those reports as soon as reasonably
      practicable after such material is electronically filed with or furnished to
      the
      SEC. Our website address is *www.southpeakgames.com.*




**Item
      1A.** ***Risk Factors***




We
      operate in a rapidly changing environment that involves a number of risks,
      some
      of which are beyond our control. This discussion highlights some of the risks
      which may affect future operating results. These are the risks and uncertainties
      we believe are most important for you to consider. Additional risks and
      uncertainties not presently known to us, which we currently deem immaterial
      or
      which are similar to those faced by other companies in our industry or business
      in general, may also impair our business operations. If any of the following
      risks or uncertainties actually occurs, our business, financial condition and
      operating results would likely suffer.




**Risks
      Related to our Business and Operations**




***Stiff
      competition within the videogame publishing industry, in particular, can
      significantly reduce our market share, curtail potential revenue, and negatively
      impact our long-term viability.***




We
      compete for licenses to properties and the sale of our videogames with the
      large
      platform manufacturers such as Sony, Microsoft and Nintendo, each of which
      also
      develops and markets software for its own platforms. Each of these competitors
      can bundle their software with their hardware and create less demand for
      individual sales of our videogames. Additionally, these hardware systems
      manufacturers have better bargaining positions with respect to retail pricing,
      shelf space and retailer accommodations than do any of their licensees,
      including us, as well as the financial resources to withstand significant price
      competition and to implement extensive advertising campaigns. These platform
      providers may also give priority to their own games or to those of other
      publishers when manufacturing capacity is insufficient.




Next
      generation consoles require larger development teams and budgets to bring
      videogames to market. Although we have been able to produce successful
      videogames for these next generation consoles with industry competitive budgets,
      we may be unable to continue to do so in the future.


9


We
      compete, as well, with domestic videogame publishers such as Activision, Inc.;
      Atari, Inc.; Capcom Co. Ltd.; Eidos PLC; Electronic
      Arts Inc.; Konami Company Ltd.; Midway Games Inc.; Namco Bandai
      Games Ltd.; Sega Enterprises, Ltd.; Take-Two Interactive
      Software, Inc.; THQ Inc.; Ubisoft Entertainment; Viacom/MTV; Vivendi
      Games Publishing; Warner Bro’s Interactive; and the Walt Disney Company. Many of
      our competitors have blockbuster videogames (with greater name recognition
      among
      consumers), a broader product line, or greater financial, marketing and other
      resources than we do. Accordingly, these competitors may be able to market
      their
      products more effectively or make larger offers or guarantees to independent
      developers in connection with the acquisition of commercially desirable
      properties.




We
      compete, as well, with a variety of independent publishers of proprietary
      videogame software. Because platform licenses are non-exclusive, and many our
      competitors also have licenses to develop and distribute videogame software
      for
      these systems, new entrants could enter the market, including those with
      business models similar to ours.




Our
      videogame distribution operations also exist in a highly competitive
      environment. Competition is based primarily on breadth, availability and
      marketability of videogames; price; terms and conditions of sale; credit terms
      and availability; speed of delivery; and effectiveness of sales and marketing
      programs. Our competitors include regional, national and international
      distributors, as well as hardware manufacturers and software publishers. We
      may
      lose market share or be forced in the future to reduce our prices in response
      to
      our competitors.




***Our
      business model can limit our growth prospects and long-term
      viability.***




We
      have
      historically focused on publishing innovative videogames for underserved niches
      that are generally sold at prices typical for big budget videogames produced
      by
      the leading large videogame publishers. In doing so, we have relied on our
      management’s industry experience to identify videogame concepts that can be
      profitably produced, their ability to allocate the Company’s limited financial
      resources among videogames under development and their ability to leverage
      low-cost offshore videogame developers. There can be no assurance, however,
      that
      we will be able to accurately assess the likelihood and volume of sales for
      future videogames or to engage low-cost developers.




The
      traditional distribution model of distributing original videogames through
      third
      parties, such as independent videogame publishers, could be challenged by the
      emergence of direct-to-consumer electronic delivery. Microsoft, Sony and
      Nintendo each plan to provide a mechanism for videogame developers to publish
      videogames via electronic store fronts that enable direct downloading of
      videogame content, though only a limited number of videogames will be selected
      for these electronic store fronts at any given time. Similar distribution venues
      already exist for the personal computer platform as well. Whereas some
      videogames are likely to entail program file sizes not easily distributed
      digitally due to bandwidth and storage constraints, it is possible that
      videogame concepts pursued by us in the future may not always have these
      constraints, and therefore originators of such videogame concepts could
      potentially bypass the traditional distribution and publication path, and take
      a
      direct-to-consumer approach, or even choose to sign multi-product deals, be
      acquired by other publishers, or go direct to our clients. Additionally,
      although we have been able to gain access to the limited videogame slots
      available in electronic store fronts, there can be no assurance that the number
      of videogames at electronic store fronts will remain limited or that we will
      continue to be able to access limited available videogame slots. Such changes
      in
      industry distribution practices and the number of videogame slots made available
      at electronic store fronts could limit our prospects for growth and negatively
      affect our profitability.




***If
      we are unable to anticipate and adapt to rapidly changing technology, our
      results of operations and competitive position could be adversely
      affected.***




We
      derive
      most of our revenue from the sale of videogame software developed for use on
      popular consoles. The success of our business is affected in large part by
      the
      market appeal of our published videogames and by the availability of an adequate
      supply of the hardware systems on which they run. Our ability to accurately
      predict which new videogame platforms will be successful in the marketplace,
      as
      well as our ability to develop commercially successful products for these new
      systems, will determine whether or not we will be competitive in the
      future.




We
      typically make product development decisions and commit significant resources
      and time (18 to 24 months) in advance to remain competitive. If we choose not
      to
      publish videogames for a new hardware system that is ultimately popular, our
      competitive position and profitability may be adversely affected. Yet, even
      if
      we seek to adapt to any new videogame platforms, we face the risk of not being
      able to generate any significant earnings or recoup our investment as quickly
      as
      anticipated if the new system does not gain widespread market appeal, is not
      available in adequate quantities to meet consumer demand, or has a shorter
      life
      cycle than anticipated. Alternatively, a platform for which we have not devoted
      significant resources could be more successful than we had initially
      anticipated, causing us to miss a vital earnings opportunity.


10


***If
      we are unable to enter into attractive publishing arrangements with developers
      of highly innovative and commercially appealing videogames, our competitiveness
      and prospects for growth could be severely impacted.***




Our
      success depends on our ability to timely identify and publish highly marketable
      videogames. We rely on third-party software developers or development studios
      for the development of most of our videogames. Because interactive videogame
      developers are highly in demand, our relatively limited resources vis-à-vis our
      competitors puts us at a competitive disadvantage when bidding to offer
      attractive compensation packages, advance royalties or ample pre-development
      financing to desirable developers, and potentially reduces our chances of
      winning the right to publish highly innovative videogames. Such a situation
      could severely impact our competitiveness and prospects for growth.




***If
      we fail to satisfy our obligations under agreements with third-party developers
      and licensors, our operating results could be materially adversely
      affected.***




Software
      developers who have developed videogames for us in the past may not be available
      to develop videogame software for us in the future. Due to the limited number
      of
      third-party software developers and the limited control that we exercise over
      them, these developers may not manage to complete videogames for us on time
      and
      within product quality expectations, if at all. We have entered into agreements
      with third parties to acquire the rights to publish and distribute proprietary
      videogame software. These agreements typically require us to make advance
      payments, pay royalties and satisfy other conditions. Our advance payments
      may
      not be sufficient to permit developers to develop new software successfully,
      which could result in material delays and significantly increase our costs
      to
      bring particular products to market. Future sales of our videogames may not
      be
      sufficient to recover advances to software developers and licensors, and we
      may
      not have adequate financial and other resources to satisfy our contractual
      commitments to such developers. If we fail to satisfy our obligations under
      agreements with third-party developers, the agreements may be terminated or
      modified in ways that are burdensome and materially adversely affect our
      operating results and long-term viability.




***If
      we are unable to sell any of the works we have committed to fund, our operating
      margins could be adversely affected.***




We
      typically enter into contracts with suppliers that are matched with commitments
      to fund original work development under specific terms. As of June 30, 2008,
      we
      have entered into contracts with 14 independent software developers pursuant to which we are subject to minimum
      funding commitments and we may enter into additional contracts with similar
      commitments in the future. To date, we have sufficiently met our commitments
      with each of those suppliers, but we cannot assure you that in the future our
      earnings and/or liquidity will meet or exceed our commitments with each vendor.
      If we are unable to sell any of the works we have committed to fund, our
      operating margins could be adversely affected.




***If
      we are unable to secure approval from hardware manufacturers to publish new
      videogames for their respective platforms, our business could suffer
      significantly or, alternatively, if we fail to satisfy our obligations under
      agreements with first-party platform manufacturers such as Microsoft, Sony,
      and
      Nintendo, our operating results could be materially adversely
      affected.***




We
      are
      dependent on non-exclusive licenses from platform manufacturers (Microsoft,
      Nintendo and Sony) for the right to publish videogames for their platforms.
      Our
      existing platform licenses require that we obtain approval for the publication
      of new videogames on a videogame-by-videogame basis. As a result, the number
      of
      videogames we are able to publish for these platforms, and our sales from
      videogames for these platforms, may be limited. A manufacturer may elect not
      to
      renew or extend our license agreement at the end of its term, or adversely
      modify it, for whatever reason. Consequently, we may be unable to publish new
      videogames for the applicable platforms or we may be required to do so on less
      attractive terms. This will not only prevent us from publishing additional
      videogames for a manufacturer but also negatively impact our operating results
      and prospects for growth.




In
      addition, our contracts with the console manufacturers often grant the
      manufacturers approval rights over new software products, and control over
      the
      development of our videogames. These rights and privileges of hardware
      manufacturers could adversely affect our results of operations or financial
      condition by:




·
            Causing
                the termination of a new project for which we have expended significant
                resources;




·
            Impeding
                the development and shipment of newly published videogames to customers;
                and




·
            Increasing
                development lead times and costs which could be avoided if we are
                able to
                manufacture new videogame software independently.




Microsoft
      released its next-generation hardware platform, the Xbox 360, into the North
      American marketplace in November 2005, and each of Sony and Nintendo introduced
      their respective next-generation platforms PlayStation 3 and the Wii into the
      marketplace during November 2006. While we have licenses for Microsoft Xbox
      360,
      Nintendo Wii, DS and Gameboy Advance, and for Sony PlayStation 3, Playstation
      2,
      and Playstation Portable, we may be unable to obtain licenses for future
      hardware platforms.


11


***If
      our inventory of next-generation videogames is not fully sold and we have paid
      upfront significant license fees and manufacturing costs, our operating results
      and net worth may be materially adversely affected.***




When
      publishing for videogame consoles, videogame publishers take on the burden
      of a
      great deal of inventory risk. All significant console manufacturers since
      Nintendo with its NES (1985) have monopolized the manufacture of every videogame
      made for their console, and have required all publishers to pay a license fee
      for every videogame so manufactured. This license fee is generally due at the
      time of manufacturing the videogame and is based upon the number of videogames
      being manufactured, unlike license fee payments in most other industries, in
      which license fees are paid following actual sales of the product. So, if a
      videogame publisher orders one million copies of its videogame, but half of
      them
      do not sell, the publisher has already paid the full console manufacturer
      license fee on one million copies of the videogame, and has to absorb that
      cost.
      Furthermore, non-moving inventory of videogames tend to decline substantially
      in
      value over time or to become obsolete. If this situation happens to us, and
      price concessions are not available to it on unsold products, we could incur
      significant losses, which could materially adversely affect our profitability
      and net worth.




***We
      are dependent upon a limited number of customers and the loss of any of four
      key
      customers could materially adversely affect our
      business.***




We
      are
      dependent on a small number of large customers for a significant portion of
      our
      sales, and the loss of one or more of these clients, or a significant decrease
      in total revenues from any of these clients, could seriously hurt our business.
      Historically, a substantial portion of our revenue has come from a limited
      number of clients. For example, we have two customers, Wal-Mart and SVG
      Distribution that accounted for approximately 12% and 11%, respectively, of
      consolidated gross revenues for the year ended June 30, 2008 and approximately
      22% and 13%, respectively, of consolidated gross accounts receivable at June
      30,
      2008.




Approximately
      95% of our sales are made through purchase orders subject to agreements with
      our
      customers, including GameStop, Wal-Mart and Pinnacle, through which the customer
      may reduce the videogames they purchase from us, renegotiate the terms on which
      they purchase our videogames, or terminate their relationship with us at any
      time. Certain of our customers may decline to carry products containing mature
      content. A substantial reduction in orders, including as a result of a product
      being rated “AO” (age 18 and over); difficulty in collecting receivables in
      full, or within a reasonable time period, or within reserve levels; or
      termination of our relationship with the customer as a result of a number of
      factors (including their level of satisfaction with the support services they
      receive from us, demand for or pricing of competing videogames, and their
      ability to continue their operations) could adversely affect our operating
      results and business viability.




***We
      are dependent on the success of a few videogames, and unless we are able to
      gain
      and maintain market acceptance for newly published videogames in the future,
      our
      growth and earnings prospects could be severely
      compromised.***




A
      limited
      number of videogames may produce a disproportionately large amount of our sales.
      Due to this dependence on a limited number of videogames, the failure of one
      or
      more of these products to achieve anticipated results may significantly harm
      our
      business and financial results.




***If
      our contracted videogame developers fail to deliver their finished videogames
      on
      time, or at all, we stand to incur significant losses that could severely
      adversely affect our financial performance.***




We
      rely
      upon our third-party software developers to deliver videogames within
      anticipated release schedules and cost projections.




While
      timetables for the development and delivery of videogame software are set in
      advance, videogame production schedules are difficult to predict and can be
      subject to delays. Schedule slippage is very common due to the uncertain
      schedules of software development. Most publishers have suffered a “false
      launch”, in which the development staff assures the company that videogame
      development will be completed by a certain date, and a marketing launch is
      planned around that date, including advertising commitments, and then after
      all
      the advertising is paid for, the development staff announces that the videogame
      will “slip”, and will actually be ready several months later than originally
      intended. When the videogame finally appears, the effects among consumers of
      the
      marketing launch - excitement and “buzz” over the release of, and intent of
      customers to purchase, the videogame - have dissipated, and lackluster interest
      leads to weak sales. These problems are compounded if the videogame is supposed
      to ship for the Christmas selling season, but actually slips into the subsequent
      year.


12


The
      development cycle for new videogames can range from twelve to twenty four months
      and can be expected to increase in connection with the development of
      next-generation software. After development of a videogame, it may take between
      nine to twelve additional months to develop the product for other hardware
      platforms. Since we have no direct control over the business, finances and
      operating practices of external videogame developers, a delay or failure by
      these developers to make shipments or to complete the work performed - whether
      due to operational issues, financial difficulties, or faulty business decisions
      - may result in delays in, or cancellations of, product releases that may
      threaten our ability to obtain sufficient amounts of our product to sell to
      our
      customers when they demand them. In addition, customers may, under certain
      contracts, have the ability to terminate agreements to purchase videogame
      publications in view of issues concerning work quality and originality, or
      prolonged delay or significant revisions to published videogames. Terminations
      by clients of their purchase commitments can significantly dampen our revenue
      and cause our business to suffer tremendous losses.




Because
      many leading independent videogame developers are small companies that are
      dependent on a few key individuals for the completion of a project, this also
      exposes us to the risk that these developers will lose a key employee, go out
      of
      business before completing a project, or simply cease work on a project for
      which we have hired them, and this occurrence could also be highly detrimental
      to our ability to compete and to generate additional revenue.




***If
      delays or disruptions occur in the delivery to our customers of newly published
      videogames following their commercial release, our operating results could
      be
      materially adversely affected.***




Certain
      of our licensing and marketing agreements contain provisions that would impose
      penalties in the event that we fail to meet agreed upon videogame release dates.
      The life cycle of a videogame generally involves a relatively high level of
      sales during the first few months after introduction, followed by a rapid
      decline in sales. New products may not achieve significant market acceptance
      or
      generate sufficient sales to permit us to recover development, manufacturing
      and
      marketing costs associated with these products. Because revenues associated
      with
      an initial product launch generally constitute a high percentage of the total
      revenue associated with the life of a product, delays in product releases or
      disruptions following the commercial release of one or more new videogames
      could
      adversely affect the sales of such products and cause our operating results
      to
      materially suffer and differ from expectations.




***If
      we incur substantial costs for market testing and sales activities after our
      new
      videogames are published, and fail to anticipate market demand or secure
      customer contracts, our profitability and liquidity could be materially
      adversely affected.***




We
      typically undertake market testing and sales activities before each of our
      videogames is eventually approved for deployment by a given customer. In
      addition, once a customer contract is signed, there is a period in which
      revisions to videogame features are made, which can contribute to further delays
      in the realization of revenue. If we incur significant expenses associated
      with
      market testing, product revisions, and sales and marketing and are not
      successful in anticipating market demand for our videogames or in securing
      contracts from our targeted customers, we may generate insufficient revenue
      to
      fully cover our costs, including our investment in videogame development, and
      our profitability and liquidity could be severely affected.




***If
      we incur unanticipated levels of returns of our videogames from customers,
      or
      price concessions granted to them, our operating results could significantly
      suffer.***




We
      are
      exposed to the risk that customers will return our products, or seek to secure
      price concessions for any bulk orders. Our distribution arrangements with our
      customers generally do not give them the right to return videogames to us or
      to
      cancel firm orders. However, when demand for our offerings falls below
      expectations, we can sometimes accept product returns for stock balancing and
      negotiate accommodations to customers in order to maintain healthy relationships
      with them as well as continued access to their sales channels. These
      accommodations include negotiation of price discounts and credits against future
      orders, referred to as price concessions. The estimated reserve for returns
      and
      price concessions is based on our management’s evaluation of expected sales,
      potential markdown allowances based on historical experience, market acceptance
      of products produced, retailer inventory levels, budgeted customer allowances
      and the nature of the videogame and existing commitments to
      customers.




While
      we
      believe that we can reliably estimate future returns and price concessions,
      we
      cannot predict with certainty whether existing reserves will be sufficient
      to
      offset any accommodations we will actually provide, nor can we predict the
      amount or nature of accommodations that we will provide in the future.
      Furthermore, the continued granting of substantial price protection and other
      allowances may require us to raise additional funds for our operating
      requirements, but there is no assurance that such funds will be available to
      us
      on acceptable terms, if at all. In addition, the license fees we pay Sony,
      Microsoft and Nintendo are non-refundable and cannot be recovered when
      videogames are returned. Ultimately, if our return rates and price concessions
      for published videogames materially exceed our reserves, our operating results
      may be adversely affected.




***If
      our published videogames suffer from grave defects, market acceptance of our
      product may be adversely affected, our results of operations adversely affected,
      and our reputation seriously harmed*** ***.***




Our
      published videogames can contain major defects, which could delay market
      acceptance of our products; cause customers to either terminate relationships
      with, or initiate product liability suits against us, or both; or divert our
      engineering resources, and consequently adversely impact our results of
      operations and our reputation.


13


***If
      our licensed intellectual property is not adequately protected from unauthorized
      use or access by others, our competitiveness could be significantly undermined
      and our viability adversely affected.***




We
      have
      obtained licenses for videogame software developed by third parties in
      connection with our publishing business, and we regard these licenses, including
      for the trademarks, copyrights, patents and trade secrets to such videogame
      software, as proprietary intellectual property. The underlying trademarks,
      copyrights, trade secrets and patents often are separately protected by the
      third party developers of the software by enforcement of intellectual property
      laws. To protect our proprietary licenses from unauthorized use and
      infringement, we maintain employee or third-party nondisclosure and
      confidentiality agreements, contractual restrictions on copying and
      distribution, as well as “shrink-wrap” or “click-wrap” license agreements or
      limitations-on-use of software included with our products.




Our
      licenses, however, are vulnerable to misappropriation and infringement, which
      could undermine our competitiveness and materially adversely affect our
      business. It is difficult to effectively police unauthorized use of our licenses
      and we cannot be certain that existing intellectual property laws will provide
      adequate protection for our products. Despite our efforts to protect our
      proprietary rights, unauthorized parties may try to copy our videogames, or
      to
      reverse engineer the licensed software. Well-organized piracy operations that
      have proliferated in recent years also have the ability to download pirated
      copies of our published software over the Internet. In addition, the laws of
      some foreign countries where our products are or may be distributed may not
      protect our proprietary rights to as great an extent as United States law,
      or
      are poorly enforced. If we are unable to protect our software against piracy,
      or
      prevent the misappropriation and infringement of our licenses in any form,
      our
      competitiveness and viability could be severely adversely affected.




***If
      we infringe on the proprietary rights of others, unknowingly or not, we could
      sustain major damages to our business.***




Although
      we believe our software and technologies and the software and technologies
      of
      third-party developers and publishers with whom we have contractual relations
      do
      not and will not infringe or violate proprietary rights of others, it is
      possible that infringement of proprietary rights of others has occurred or
      may
      occur.




Any
      claims of infringement, with or without merit, could be time consuming, costly
      and difficult to defend. Parties making claims of infringement may be able
      to
      obtain injunctive or other equitable relief that could require us to discontinue
      the distribution of our interactive entertainment software, prevent us from
      obtaining a license or redesigning our videogames, block us from publishing
      new
      materials, and compel us to pay substantial damages. In the event of a
      successful claim of infringement, we may need to obtain one or more licenses
      from third parties, which may not be available at a reasonable cost, if at
      all;
      divert attention and resources away from our daily business; impede or prevent
      delivery of our published videogames; and require us to pay significant
      royalties, licensing fees and damages. The defense of any lawsuit could result
      in time-consuming and expensive litigation, regardless of the merits of such
      claims, and could also result in damages, license fees, royalty payments and
      restrictions on our ability to provide our services, any of which could harm
      our
      business.




***We
      are subject to the risks and uncertainties associated with international trade,
      which could adversely affect our business.***




As
      we
      expand our international operations, we are exposed to other risks, including:
      different market dynamics and consumer preferences; unexpected changes in
      international political, regulatory and economic developments; increased credit
      risks, tariffs and duties; difficulties in coordinating foreign transactions
      and
      operations; shipping delays; and possible impediments to the collection of
      foreign accounts receivable. Moreover, all of our international sales are made
      in local currencies, which could fluctuate against the dollar. While we may
      use
      forward exchange contracts to a limited extent to seek to mitigate foreign
      currency risk, our results of operations could be adversely affected by
      unfavorable foreign currency fluctuations. These or other factors could have
      an
      adverse effect on our business.




***If
      we are unable to effectively manage and fund our expansion initiatives, we
      could
      incur huge charges, which in turn could undermine our growth
      plans.***




We
      have
      begun to expand our publishing operations, enlarge our work force, and increase
      our investments in proprietary videogames created by third-party developers.
      To
      manage this growth successfully, we must constantly hire, train and manage
      an
      increasing number of management, technical, marketing, and other personnel.
      Furthermore, we will require significant cash resources to fuel our expansion
      activities, and may have to seek debt or equity financing to fund related costs.
      There is no guarantee, however, that we could obtain the additional financing
      required on acceptable terms or at all. The issuance of new equity securities
      of
      the Company, moreover, would result in dilution to the interests of our
      stockholders. Unless we are able to effectively manage our growth activities,
      our business may be materially adversely affected.


14


***We
      may not be able to adequately adjust our cost structure in a timely fashion
      in
      response to a sudden decrease in demand.***




A
      significant portion of our sales and marketing and general and administrative
      expenses are comprised of personnel and facilities. In the event of a
      significant decline in revenues, we may not be able to exit facilities, reduce
      personnel, or make other changes to our cost structure without disruption to
      our
      operations or without significant termination and exit costs. Management may
      not
      be able to implement such actions in a timely manner, if at all, to offset
      an
      immediate shortfall in revenues and profit. Moreover, reducing costs may impair
      our ability to produce and develop videogames at sufficient levels in the
      future. We are subject to the risk that our inventory values may decline and
      protective terms under supplier arrangements may not adequately cover the
      decline in values.




***Failure
      to collect our accounts receivable on a timely basis will negatively impact
      our
      cash flow.***




Our
      sales
      are typically made on credit. We do not hold any collateral to secure payment
      from our customers. As a result, we are subject to credit risks, particularly
      in
      the event that a significant amount of our receivables represent sales to a
      limited number of retailers or are concentrated in foreign markets. Although
      we
      continually assess the creditworthiness of our customers, which are principally
      large, national retailers, if we are unable to collect our accounts receivable
      as they become due, our financial condition and cash flow could be adversely
      affected. From time to time we may purchase from financial institutions
      insurance on our receivables (with certain limits) to help protect us from
      loss
      in the event of a customer’s bankruptcy or insolvency.




***Our
      quarterly operating results may fluctuate significantly due to various factors
      related to our operations, which could cause our stock price to decline and
      could result in substantial losses to investors.***




Our
      quarterly operating results have varied widely in the past and are likely to
      vary in the future, due to numerous factors, several of which are not under
      our
      control. These factors include the timing of our release of new videogames,
      customer demand for our videogames, and fluctuations in receivables collections
      and quarterly working capital needs. Other factors that cause fluctuations
      in
      our sales and operating results include:




·
            The
                timing of release of our competitor’s
                products;




·
            The
                popularity of both new videogames and videogames released in prior
                periods;




·
            The
                profit margins for videogames we
                sell;




·
            Competition
                in the industry for retail shelf
                space;




·
            Changing
                consumer demand for videogames for different platforms; and




·
            The
                timing of the introduction of new platforms and the accuracy of retailers’
                forecasts of consumer demand.




The
      uncertainties associated with videogame development, including varying
      manufacturing lead times, production delays and the approval process for
      products by hardware manufacturers and other licensors also make it difficult
      to
      predict the quarter in which our products will ship and therefore may cause
      us
      to fail to meet financial expectations. In future quarters, operating results
      may fall below the expectations of securities analysts and investors and the
      price of our stock could decline significantly.




The
      videogame publishing industry is highly seasonal, with the Christmas selling
      season accounting for a substantial portion of the industry’s yearly sales of
      video and computer videogames, leading to a concentrated glut of high-quality
      competition every year in every videogame category during this seasonal period.
      Although historically we have not been materially impacted by the industry
      seasonality, primarily because we have produced a limited volume of videogames
      that have been absorbed by the market even in low volume periods of the year,
      we
      may be impacted by the industry seasonality in the future as we increase the
      volume of our videogame production. Our failure or inability to introduce
      products on a timely basis to meet seasonal fluctuations in demand could
      adversely affect our business and operating results in the future.




We
      believe that quarter-to-quarter comparisons of our operating results will not
      be
      a good indication of our future performance. We may not be able to maintain
      consistent profitability on a quarterly or annual basis. It is likely that
      in
      some future quarter, our operating results may be below the expectations of
      public market analysts and investors and as a result of the above-mentioned
      factors, and other factors described throughout this “Risk Factors” section, the
      price of our common stock may fall or significantly fluctuate, and possibly
      bring about significant reductions to stockholder value.


15


***If
      we fail to retain the services of senior management, our business and prospects
      could be materially adversely affected.***




Our
      continued success will depend to a significant extent upon the performance
      and
      contributions of our senior management and upon our ability to attract, motivate
      and retain highly qualified employees. We are dependent upon key senior
      management to effectively manage our business in a highly competitive
      environment. If one or more of our key officers joins a competitor or forms
      a
      competing company, we may experience material interruptions in product
      development, delays in bringing products to market, difficulties in our
      relationships with licensors, suppliers and customers, and lose additional
      personnel, which could significantly harm our business, financial condition
      and
      operating results. Additionally, failure to continue to attract and retain
      qualified management personnel could adversely affect our business and
      prospects.




We
      do not
      have “key person” life insurance policies covering any of our employees, nor are
      we certain if any such policies will be obtained or maintained in the future.
      In
      particular, we will depend in large part on the abilities of Mr. Terry Phillips
      and Ms. Melanie Mroz, who are the chairman, and president and chief executive
      officer, respectively, of the Company, to effectively execute future
      strategies.




***If
      we fail to hire and retain qualified personnel, in an industry where competition
      for qualified personnel is intense, our business could be seriously
      harmed.***




Our
      business, operating results and financial condition could be materially and
      adversely affected if we lose the services of key technical, sales or marketing
      employees, or if we fail to attract additional highly qualified employees.
      Our
      employees are responsible for ensuring the timely publication, distribution
      and
      continued improvement of proprietary videogames that our clients demand, for
      promptly addressing client requirements through technical and operational
      support services, and for identifying and developing opportunities to provide
      additional products and/or services to existing clients. The loss of the
      services of these employees, the inability to attract or retain qualified
      personnel in the future, or delays in hiring qualified personnel could limit
      our
      ability to generate revenues and to successfully operate our
      business.




Competition
      for employees can be intense and the process of locating key personnel with
      the
      right combination of skills is often lengthy. We rely to a substantial extent
      on
      the expertise, skills and knowledge of management, marketing, sales, technical
      and technology personnel to formulate and implement our business plan, as well
      as to identify, support, publish and market quality videogames. Although we
      have
      granted incentives to some employees, we may not be able to continue to retain
      these personnel at current compensation levels, or at all. The compensation
      arrangements with such employees could result in increased expenses and have
      a
      negative impact on our operating results. In addition, if one or more of these
      individuals leave us, we may experience material delays in bringing products
      to
      market, which could have a material adverse effect on our business and
      prospects.




***Growth
      of our business will result in increased demands on our management and limited
      human capital resources, which we may not be able to
      meet.***




Any
      future growth in our business, whether organic or through acquisitions, will
      result in increased responsibility for our management and increased demands
      on
      our personnel. As our business grows, it will be required to retain qualified
      personnel who can expand our customer base and ensure continued development
      and
      delivery of highly innovative and technologically advanced videogames. We must
      continue to enhance and expand our management, technical, selling and marketing
      capabilities to accommodate this growth. To manage future growth, we will need
      to:




·
            Retain
                and hire competent senior management and marketing personnel to manage
                publishing and marketing
                activities;




·
            Maintain
                and expand our base of operating, financial and administrative personnel;
                and




·
            Continue
                to train, motivate, and retain existing employees and attract and
                integrate new employees.




If
      we are
      unable to manage future expansion, our ability to provide and maintain superior
      services to our vendors and customers can be compromised, which could in turn
      damage our reputation and substantially harm the business.




***The
      Company is still in the process of making significant compensation
      decisions.***




Significant
      compensation decisions are made by our board of directors and compensation
      committee. Currently, only Terry Phillips, our chairman, and Melanie Mroz,
      our
      president and chief executive officer, have employment agreements with us.
      The
      compensation arrangements for other key employees are subject to review and
      change from time to time, including in the near term, by our board of directors
      and its compensation committee.


16


***Potential
      increased regulation of videogame content and distribution can stifle growth
      and
      profitability and seriously hurt our business.***




Videogame
      entertainment has come under increased scrutiny from politicians and consumer
      advocacy groups many of which are calling for increased regulation/oversight
      of
      the content of videogame products. Such potential regulation could raise costs
      or limit the market for videogames, in general, and for our products in
      particular.




Consumer
      advocacy groups have opposed sales of videogame software containing graphic
      violence or sexually explicit material or other objectionable content by
      pressing for legislation in these areas, including legislation prohibiting
      the
      sale of certain “M” rated videogames to minors, and by engaging in public
      demonstrations and media campaigns, and various governmental bodies have
      proposed regulation aimed at our industry to prohibit the sale to minors of
      software containing such material. Additionally, retailers may decline to sell
      videogames containing graphic violence or sexually explicit material that they
      deem inappropriate for their businesses. Some of our videogames have received
      an
“M” rating (age 17 and over). If retailers decline to sell our “M” rated
      products or if our products are rated “AO” (age 18 and over), we may be required
      to significantly change or discontinue particular videogames.




Currently
      in the United States, the videogame publishing industry is rated by the
      Entertainment Software Rating Board or ESRB, a self-regulated volunteer
      videogame rating organization. The ESRB, through its ratings system, requires
      videogame publishers to provide consumers with information relating to videogame
      content, including graphic violence, profanity or sexually explicit material
      contained in videogames. There are similar ratings agencies in the UK, Germany,
      Australia and other geographic territories.




***Failure
      to obtain a target rating for certain of our products, as well as videogame
      re-rating, could negatively impact our sales.***




The
      ESRB
      system uses a rating symbol that suggests the appropriate player age group,
      and
      content descriptor information, such as graphic violence, profanity, or sexually
      explicit material. The ESRB rating is printed on each videogame package and
      retailers may use the rating to restrict sales to the recommended age groups.
      Retail customers take the ESRB rating into consideration when deciding which
      videogames they will purchase. If the ESRB or a manufacturer determines that
      any
      of our videogames should have a rating directed to an older or more mature
      consumer, we may be less successful in marketing and selling said
      videogames.




We
      claim
      compliance with rating system requirements and the proper display of the
      designated rating symbols and content descriptors. In some instances, however,
      we may have to modify certain videogames in order to market them under the
      expected rating, which could delay or disrupt the release of these videogames.
      In the United States, we expect our videogames to receive ESRB ratings of “E”
(age 6 and older), “E10+” (age 10 and older), “T” (age 13 and over) or “M” (age
      17 and over). In addition to these ratings, the ESRB may also rate a videogame
      as “AO” (age 18 and over). A few of our published videogames have been rated “M”
by the ESRB. If we are unable to obtain “M” ratings as a result of changes in
      the ESRB’s ratings standards or for other reasons, including the adoption of
      legislation in this area, our business and prospects could be negatively
      affected. In the event any of our videogames are re-rated by the ESRB, we may
      be
      required to record a reserve for anticipated product returns and inventory
      obsolescence which could expose us to additional litigation, administrative
      fines and penalties and other potential liabilities, and could adversely affect
      our operating results.




***New
      legislation, content policies adopted by retailers, and litigation could inhibit
      sales of our products.***




Legislation
      has been introduced at the local, state and federal levels for the establishment
      of a government-mandated rating and governing system in the United States and
      in
      foreign countries for the videogame software publishing industry. Various
      foreign countries already allow government censorship of videogames. We believe
      that if our industry were to become subject to a government rating system,
      our
      ability to successfully market and sell our products could be adversely
      affected.




In
      the
      United States, proposals have been made by numerous state legislators to
      regulate the sale of videogames containing violent or sexually explicit material
      by prohibiting the sale of such products to under 17 or 18 audiences and
      proposing penalties for non-compliance, and certain states have recently sought
      to adopt laws regulating “M” or “AO” rated products or products otherwise
      depicting violent or sexually explicit materials. While such legislation has
      been successfully enjoined by industry and retail groups, the adoption into
      law
      of such legislation in federal and/or in state jurisdictions in which we do
      significant business could severely limit the retail market for our “M” rated
      videogames.




Furthermore,
      a United States Senate bill, referred to as The Family Entertainment Protection
      Act, proposes to adopt a common rating system for videogame software, television
      and music containing violence or sexually explicit material and to prohibit
      the
      sale of “M” rated, “AO” rated and “Rating Pending” products to under-17
      audiences. The Federal Trade Commission has issued reports with respect to
      the
      marketing of such material to minors. If the bill is adopted into law, it may
      limit the potential market for our “M” rated products, and adversely affect our
      operating results.


17


Certain
      countries have also established similar rating systems as prerequisites for
      sales of videogame software in such countries. In some instances, we may be
      required to modify certain of our videogames to comply with the requirements
      of
      these rating systems, which could delay the release of videogames in these
      countries. Other countries, such as Germany, have adopted laws regulating
      content both in packaged videogames and those transmitted over the Internet
      that
      are stricter than current United States laws.




Moreover,
      retailers may decline to sell videogame software containing graphic violence
      or
      sexually explicit material. Some trade organizations also require videogame
      publishers to provide consumers with information relating to graphic violence,
      profanity, or sexually explicit material contained in videogames, and they
      impose penalties for non-compliance.




Additionally,
      although lawsuits seeking damages for injuries allegedly suffered by third
      parties as a result of videogames have been unsuccessful in the courts, claims
      of this kind can be asserted against us.




***Our
      Chairman is subject to an SEC cease and desist order.***




Our
      Chairman, Mr. Terry Phillips, agreed, in May 2007, to a settlement with the
      SEC
      in a proceeding arising from certain actions in 2000 and 2001. Without admitting
      or denying the allegations, Mr. Phillips agreed to consent to the entry of
      an
      order to cease and desist from committing or causing any violations of Section
      10(b) of the Securities Exchange Act of 1934, or the Exchange Act, and Exchange
      Act Rules 10b-5 and 13b2-1 and from causing any violations of Sections 13(a)
      and
      13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-2, 13a-1 and
      13a-13.




This
      proceeding arose from the involvement in 2000 and 2001 of Mr. Phillips, Capitol
      Distributing, L.L.C, and another private company in which Mr. Phillips was
      a
      principal, in certain actions of Take-Two Interactive Software, Inc., where
      Mr.
      Phillips was accused of taking receipt of merchandise from Take-Two Interactive
      Software, Inc. and later returning the merchandise to Take-Two without making
      an
      effort to sell the merchandise. In his agreement to cease and desist, Mr.
      Phillips paid a civil penalty of $50,000.




Should
      Mr. Phillips be found to have violated the terms of the SEC’s order in the
      future, he may be subject to further enforcement action, including legal action
      imposing injunctive relief and assessing fines or penalties, which could have
      a
      material impact on our reputation and business.




**Risks
      Relating to our Securities**




***Because
      we do not currently intend to pay dividends on our common stock, stockholders
      will benefit from an investment in our common stock only if it appreciates
      in
      value.***




We
      do not
      currently anticipate paying any dividends on shares of our common stock. Any
      determination to pay dividends in the future will be made by our board of
      directors and will depend upon results of operations, financial condition,
      contractual restrictions, restrictions imposed by applicable law and other
      factors our board of directors deems relevant. Accordingly, realization of
      a
      gain on stockholders’ investments will depend on the appreciation of the price
      of our common stock. There is no guarantee that our common stock will appreciate
      in value or even maintain the price at which stockholders purchased their
      shares.




***The
      concentration of our capital stock ownership will likely limit a stockholder’s
      ability to influence corporate matters, and could discourage a takeover that
      stockholders may consider favorable and make it more difficult for a stockholder
      to elect directors of its choosing.***




As
      of
      September 30 ,
      2008,
      our executive officers, directors and affiliates together beneficially owned
      approximately 57.8 %
      of our
      outstanding common stock. As a result, these stockholders have the ability
      to
      exert significant control over matters that require approval by all our
      stockholders, including the election of directors and approval of significant
      corporate transactions. The interests of these stockholders might conflict
      with the interests of the other holders of our securities, and it
      may cause us to pursue transactions that, in their judgment, could enhance
      their
      equity investments, even though such transactions may involve significant risks
      to our other security holders. The large concentration of ownership in a small
      group of stockholders might also have the effect of delaying or preventing
      a
      change of control of our company that our other stockholders may view as
      beneficial.


18




***It
      may be difficult for you to resell shares of our common stock if an active
      market***  ***for
      our common stock does not develop.***




Our
      common stock is not actively traded on a securities exchange and we currently
      do
      not meet the initial listing criteria for any registered securities exchange,
      including the Nasdaq Stock Market. Our securities are quoted on the less
      recognized Over-the-Counter Bulletin Board. This factor may further
      impair our stockholders’ ability
      to
      sell their shares when they want and/or could depress our stock price.
      As a result, stockholders may find it difficult to dispose of, or to obtain
      accurate quotations of the price of, our securities because smaller quantities
      of shares could be bought and sold, transactions could be delayed and security
      analyst and news coverage of our company may be limited. These factors could
      result in lower prices and larger spreads in the bid and ask prices for our
      shares.





***We
      seek to manage our business with a view to achieving long-term results, and
      this
      could have a negative effect on short-term trading.***





Our
      focus
      is on creation of stockholder value over time, and we intend to make decisions
      that will be consistent with this long-term view. As a result, some of our
      decisions, such as whether to make or discontinue operating investments, manage
      our balance sheet and capital structure, or pursue or discontinue strategic
      initiatives, may be in conflict with the objectives of short-term traders.
      Further, this could adversely affect our quarterly or other short-term results
      of operations.




***Our
      warrants may have an adverse effect on the market price of our common stock.***




We
      have
      outstanding warrants to purchase 13,655,000 shares of common stock. There is
      also an option to purchase 200,000 Class Z warrants and 260,000 Class W warrants
      issued to the representative of the underwriters in our initial public offering.
      The sale, or even the possibility of sale, of the shares underlying the warrants
      and options could have an adverse effect on the market price for our securities
      or on our ability to obtain future public financing. If and to the extent these
      warrants are exercised, the common stockholders may experience dilution to
      their
      holdings.




**Item 1B.** ******  ***Unresolved
      Staff Comments***




Not
      applicable.




**Item 2.**  ***Properties***




We
      lease
      a 5,500 square-foot office suite for our corporate headquarters in Midlothian,
      Virginia under an agreement that expires in December 2010. We also lease a
      300
      square-foot office suite in London, England for our international operations
      under an agreement that expires in November 2008. We own a 7,000 square-foot
      office building in Grapevine, Texas which houses our North American sales and
      marketing department and our product production and development management
      departments. We believe our current facilities are suitable and adequate to
      meet
      our current needs, and that suitable additional or substitute space will be
      available as needed to accommodate expansion of our operations. As we expand
      our
      business into new markets, we expect to lease additional office facilities.
      See
      Note 10 to the notes to our consolidated financial statements and
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations - Commitments” appearing elsewhere in this report for information
      regarding our lease obligations.




**Item 3.**  ***Legal
      Proceedings***




We
      are
      not currently subject to any material legal proceedings. From time to time,
      however, we may be named as a defendant in legal actions arising from our normal
      business activities. Although we cannot accurately predict the amount of our
      liability, if any, that could arise with respect to legal actions currently
      pending against us; we do not expect that any such liability will have a
      material adverse effect on our financial position, operating results or cash
      flows.




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




A
      special
      meeting of our stockholders was held on April 24, 2008. The first proposal
      set
      forth in our Definitive Proxy Statement (No. 000-51869), filed with the SEC
      on
      April 11, 2008, proposed the adoption of the Agreement and Plan of
      Reorganization, dated January 15, 2008, as amended, by and among the Company,
      SouthPeak and the other parties named therein, pursuant to which we would
      consummate a business combination with SouthPeak. Our certificate of
      incorporation in effect at that time required that the first proposal be
      approved by the affirmative vote of a majority of our outstanding common stock
      and Class B common stock voting together without distinction as to class
      and the affirmative vote of a majority of our outstanding Class B common stock
      voting as a separate class. The first proposal was not approved by the holders
      of a majority of our common stock and Class B common stock. Results of the
      voting were as follows:




19




**For**
            
            **Against**
            
            **Abstain**Common
                Stock
            
            
            1,400
            
            
            303,143
            
            
            -Class
                B common stock
            
            
            596,000
            
            
            4,160,014
            
            
            -





As
      a
      result of the first proposal not being approved, none of the other proposals
      set
      forth in our Definitive Proxy Statement were presented at the special meeting
      or
      voted on by our stockholders.




On
      May
      12, 2008, the holder of a majority of our outstanding capital stock approved
      by
      written consent the following:




·
            provisions
                of our amended and restated certificate of incorporation, including
                (a)
                the authorization of 90,000,000 shares of common stock and 20,000,000
                shares of preferred stock, (b) restriction on our stockholders’ ability to
                remove directors, and (c) restriction on our stockholders’ ability to call
                a special meeting; and




·
            our
                2008 Equity Incentive Compensation Plan, which provides for the grants
                of
                up to 5,000,000 shares of our common stock or cash equivalents to
                our
                directors, officers, employees and/or consultants or those of our
                subsidiaries.




**PART II**




**Item 5.**  ***Market
      for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities***




**Market
      Price for Equity Securities**




Following
      our initial public offering in April 2006, our Series A units,
      Series B units, common stock, Class B common stock, Class W
      warrants and Class Z warrants were listed on the Over-the-Counter bulletin
      board under the symbols GSPAU, GSPBU, GSPA, GSPAB, GSPAW and GSPAZ,
      respectively.




Our
      Class
      B common stock ceased trading on the Over-the-Counter bulletin board and was
      automatically cancelled and converted into a right to receive $5.36 per share
      from our trust fund on April 25, 2008. As a result of the cancellation of the
      Class B common stock, our Series B units were mandatorily separated from their
      associated Class W warrants and then cancelled on April 25, 2008.




Our
      Series A units, common stock, Class W warrants and Class Z
      warrants now trade on the Over-the-Counter bulletin board under the symbols
      SOPKU, SOPK, SOPKW and SOPKZ, respectively. The closing price for the securities
      on October 3, 2008, the most recent trading day practicable before the date
      of this report, was $6.40, $1.70, $0.30 and $0.30, respectively. As of October
      3, 2008, there were approximately 42 holders of records of our common
      stock.




The
      following table sets forth, for the calendar quarter indicated, the quarterly
      high and low closing sale prices of our securities as reported on the
      Over-the-Counter bulletin board in US dollars. The quotations listed below
      reflect interdealer prices, without retail markup, markdown or commission and
      may not necessarily represent actual transactions.


**Common Stock**
              
              **Class
                  W**
                **Warrants**
              
              **Class
                  Z**
                **Warrants**
              
              **Series
                  A**
                **Units****High**
              
              **Low**
              
              **High**
              
              **Low**
              
              **High**
              
              **Low**
              
              **High**
              
              **Low****2006**Fourth
                  Quarter
              
              $
              2.50
              
              $
              2.25
              
              $
              0.45
              
              $
              0.35
              
              $
              0.52
              
              $
              0.36
              
              $
              13.50
              
              $
              8.85**2007**First
                  Quarter
              
              
              3.30
              
              
              2.45
              
              
              0.54
              
              
              0.36
              
              
              0.66
              
              
              0.39
              
              
              13.10
              
              
              9.25Second
                  Quarter
              
              
              2.75
              
              
              2.25
              
              
              0.41
              
              
              0.36
              
              
              0.45
              
              
              0.40
              
              
              11.10
              
              
              9.16Third
                  Quarter
              
              
              3.00
              
              
              2.50
              
              
              0.38
              
              
              0.35
              
              
              0.52
              
              
              0.40
              
              
              9.70
              
              
              9.00Fourth
                  Quarter
              
              
              1.74
              
              
              1.25
              
              
              0.20
              
              
              0.03
              
              
              0.33
              
              
              0.27
              
              
              6.25
              
              
              4.75**2008**First
                  Quarter
              
              
              1.75
              
              
              1.03
              
              
              0.26
              
              
              0.04
              
              
              0.32
              
              
              0.24
              
              
              6.70
              
              
              4.70Second
                  Quarter
              
              
              3.00
              
              
              0.35
              
              
              0.38
              
              
              0.05
              
              
              0.48
              
              
              0.08
              
              
              11.00
              
              
              1.75Third
                Quarter
              
              
              2.65
              
              
              1.50
              
              
              0.74
              
              
              0.20
              
              
              0.73
              
              
              0.32
              
              
              11.75
              
              
              6.40




**Dividends**




We
      have
      not paid any dividends on our common stock to date and do not anticipate paying
      any dividends in the foreseeable future. We intend to retain future earnings,
      if
      any, in the operation and expansion of our business. Any future determination
      to
      pay cash dividends will be made at the discretion of our board of directors
      and
      will depend on our financial condition, results of operations, capital
      requirements and other factors that our board of directors deems relevant.
      Investors should not purchase our common stock with the expectation of receiving
      cash dividends.




20




**Item 6.**  ***Selected
      Financial Data***




We
      are a
      smaller reporting company as defined by Rule 12b-2 of the Exchange Act and
      are
      not required to provide the information required under this item.




**Item 7.**  ***Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations***




*The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with our consolidated financial
      statements and related notes that appear elsewhere in this report. In addition
      to historical consolidated financial information, the following discussion
      contains forward-looking statements that reflect our plans, estimates and
      beliefs. Our actual results could differ materially from those discussed in
      the
      forward-looking statements. Factors that could cause or contribute to these
      differences include those discussed below and elsewhere in this report,
      particularly in “Risk Factors” in Item 1A.*




**Overview**




We
      are an
      independent developer and publisher of interactive entertainment software.
      We
      utilize our network of independent studios and developers to create videogames
      for all current hardware platforms including:  Sony’s PS3 and PS2 computer
      entertainment systems; Sony’s PSP® system; Microsoft’s Xbox 360® video game and
      entertainment system; Nintendo’s WiiTM, DSTM, and GBA; and for the PC and Game for
      Windows®. Our portfolio of games extends across a variety of consumer
      demographics, ranging from adults to children and hard-core game enthusiasts
      to
      casual gamers.




We
      incorporated in Delaware on August 10, 2005 under the name Global Services
      Partners Acquisition Corp. to serve as a vehicle to effect an acquisition,
      through a merger, capital stock exchange, asset acquisition or other similar
      business combination with a then-unidentified operating business. On May 12,
      2008, we acquired all of the outstanding membership interests of SouthPeak
      pursuant to a Membership Interest Purchase Agreement. SouthPeak was originally
      formed in 1996 as an independent business unit of SAS Institute,
      Inc.




We
      operate in a growing industry with highly favorable industry dynamics. Videogame
      hardware sales are approaching record levels, driving strong growth in software
      and further predictions for continued double-digit growth for the remainder
      of
      2008 and into 2009. 2007 marked a year of transition and growth in videogame
      sales based on the introduction of the next generation of videogame consoles
      in
      2005 and 2006 and the expanding demographic of videogame users.
      Particularly, the introduction of Microsoft’s Xbox 360, Sony’s PS3 and
      Nintendo’s Wii consoles are driving demand for new videogames with increasing
      sophistication and graphics given the enhanced functionality of the consoles
      including high definition capability and the ability to access the internet.
      New
      handhelds, such as Nintendo’s DS and Sony’s PSP, are also driving demand for new
      content.




Our
      strategy is to capitalize on the growth of videogame market, particularly the
      expanding demographics of videogame players, and focus on creating premium
      quality videogames and successful franchises for which we can create sequels.
      We
      are developing a portfolio of exciting proprietary software content for the
      major hardware platforms in a wide range of genres including action, adventure,
      strategy, role-playing, sports and racing.




**Sources
      of Revenue**




Our
      business model is primarily based on utilizing a network of third-party software
      developers and independent studios to develop our products, and obtaining
      marketing and selling rights to certain titles for
      specific territories from large videogame publishers. We are
      positioned as an “indie” label videogame developer and publisher, working with
      independent developers to create and publish our videogames. We have cultivated
      relationships with independent videogame studios and developers in the United
      States, Western Europe, Eastern Europe, Scandinavia, Australia and Asia, that
      provide us with innovative and compelling videogame concepts.




We
      generate revenue by selling software titles developed on our behalf by third
      parties and other content partnerships. Our unique business model of sourcing
      and developing creative product allows us to better manage our fixed costs
      relative to industry peers. Our operating margins are dependent in part upon
      our
      ability to continually release new products that perform according to our
      budgets and forecasts, and manage our fixed costs accordingly. Although software
      development costs as well as the development cycle for next-generation platforms
      have increased compared to prior-generation platforms, the impact is partially
      offset by the higher selling prices on next-generation software.




We
      maintain operations in the US and, as of August 2005, in the United Kingdom.
      In
      fiscal year 2007, international operations contributed approximately 18% of
      consolidated net revenues. For the year ended June 30, 2008, international
      operations contributed approximately 14% of consolidated net revenues. We sell
      our games directly to retailers and distributors in North America. In Europe
      and
      Australia, we primarily sell our games directly to distributors. We operate
      in
      one business segment, interactive videogame publishing.




21


**Fiscal
      Year 2008 Releases**




We
      released the following videogames in fiscal year 2008:


Title
              Platform
              Date
                  ReleasedTwo
                  Worlds
              X360
              8/21/07Two
                  Worlds Collectors Edition
              X360
              8/21/07Pool
                  Party
              Wii
              8/28/07Two
                  Worlds
              PC
              8/28/07Two
                  Worlds Collectors Edition
              PC
              8/28/07Dream
                  Pinball 3D
              PC
              1/21/08Iridium
                  Runners
              PS2
              2/14/08Imperium
                  Romanum
              PC
              3/10/08Dream
                  Pinball 3D
              Wii
              3/31/08Dream
                  Pinball 3D
              NDS
              4/22/08Grid
              PS3
              5/31/08Grid
              X360
              5/30/08Grid
              PC
              6/2/08Overlord
              PS3
              6/23/08Roogoo
              PC
              6/24/08




**Consolidated
      Financial Statements**




Our
      consolidated financial statements include the accounts of SouthPeak Interactive
      Corporation and its wholly-owned subsidiaries, SouthPeak Interactive, L.L.C.
      and
      SouthPeak Interactive, Ltd. All intercompany accounts and transactions have
      been
      eliminated in consolidation.




The
      following are the primary components of our consolidated statement of
      operations:




*Net
      Revenues.* Our
      revenue is derived from publishing and selling videogames. We work with
      independent developers and/or development studios to develop proprietary
      videogames and also license rights to properties from third parties. We focus
      on
      providing high quality games that command prices that are similar to those
      obtained by our major competitors in the front-line/premium game market ($39.95
      to $59.95) and that are featured prominently “on the shelf” of major retailers,
      and not on focusing on lower-priced “value games” and that generally are found
      in “budget game bins” in retail outlets (usually priced between $9.99 and
      $14.99). The future growth of our revenues is dependent upon our ability to
      continue providing highly desirable, high quality videogames to the
      market.




*Cost
      of Goods Sold.*  ****** Cost of
      goods sold consists of royalty payments to third party developers, license
      fees
      to videogame manufacturers, and manufacturing costs of the videogame discs,
      cartridges or similar media. Proprietary console manufacturers approve and
      manufacture each game for their platform. They charge their license fee for
      each
      game based on the expected retail sales price of the game. Such license fee
      is
      paid by us based on the number of games manufactured. Should some of the games
      ultimately not be sold, or the sales price to the retailer be reduced by us
      through price protection, no adjustment is made by the proprietary console
      manufacturer in the license fee originally charged. Therefore, because of the
      terms of these license fees, we may have an increase in the cost of goods as
      a
      percent of net revenue should we fail to sell a number of copies of a game
      for
      which a license has been paid, or if the price to the retailer is
      reduced.




We
      utilize third-parties to develop our games on a royalty payment basis. We enter
      into contracts with third party developers once the game design has been
      approved by the platform proprietors and is technologically
      feasible. Specifically, payments to third-party developers are made when
      certain contract milestones are reached, and these payments are capitalized.
      These payments are considered non-refundable royalty advances and are applied
      against the royalty obligations owing to the third-party developer from the
      sales of the game. To the extent these prepaid royalties are sales performance
      related, the royalties are expensed against projected sales revenue at the
      time
      a game is released and charged to costs of goods sold. This normally results
      in
      expensing all prepaid royalties based upon the first and, on occasion, the
      second lot of shipments of the game. Any pre-release milestone payments that
      are
      not prepayments against future royalties are expensed when a game is released
      and then charged to costs of goods sold. Capitalized costs for games that are
      cancelled or abandoned prior to product release are charged to “cost of goods
      sold - royalties” in the period of cancellation.




*Gross
      Profit* .
      Our
      gross profit is positively impacted by our strategy of using cost-efficient,
      external third party developers to develop our games, rather than directly
      employing game developers or maintaining a costly development studio.
      Additionally, we are often able to attract high quality developers willing
      to work for lower costs because of the creative flexibility and focused
      attention provided by us. Gross profits are positively impacted by titles
      that perform better then our budgeted forecasts, since manufacturing,
      royalties and licensing costs are faster recouped and economies of scale
      occur as the incremental sales of a game produce greater profitability. In
      addition since we utilize a variety of third-party developers, our royalty
      payments and obligations are different for each title thereby impacting our
      gross profit. Gross profits are negatively impacted by costs written off from
      abandoned projects, games that do not meet our sales expectations, and by games
      that require more significant royalty payments to developers.




22


*Warehousing
      and Distribution Expenses* .
      Our
      warehousing and distribution expenses primarily consist of costs associated
      with
      warehousing, order fulfillment, and shipping. Because we use third-party
      warehousing and order fulfillment companies in the US and in Europe, the
      expansion of our product offerings and escalating sales will increase our
      expenditures for warehousing and distribution in proportion to our increased
      sales.




*Sales
      and Marketing Expenses* .
      Sales
      and marketing expenses consist of advertising, marketing and promotion expenses,
      and commissions to external sales representatives. The largest component of
      this
      expense relates to certain customer marketing allowances. As the number of
      newly
      published games increases, advertising, marketing and promotion expenses are
      expected to rise accordingly. We recognize advertising, marketing and promotion
      expenses as incurred, except for production costs associated with media
      advertising, which are deferred and charged to expense when the related ad
      is
      run for the first time. We also engage in cooperative marketing with some of
      our
      retail channel partners. We accrue marketing and sales incentive costs when
      revenue is recognized and such amounts are included in selling and marketing
      expense when an identifiable benefit to the company can be reasonably estimated;
      otherwise, there incentives are recognized as a reduction to net revenues.
      Such
      marketing is offered to our retail channel partners based on a single sales
      transaction, as a credit on their accounts receivable balance, and would include
      items such as contributing to newspaper circular ads and in store banners and
      displays.




*General
      and Administrative Expenses* .
      General
      and administrative expenses primarily represent personnel-related costs,
      including corporate executive and support staff, general office expenses,
      professional fees, consulting and professional fees, and various other expenses.
      Professional and consulting fees represent the largest component of general
      and
      administrative expenses. We expect that our personnel costs will increase as
      the
      business continues to grow. We expect to incur additional increased costs for
      personnel and consultants as a result of becoming a publicly traded company
      which requires compliance and adherence to new regulations for corporate
      governance and accounting. Depreciation expenses also are included in general
      and administrative expenses.




*Interest
      and Financing Costs* .
      Interest and financing costs are attributable to SouthPeak’s line of credit and
      financing arrangements that are used to fund development of games with third
      parties, which often takes 12-18 months. Additionally, such costs are used
      to
      finance the accounts receivables prior to payment by customers.




*Income
      Taxes.* Effective November 10, 2000, the US operations of SouthPeak, as a limited
      liability company, were taxed as a “partnership.” As a partnership under the
      Internal Revenue Code, the US operations of SouthPeak generally are not subject
      to income tax charges. Rather, the taxable income of SouthPeak was reported
      to
      its members prior to the Acquisition and to the company after the Acquisition
      and applicable income taxes are paid by the members or the company, as
      applicable. The United Kingdom operations of SouthPeak are subject to tax by
      the
      United Kingdom. However, because of a loss in the United Kingdom operations,
      SouthPeak has not paid any tax to the United Kingdom and instead carries its
      losses forward. There is a provision for (benefit from) income taxes in the
      consolidated financial statements of the company as of June 30, 2008. This
      provision takes into account the taxable income of the entity after the
      Acquisition.




**Critical
      Accounting Policies and Estimates**




This
      discussion and analysis of our financial condition and results of operations
      is
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the US. The
      preparation of these consolidated financial statements requires estimates and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses, and related disclosure of contingent assets and liabilities. Estimates
      were based on historical experience and on various other assumptions that we
      believe to be reasonable under the circumstances, the results of which form
      the
      basis for making judgments about the carrying values of assets and liabilities
      that are not readily apparent from other sources. Actual results could differ
      materially from these estimates under different assumptions or
      conditions.




We
      have
      identified the policies below as critical to our business operations and the
      understanding of our financial results. 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. For a detailed discussion on the application of these and other
      accounting policies see Note 1 to our consolidated financial statements included
      elsewhere in this report.




*Accounts
      Receivable, Allowances for Sales Returns and Price Protection.* We earn
      revenues from the sale of videogames. Revenue is recognized net of allowances
      for price protection, sales returns and customer discounts. We analyze sales
      returns in accordance with Statement of Financial Accounting, or SFAS, No.
      48
“Revenue Recognition When Right Of Return Exists.” We estimate the amount of
      future sales returns and price protection for current period revenue after
      analyzing historical returns, inventory remaining in the retail channel, the
      rate of inventory sell-through in the retail channel and other factors.
      Generally, we maintain a policy of credits for price protection and returns,
      but
      not cash refunds.




23


Generally,
      price protection refers to the circumstances when we voluntarily decrease the
      wholesale price of a product and allow a credit against amounts owed to us
      by
      customers with respect to open and/or future invoices. The conditions customers
      must generally meet in order to receive price protection include compliance
      with
      applicable payment terms and regular submission of inventory and sell-through
      reports. As such, our management uses significant judgment and makes estimates
      in connection with establishing allowances for price protection and sales
      returns. Such estimates are generally made on a per-game basis, based on
      previous experience and information, including an analysis of our historical
      experience, the current sell-through of distributor and retailer inventory,
      previous returns on similar products, current trends in the videogame market,
      the overall economy, changes in customer demand or acceptance of our products,
      and other factors. Actual sales returns and price protection could differ
      materially from management’s allowance estimates due to a number of reasons,
      including: a lack of consumer acceptance of a videogame, the release in the
      same
      period of a similarly themed videogame by a competitor, or technological
      obsolescence due to the emergence of new hardware platforms.




As
      with
      any set of assumptions and estimates, there is a range of reasonably likely
      amounts that may be calculated for each allowance above. We believe however,
      there would be no significant difference in the amounts using other reasonable
      assumptions than what was used to arrive at each allowance. We regularly review
      the factors that influence our estimates and, if necessary, make adjustments
      when we believe that actual product returns, credits and other allowances may
      differ from established reserves. Actual experiences associated with any of
      these items may be significantly different than our estimates.




*Inventory* .
      We
      value our inventory of videogames at the lower of cost (first-in, first-out)
      or
      market. We estimate the net realizable value of slow-moving inventory on a
      regular, videogame by videogame basis and charge the excess of cost over net
      realizable value to “cost of goods sold - product costs.”




*Advances
      on Royalties.* Beginning upon a product release, advances on royalties are amortized to “cost
      of goods sold - royalties” using the ratio of current revenues to total
      projected revenues, based on management’s estimates usually resulting in an
      amortization period of six months or less. At the end of each reporting period,
      we evaluate the future recoverability of games released in prior periods, based
      upon an individual game’s performance.




Evaluating
      the recoverability of advance royalties often involves assumptions and judgments
      that can have a significant impact on the timing and amounts that we report.
      For
      example, in determining the future recoverability and timing of such advance
      royalties, we must make assumptions in the assessment of expected videogame
      performance which utilize forecasted sales amounts and estimates of additional
      costs to be incurred. If actual sales or revised forecasted sales fall below
      the
      initial forecasted sales for a specific videogame, the charge to “cost of goods
      sold - royalties” may be larger than expected for any particular
      period.




*Intellectual
      Property Licenses.* Intellectual property license costs arise from fees paid by us to license the
      use of trademarks, copyrights, and software used in the development of games
      by
      third party developers. The licenses may be used in several videogames or a
      single videogame.




Periodically,
      we evaluate the future recoverability of capitalized intellectual property
      licenses, based on the expected performance of the specific videogames. Prior
      to
      the related videogame’s release, we expense, as part of “cost of goods sold -
      intellectual property licenses,” any intellectual property license costs that
      are not recoverable. If we abandon a videogame, any capitalized intellectual
      property costs are charged to “cost of goods sold - intellectual property
      licenses,” at the time of cancellation. We use various factors to evaluate
      expected videogame performance, including preorders for the videogame prior
      to
      release.




Beginning
      with a videogame’s release, intellectual property license costs are amortized to
“cost of goods sold - intellectual property licenses” based on the ratio of
      current revenues for the specific videogame to the total of projected revenues
      for all the videogames which will use the license. Periodically, we evaluate
      the
      future recoverability of capitalized intellectual property licenses utilizing
      the main evaluative factor of actual videogame performance.




*Property
      and Equipment.* Property
      and equipment are recorded at cost. Depreciation is provided using the
      straight-line method over the shorter of the estimated useful lives: buildings,
      40 years; computer equipment and software, three to five years; office furniture
      and other equipment, five to ten years; and leasehold improvements, five years.
      When assets are retired or disposed of, the cost and accumulated depreciation
      thereon are removed and any resulting gains or losses are recognized in current
      operations. Expenditures for maintenance and repairs are charged to operations
      as incurred. Renewals and betterments are capitalized.




*Impairment
      of Long-lived Assets* .
      In
      accordance with the provisions of SFAS No. 144, “Accounting for the Impairment
      or Disposal of Long-Lived Assets,” we review long-lived assets for impairment
      when circumstances indicate the carrying amount of an asset may not be
      recoverable based on the undiscounted future cash flows of the asset. If the
      carrying amount of an asset may not be recoverable, a write-down to fair value
      is recorded. Fair values are determined based on the discounted cash flows,
      quoted market values, or external appraisals, as applicable. Long-lived assets,
      which are assets that provide the Company with benefit beyond one year, are
      reviewed for impairment at the individual asset or the asset group level for
      which the lowest level of independent cash flows can be identified.




24


*Revenue
      Recognition.* We
      recognize revenue from the sale of videogames when the videogame and risk of
      loss transfers to the customer, which in the normal business cycle occurs at
      the
      time of shipment. In conjunction with sale of videogames, we also establish
      a
      reserve to reduce the amount of revenue recognized on the sale of the games
      for
      expected future price protections (sales allowances) and returns issued for
      the
      product sold. Any changes in management’s estimates of future returns or price
      protections issued versus actual results could affect future net revenue and
      earnings of the company. Appropriately, management is very diligent to ensure
      that the reserves taken are appropriate for the sales in the period, so that
      variances in management estimates will be minimal. In Europe, we have agreements
      that provide customers on a videogame by videogame basis, the right to multiple
      copies in exchange for guaranteed minimum license fees, and revenue pursuant
      to
      such agreements is recognized at delivery of the product master. With respect
      to
      license agreements that provide mass retailers the right to rent the software,
      revenue is recognized when the rental occurs. Regarding online transactions
      involving electronic downloads of videogames and content, which is a new area
      for the company, revenue is recognized when the fee is paid by the online
      customer for the online product and the company is notified. Our revenues are
      recognized net of reserves for price protection and other allowances. Also,
      in
      order to recognize revenue for both videogame sales and licensing transactions,
      persuasive evidence of an arrangement must exist and collection of the related
      receivable must be deemed probable. Revenue recognition also determines the
      timing of recognition of certain expenses, including “cost of goods sold -
      product costs” and “cost of goods sold - royalties.”




*Income
      Taxes.* Effective July 1, 2007, we adopted the provisions of Financial Accounting
      Standards Board, or FASB, Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes, an interpretation of FASB Statement No. 109,” or FIN 48. FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in the
      Company’s consolidated financial statements in accordance with FASB Statement
      109, “Accounting for Income Taxes,” and prescribes a recognition threshold and
      measurement process for financial statement recognition and measurement of
      a tax
      position taken or expected to be taken in a tax return. FIN 48 also provides
      guidance on derecognition, classification, interest and penalties, accounting
      in
      interim periods, disclosure and transition.




Our
      management has evaluated and concluded that there are no significant uncertain
      tax positions requiring recognition in our consolidated financial statements
      as
      of June 30, 2008. The evaluation was performed for the tax years ended December
      31, 2007, 2006 and 2005 which remain subject to examination for federal,
      various states and United Kingdom income tax purposes by various taxing
      authorities as of June 30, 2008.




Our
      policy is to reclassify assessments, if any, for tax related interest as
      interest expense and penalties as general and administrative
      expenses.




*Foreign
      Currency Translation.* The
      functional currency for our foreign operations is the applicable local currency.
      Accounts of foreign operations are translated into US 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 transaction gains and losses are included in income
      in
      the period in which they occur, except on intercompany balances considered
      to be
      long term. Transaction gains and losses on intercompany balances considered
      to
      be long term are recorded in other 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. Our items of other
      comprehensive income (loss) are foreign currency translation adjustments, which
      relate to investments that are considered long-term in nature and therefore
      do
      not require tax adjustments.




*Stock-Based
      Compensation Plans.* In
      December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which
      requires companies to expense the estimated fair value of employee stock options
      and similar awards. This statement is a revision to SFAS No. 123, “Accounting
      for Stock-Based Compensation”, supersedes Accounting Principles Board (APB)
      Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS No.
      95, “Statement of Cash Flows.” 
 Prior
        to
        July 1, 2006, we accounted for our stock-based compensation plans under the
        recognition and measurement provisions of APB 25, and related interpretations,
        as permitted by SFAS 123. Effective July 1, 2006, we adopted SFAS 123R,
        including the fair value recognition provisions, using the prospective method.
        Under SFAS 123R, a non-public company that previously used the minimum value
        method for pro forma disclosure purposes is required to adopt the standard
        using
        the prospective method. Under the prospective method, all awards granted,
        modified or settled after the date of adoption are accounted for using the
        measurement, recognition and attribution provisions of SFAS 123R. As a result,
        stock-based awards granted prior to the date of adoption of SFAS 123R will
        continue to be accounted for under APB 25 with no recognition of stock-based
        compensation in future periods, unless such awards are modified or settled.
        Subsequent to the adoption of SFAS 123R, we estimate the value of stock-based
        awards on the date of grant using the Black-Scholes option-pricing model.
        For
        stock-based awards subject to graded vesting, we utilized the straight-line
        ratable method for allocating compensation cost by period. As of June 30,
        2008,
        we have not issued any stock options.


25


SFAS
      123(R) requires companies to estimate the fair value of share-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as
      expense over the requisite service period in our consolidated statement of
      operations. Prior to the adoption of SFAS 123(R), we accounted for employee
      equity awards and employee stock purchases using the intrinsic value method
      in
      accordance with APB 25 as allowed under Statement of Financial Accounting
      Standards No. 123, “Accounting for Stock-Based Compensation,” or SFAS 123. Under
      the intrinsic value method, no stock-based compensation expense had been
      recognized in our Consolidated Statement of Operations because the exercise
      price of our stock options granted to employees and directors equaled the fair
      market value of the underlying stock at the date of grant.




*Use
      of*  *Estimates.* The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the US 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 revenues and expenses during the
      reporting periods. Accordingly, actual results could differ from those
      estimates. The most significant estimates are related to advances for royalties
      and accounts receivable allowances. Such estimates include sales returns and
      allowances, price protection estimates, provisions for doubtful accounts,
      accrued liabilities, and estimates regarding the recoverability of prepaid
      royalties, inventories, long lived assets, and deferred tax assets. These
      estimates generally involve complex issues and require the company to make
      judgments, involve analysis, of historical and future trends, can require
      extended periods of time to resolve, and are subject to change from time to
      time.




**Recently
      Issued Accounting Standards**




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurement,” or SFAS 157. SFAS 157 provides a single definition of fair value,
      together with a framework for measuring it, and requires additional disclosure
      about the use of fair value to measure assets and liabilities. SFAS 157 states
      that fair value is a market-based measurement, not an entity-specific
      measurement, and sets out a fair value hierarchy with the highest priority
      being
      quoted prices in active markets. SFAS 157 is effective for fiscal years
      beginning after November 15, 2007. We are evaluating the impact, if any,
      the adoption of this statement will have on its results of operations, financial
      position or cash flows.




In
      February 2007, the FASB issued Statement No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities —
Including an amendment of FASB Statement No. 115, or* SFAS No.
      159. SFAS No. 159 permits entities to choose to measure many financial
      instruments and certain other items at fair value that are not currently
      required to be measured at fair value. Subsequent unrealized gains and losses
      on
      items for which the fair value option has been elected will be reported in
      earnings. The provisions of SFAS No. 159 are effective for financial
      statements issued for fiscal years beginning after November 15, 2007. We
      are evaluating if it will adopt SFAS No. 159 and what impact the
      adoption will have on its results of operations, financial position or cash
      flows.




In
      December 2007, the FASB issued Statement No. 141(R), “Business Combinations”, or
      SFAS 141(R), which will change the accounting for and reporting of business
      combination transactions. The most significant changes in the accounting for
      business combinations under SFAS 141(R) include: (1) valuation of any acquirer
      shares issued as purchase consideration will be measured at fair value as of
      the
      acquisition date; (2) contingent purchase consideration, if any, will generally
      be measured and recorded at the acquisition date, at fair value, with any
      subsequent change in fair value reflected in earnings rather than through an
      adjustment to the purchase price allocation; (3) acquired in-process research
      and development costs, which have historically been expensed immediately upon
      acquisition, will now be capitalized at their acquisition date fair values,
      measured for impairment over the remaining development period and, upon
      completion of a successful development project, amortized to expense over the
      asset’s estimated useful life; (4) acquisition related costs will be expensed as
      incurred rather than capitalized as part of the purchase price allocation;
      and
      (5) acquisition related restructuring cost accruals will be reflected within
      the
      acquisition accounting only if certain specific criteria are met as of the
      acquisition date; the prior accounting convention, which permitted an acquirer
      to record restructuring accruals within the purchase price allocation as long
      as
      certain, broad criteria had been met, generally around formulating, finalizing
      and communicating certain exit activities, will no longer be
      permitted.




26




SFAS
      141(R) is effective for reporting periods beginning on or after December 15,
      2008. Earlier adoption is not permitted. We anticipate that adoption of this
      pronouncement will significantly impact how we account for business combination
      transactions consummated after the effective date, in the various areas outlined
      above.




In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements, an Amendment of ARB No. 51”, or SFAS 160,
      effective for fiscal years beginning after December 15, 2008. SFAS 160 clarifies
      the accounting for noncontrolling interests and establishes accounting and
      reporting standards for the noncontrolling interest in a subsidiary, including
      the requirement that the noncontrolling interest be classified as a component
      of
      equity. SFAS 160 is required to be adopted simultaneously with SFAS 141(R).
      We
      do not expect that this pronouncement will have a significant impact on our
      consolidated financial position, results of operations or cash flows.


In
        March
        2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and
        Hedging Activities -an amendment of FASB Statement No. 133,” which enhances the
        disclosure requirements for derivative instruments and hedging activities.
        Entities are required to provide enhanced disclosures about (a) the location
        and
        amounts of derivative instruments in an entity’s financial statements, (b) how
        derivative instruments and related hedged items are accounted for under
        Statement 133 and its related interpretations, and (c) how derivative
        instruments and related hedged items affect an entity’s financial position,
        financial performance, and cash flows. The guidance in SFAS No. 161 is effective
        for financial statements issued for fiscal years and interim periods beginning
        after November 15, 2008, with early application encouraged. This Statement
        encourages, but does not require, comparative disclosures for earlier periods
        at
        initial adoption. We are currently evaluating the impact of SFAS No.
        161.
  In
        May
        2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted
        Accounting Principles.” SFAS No. 162 identifies the sources of accounting
        principles and the framework for selecting the principles to be used in the
        preparation of financial statements of nongovernmental entities that are
        presented in conformity with generally accepted accounting principles (GAAP)
        in
        the United States (the GAAP hierarchy). This Statement 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 are currently evaluating the
        impact of SFAS No. 162.
  **Results
        of Operations**




The
      following table sets forth our results of operations expressed as a percentage
      of net revenues:




**For
                the year**
              **ending
                June 30,****2008**
            
            **2007**
            
            **2006**Net
                revenues
            
            
            100.0
            %
            
            100
            %
            
            100
            %Cost
                of goods sold:Product
                costs
            
            
            55.5
            %
            
            51.4
            %
            
            56.2
            %Royalties
            
            
            12.3
            %
            
            14.9
            %
            
            29.6
            %Total
                cost of goods sold
            
            
            67.8
            %
            
            66.3
            %
            
            85.8
            %Gross
                profit
            
            
            32.2
            %
            
            33.7
            %
            
            14.2
            %Operating
                expenses:Warehousing
                and distribution
            
            
            1.2
            %
            
            4.0
            %
            
            1.0
            %Sales
                and marketing
            
            
            10.6
            %
            
            17.0
            %
            
            9.4
            %Transaction
                costs
            
            
            3.9
            %
            
            -
            
            
            -General
                and administrative
            
            
            9.5
            %
            
            18.2
            %
            
            16.2
            %Total
                operating expenses
            
            
            25.2
            %
            
            39.2
            %
            
            26.6
            %Operating
                income (loss)
            
            
            7.0
            %
            
            (5.5)
            %
            
            (12.4)
            %Interest
                expense
            
            
            3.0
            %
            
            1.5
            %
            
            2.2
            %Income
              (loss) before taxes
            
            
            4.0
            %
            
            (7.0
            )%
            
            (14.6
            )%Income
              tax (benefit) expense
            
            
            (0.2
            )%
            
            -
            %
            
            -
            %Net
                income (loss)
            
            
            3.8
            %
            
            (7.0)
            %
            
            (14.6)
            %





*Years
      ended June 30, 2008 and June 30, 2007*




*Net
      Revenues*.  For
      the year 2008, net revenues increased to $40,153,094 from $12,544,046 in the
      prior year same period. The significant increase in net revenues for fiscal
      year
      2008 is due primarily to the launch of more videogames for the next generation
      hardware platforms compared to the launch of games for fiscal year 2007. The
      number of units sold for fiscal year 2007 was approximately 678,000 units
      increasing to approximately 1,228,000 units for fiscal year 2008, an increase
      of
      81%; while the average net revenue per game sold increased approximately 77%,
      from $18.52 to $32.70.




We
      have
      continued to be significantly involved in the creative process of game
      development in fiscal year 2008 which has continued our efforts from fiscal
      year
      2007 to (i) establish a reputation as a successful game publisher; (ii) build
      a
      large enough portfolio of game titles so that we now focus on developing higher
      quality, more creative games as opposed to focusing on building a “critical
      volume” of games; and (iii) increase our personnel and dedicate the necessary
      human resources to become engaged in the creative process. This has resulted
      in
      a substantial increase in net revenues for fiscal year 2008 compared to fiscal
      year 2007. Although there can be no assurances, we expect that net revenues
      will
      continue to improve on a year to year basis as we further dedicate ourself
      to deeper involvement in the creative process and to the development of games
      for the newest platforms.




27


*Cost
      of Goods Sold.* For
      fiscal year 2008, the cost of goods sold increased to $27,205,359 from
      $8,315,843 for the prior year same period, an increase of 227%. This increase
      is
      largely because of the variable costs of manufacturing of game discs or
      cartridges, license fees to the hardware manufacturers and developer and royalty
      fees. The cost of royalty expense also increased in fiscal year 2008 from
      the prior year same period by 164%. This is a result of increased sales revenue
      and developer royalty agreements for games released during the
      period.




*Gross
      Profit.* For
      fiscal year 2008, gross profit increased to $12,947,735 from $4,228,203 for
      the
      prior year same period, while the gross profit margin decreased to 32.3% from
      33.7% for the prior year period. This
      slight decrease in gross margins is primarily due to sales of*Grid*,
      which
      has a lower gross margin resulting from higher co-publishing and distribution
      royalty costs as a percentage of total net revenue. However,our
      gross profit margins have generally increased during each year of our
      operations due to (i) deeper engagement in the creative process of publishing
      games over time and (ii) migration towards publishing games for next generation
      hardware platforms that allow games to be sold at higher prices, without a
      proportionate increase in cost of goods sold.




*Warehousing
      and Distribution Expenses.* For
      fiscal years 2008 and 2007, warehousing and distribution expenses were $468,008
      and $502,132, respectively, resulting in a decrease of 7%. This decrease is
      due
      primarily to our efforts to reduce costs by having manufacturers directly ship
      videogames to customers rather than having all sales go through a third party
      warehouse and logistics provider.




*Sales
      and Marketing Expenses* .  For fiscal year 2008, sales and marketing expenses increased 101%
      to $4,257,290 from $2,128,025 for the same period in the prior year. This
      increase is primarily due to larger marketing budgets for the videogames
      released during fiscal year 2008. This increase is partially due to higher
      sales commissions that increase proportionately as sales volume increases and
      the increased marketing at trade shows that coincides with the launch of new
      titles. Advertising and marketing costs vary on a videogame by videogame basis
      depending on market conditions and consumer demand, and do not necessarily
      increase or decrease proportionate to sales volumes.




*General
      and Administrative Expenses.* For fiscal year 2008, general and administrative expenses increased 68% to
      $3,827,621 from $2,276,818 for the same period in the prior year. Included
      in
      such expenses is the consulting fee incurred by us in payment for staff related
      expenses, occupancy costs, telephones and communications expenses, and office
      supplies. This consulting fee was incurred through December 31, 2007, at which
      time we no longer had a need for the consulting arrangement as these functions
      were handled internally. Such consulting fee totaled $1,183,195 for fiscal
      year 2007 and $920,930 for fiscal year 2008. In addition to the staffing
      provided by consultants, we also had direct employees. Such wages increased
      from
      $192,733 for fiscal year 2007 to $1,371,487 for fiscal year 2008, an increase
      of
      612%. Professional fees increased 74% from $104,568 in fiscal year 2007 to
      $182,359 in fiscal year 2008. Travel and entertainment expenses were $157,595
      in
      fiscal year 2007, increasing 172% to $429,413 in fiscal year 2008. General
      and
      administrative expenses as a percentage of net revenues decreased, to 9.5%
      for
      fiscal year 2008 from 18.2% for fiscal year 2007.




As
      a
      result of the Acquisition, it is anticipated that staffing will increase, partly
      to comply with financial and accounting reporting requirements of a public
      company. In addition it is expected, as additional sales territories are added
      and more videogames are offered for sale, that sales will increase. It is
      anticipated that staffing will increase to support the increased sales
      volume.




*Transaction
      Costs.*  During fiscal year 2008, we incurred $1,579,946 in costs
      related to the Acquisition. These costs included professional fees to public
      accountant firms, law firms and advisors.




*Operating
      Income (Loss)* .  
      For fiscal year 2008, operating income was $2,814,870 versus an operating loss
      of $678,772 in the prior year period. The increase in operating income is
      principally due to our release of new, more profitable videogame titles.  
For fiscal year 2008, operating income as a percentage of net revenue was
      7.0%.




*Interest
      and Financing Costs.* For fiscal year 2008, interest and financing costs increased to $1,191,014
      from
      $187,440 for the prior year period due to (1) an increase in average borrowings
      related to funding the increased costs for development of videogames with third
      parties, (2) an increase in accounts receivable as a reuslt of increased
      sales and (3) due to a one time non-cash interest charge of $643,418 for
      common stock issued in connection with the conversion of a note payable into
      SouthPeak preferred stock.




*Income
      Taxes* .
      Following the Acquisition, SouthPeak became subject to the payment of corporate
      income taxes. As a result of net operating loss carryforwards from losses
      generated in the United Kingdom in prior years, we have booked a deferred tax
      asset of $461,931 for fiscal year 2008. There was not such loss booked for
      the
      previous year period since the losses had not been used to offset income until
      fiscal year 2008.




28


*Net
      Income* .  
      For fiscal year 2008, we generated net income of $1,553,558 as compared to
      net
      loss of $866,212 for fiscal year 2007.




*Years
      ended June 30, 2007 and 2006*




*Net
      Revenues* .  For
      fiscal year 2007, net revenues increased to $12,544,046 from $6,235,148 in
      the
      prior year. The significant increase in net revenues is due primarily to the
      launch of new videogames in fiscal year 2007, including our first game for
      a
      next generation hardware platform. The number of units sold for fiscal year
      2006
      was approximately 386,000 units increasing 76% to approximately 678,000 units
      for fiscal year 2007, while the average net revenue per game sold increased
      15%
      from $16.15 to $18.52.




*Cost
      of Goods Sold.* For
      fiscal year 2007, the cost of goods sold increased to $8,315,843 from $5,346,809
      for the prior year. This increase primarily is due to the increase in sales,
      with cost of goods sold being 66.3% and 85.8% of net revenues for fiscal years
      2007 and 2006 respectively.




*Gross
      Profit.* For
      fiscal year 2007, gross profit increased to $4,228,203 from $888,339 for the
      prior year while the gross profit margin increased to 33.7% from 14.2% for
      the
      prior year. In general, our gross profit margins have increased during each
      year
      of our operations due to (i) deeper engagement in the creative process of
      publishing games over time and (ii) migration towards publishing videogames
      for
      next generation hardware platforms that allow videogames to be sold at higher
      prices, without a proportionate increase in cost of goods sold. These factors
      are principally responsible for the substantial increase in gross profit margins
      for fiscal year 2007 compared to fiscal year 2006. Although there can be no
      assurances, we expect that gross profit margins will continue to improve on
      a
      year to year basis as we further dedicate ourselves to deeper involvement in
      the
      creative process and to the development of videogames for the newest
      platforms.




*Warehousing
      and Distribution Expenses.* For
      fiscal year 2007, warehousing and distribution expenses increased to $502,132
      from $62,197 for the prior year. This increase is principally due to higher
      variable costs associated with storage and logistics, which increase as sales
      volume increases and as the number of videogames warehoused increases.
      Warehousing and distribution expenses as a percentage of net revenues increased
      to 4% for 2007 from 1% for the prior year principally as a result of the fact
      that a larger percentage of our sales were in the US as a percentage of total
      sales. Our US operations have a higher warehousing and distribution cost than
      our European operations.




*Sales
      and Marketing Expenses* .  For
      fiscal year 2007, sales and marketing expenses increased 262% to $2,128,025
      from
      $587,667 for the prior year. This increase primarily is due to higher sales
      commissions that increase proportionately as sales volume increases and with
      the
      increased marketing at trade shows that coincides with the launch of new titles.
      Advertising and marketing costs vary on a game by game basis depending on market
      conditions and consumer demand, and do not necessarily increase or decrease
      proportionate to sales volumes. Sales and marketing expenses as a percentage
      of
      net revenues increased from 9.4% for fiscal year 2006 to 17.0% for fiscal year
      2007, principally as a result of a strategy of increasing advertising with
      new
      game releases. Advertising expenses for fiscal years 2007 and 2006 were
      approximately $1,606,247 and $446,588 respectively.




*General
      and Administrative Expenses.*  For
      fiscal year 2007, general and administrative expenses increased to
      $2,276,818 from $1,007,248 in the prior year. Included in such expenses is
      the consulting fee incurred by the company in payment for staff related
      expenses, occupancy costs, telephones and communications expenses, and office
      supplies. Such consulting fee totaled $652,582 for fiscal year 2006, increasing
      81% to $1,183,195 for fiscal year 2007. In addition to the staffing provided
      by
      consultants, we also had direct employees. Such wages increased from $81,379
      for
      fiscal year 2006 to $192,733 for fiscal year 2007, an increase of 137%.
      Professional fees increased 68% from $62,206 in fiscal year 2006 to $104,568
      in
      fiscal year 2007. Travel and entertainment expenses were $50,843 in fiscal
      year
      2006, increasing 210% to $157,595 in fiscal year 2007. General and
      administrative expenses as a percentage of net revenues was 18.2% for fiscal
      year 2007 and 16.2% for fiscal year 2006.




*Operating
      Income* .  For
      fiscal year 2007, the operating loss was $678,772 versus an operating loss
      of
      $768,773 in the prior year. The decrease in operating losses is principally
      due
      to the increase in gross profit margins. For fiscal year 2007 operating loss
      as
      a percentage of net revenue was 5.4% compared to 12.3% for the prior
      year.




*Interest
      and Financing Costs.* For
      fiscal year 2007, interest and financing costs increased to $187,440 from
      $138,672 for the prior year due to an increase in average borrowing under the
      line of credit related to funding the increased costs for development of
      videogames with third parties and the increase in the accounts receivables
      prior
      to payment by customers.




*Income
      Taxes* .  Prior
      to the Acquisition, we were taxed as a partnership. As a partnership under
      the
      Internal Revenue Code, we were generally not liable for income taxes. Rather,
      our taxable income was reported to our members and applicable income taxes
      were
      paid by the members. Therefore, there are no provision (benefit from) income
      taxes in our consolidated financial statements for fiscal years 2007 and
      2006.




29




*Net
      Loss* .  For
      fiscal year 2007, we generated a net loss of $866,212, as compared to a net
      loss
      of $907,445 for the fiscal year 2006.





**Quarterly
      Operating Results Not Meaningful**




Our
      quarterly net revenues and operating results have varied widely in the past
      and
      can be expected to vary in the future, due to numerous factors, several of
      which
      are not under our control. These factors include the timing of our release
      of
      new titles, the popularity of both new titles and titles released in prior
      periods, changes in the mix of titles with varying gross margins, the timing
      of
      customer orders and fluctuations in consumer demand for gaming platforms.
      Accordingly, our management believes that quarter-to-quarter comparisons of
      our
      operating results are not meaningful.




**Liquidity
      and Capital Resources**




Historically,
      we have met our capital needs through our operating activities, our line of
      credit and, prior to the Acquisition, loans from related persons and our
      members. Our cash and cash equivalents were $4,095,036 at June 30, 2008 and
      $510,265 at June 30, 2007. Our cash is and was used principally for working
      capital purposes, including milestone payments for advances on
      royalties.




We
      expect
      continued volatility in the use and availability of cash due to fluctuations
      in
      receivables collections and quarterly working capital needs necessary to finance
      our business and growth objectives. During the last quarter of fiscal year
      2008,
      we sold preferred stock which provided additional liquidity to fund continued
      growth through the investment in videogame development. As of June 30, 2008,
      our
      operating activities combined with the preferred stock sold funded our working
      capital needs.




Although
      there can be no assurance, our management believes that there will be sufficient
      capital resources from our operations, our line of credit and the sale of
      preferred stock to finance our requirements for development, production,
      marketing, the purchases of equipment, and the acquisition of intellectual
      property rights for future products for at least the next 12 months.
      Furthermore, as a result of the Acquisition, we have enhanced our ability to
      finance our operations and future growth.




*Line
      of Credit*.
      We have
      a revolving loan due to a financial institution, with a maximum outstanding
      amount of $5.0 million at June 30, 2008. The loan bears interest at prime plus
      1⁄2%, which was 8.75% at June 30, 2007 and 5.50% as of June 30, 2008. The
      outstanding loan amount cannot exceed 65% of eligible accounts receivable from
      North American operations. Payments received on such accounts are processed
      by
      the financial institution as payments on the revolving loan. The line is
      collateralized by gross accounts receivable of $14,773,796 and $6,035,659 at
      June 30, 2008 and June 30, 2007, respectively. The line of credit is further
      collateralized by the personal guarantees, and pledge of personal securities
      and
      assets, by two stockholders. The note contains certain financial and
      non-financial covenants, and at June 30, 2008 and June 30, 2007, we were in
      compliance with the covenants.




At
      June
      30, 2008, the loan outstanding totaled $4,851,819 and the remaining available
      under the line of credit amounted to $148,180. In the future, we may elect
      to
      increase the maximum outstanding amount on the line of credit as our business
      grows and our gross margins continue improving in the ordinary course of
      business. For fiscal years 2008 and 2007, interest expense relating to the
      line
      of credit was $247,357 and $183,402, respectively. At June 30, 2007 the
      outstanding line of credit balance is $4,822,872 and the remaining available
      under the line of credit amounted to $ 0. All interest is expensed. The
      termination date of the line of credit has been extended to November 1, 2008.
      Our management believes that the line of credit will be renewed and potentially
      expanded in the normal course of business. The maximum amount outstanding
      was temporarily increased to $9.0 million for the period of August 6, 2007
      to
      November 1, 2007 in order to provide funding to finance the production and
      sales
      of videogames in this period; after which it was reduced to $6.5 million until
      December 1, 2007, at which time the maximum amount outstanding was reduced
      to
      $5.0 million.




*Cash
      Flows.* We
      expect that we will make significant expenditures relating to advances on
      royalties to third-party developers to fund our continued growth. Our future
      cash commitments relating to these investments are detailed below in
“Contractual Obligations.”  Cash flows from operations are affected by our
      ability to release successful titles. Though many of these titles have
      substantial royalty advances and marketing expenditures, once a title recoups
      these costs, incremental net revenues typically will directly and positively
      impact cash flows.




For
      fiscal year 2008, we had net cash used in operating activities of $6,163,950
      as
      compared $3,119,684 for fiscal year 2007. Although there is a large swing in
      income in comparing fiscal years 2008 to 2007, there other factors that have
      led
      to the negative cash flow from operations, which includes a large amount of
      inventory on hand at June 30, 2008 and large accounts receivable balances as
      a
      result of large sales volume in June 2008. With the increased cash flow for
      fiscal year 2008 as a result of net income and the sale of preferred stock,
      our
      liabilities were paid down, including accrued expenses - related parties and
      accrued royalties.  The largest increase in cash provided by operating
      activities for fiscal year 2008 was an increase in accounts payable of
      $12,290,066. Generally, when new videogames are launched, there is a large
      amount of payables and receivables on the books to account for the cost of
      manufacturing the videogames, and from the large sales volume.  In June
      2008, *Grid* was
      successfully launched, leading to large balances of accounts payable and
      accounts receivable on the books at June 30, 2008.




30




The
      cash
      used in investing activities during fiscal years 2008 and 2007 was $708,290
      and
      $112,030, respectively. The cash used in both periods primarily related to
      the
      purchase of office and computer equipment.




During
      fiscal year 2008 and 2007, financing activities resulted in net cash provided
      of
      $10,511,909 and $3,595,912, respectively. The largest items that provided cash
      were the sale of preferred stock and the proceeds from a convertible note
      payable. We utilized cash provided by financing activities to fund our
      operations.




We
      are
      now able to meet a substantial portion of our capital needs through operating
      cash flows, our line of credit and the sale of preferred stock. Additionally,
      as
      our gross profit margins increase our operating cash flows are expected to
      contribute more towards our capital needs in the future. Although there can
      be
      no assurances, our management believes that we have sufficient capital resources
      from our operations, our line of credit, and the sale of preferred stock to
      finance our operations and growth.




**Contractual
      Obligations**




*Operating
      Obligations.* We
      regularly enter into contractual arrangements with third parties for the
      development of videogames. Under these agreements, we commit to provide
      specified payments to a developer, based upon contractual arrangements, and
      conditioned upon the achievement of specified development milestones. These
      payments to third-party developers typically are deemed to be advances and
      are
      recoupable against future royalties earned by the developers based on the sale
      of the related videogame. On October 26, 2007, we entered into an agreement
      with
      a third party developer in connection with certain development agreements.
      Pursuant to the agreement, we committed to spend specified amounts for marketing
      support for the related videogame which is to be developed. We lease our United
      Kingdom and Midlothian, Virginia office space. We entered into a three year
      non-cancelable operating lease for our Midlothian, Virginia headquarters in
      January 2008, with monthly rent of $7,542. In October 2007, we entered into
      a
      new one year lease for our United Kingdom, effective December 2007, with a
      monthly rent of $5,188.




*Long-Term
      Obligations.* We have
      minimum principal payments due on a mortgage loan. In October 2007, we purchased
      a building and land in Grapevine, Texas for $1,175,000. This building has 7,000
      square feet and is being used for office space. In connection with the purchase,
      we entered into a 20 year mortgage with a financial institution in the amount
      of
      $1,068,450. The interest rate on the mortgage adjusts every five years to prime
      minus 1⁄4%, and has an initial rate of 7.5%. Monthly principal and interest
      payment are $8,611 with interest only payments for the first six months. The
      mortgage is secured by land and building with a net book value of $1,294,573
      at
      June 30, 2008. Two of our stockholders have personally guaranteed the mortgage
      note.




The
      total
      future minimum commitments for the above and other contractual arrangements
      in
      place as of June 30, 2008 are scheduled to be paid as follows:




**Payment
                due by period****Contractual
                Obligations**
            
            **Total**
            
            **Less
                than**
              **1****year**
            
            **1-3
                years**
            
            **3-5
                years**
            
            **More
                than**
              **5
                years**Long-term
                debt
            
            $
            2,041,655
            
            $
            103,224
            
            $
            206,447
            
            $
            206,447
            
            $
            1,525,537Operating
                lease obligations
            
            
            254,060
            
            
            118,310
            
            
            135,750
            
            
            -
            
            
            -Other
                contractual obligations
            
            
            12,022,657
            
            
            11,027,707
            
            
            994,950
            
            
            -
            
            
            -Total
            
            $
            14,318,372
            
            $
            11,249,241
            
            $
            1,337,147
            
            $
            206,447
            
            $
            1,525,537





In
      the
      normal course of business, we execute contracts with third parties for
      development of videogames. During the period from July 1, 2008 to September
      16,
      2008, we entered into four agreements with such developers for an aggregate
      royalty commitment of approximately $2,130,000.




**Item 7A.** ***Quantitative
      and Qualitative Disclosures about Market Risk***




We
      are
      exposed to various market risks, including the changes in foreign currency
      exchange rates and interest rates. Market risk is the potential loss arising
      from changes in market rates and prices.




*Interest
      Rate Risk* . We
      have a
      line of credit for up $5.0 million. At June 30, 2008, the loan outstanding
      totaled $4,851,819. In October 2007, we entered into a 20 year mortgage for
      our
      Grapevine, Texas facility for $1,068,450. The loan bears interest at prime
      plus
1⁄2%, which was 5.50% and 8.75% at June 30, 2008 and 2007, respectively. The
      interest rate on the mortgage adjusts every five years to prime minus 1⁄4%, and
      had an initial annual rate of 7.5%. We do not believe that interest rate risk
      is
      significant to us at June 30, 2008.




31





*Foreign
      Currency Risk* .  We
      transact business in various foreign currencies and are exposed to financial
      market risk resulting from fluctuations in foreign currency exchange rates,
      particularly the British Pound, or GBP, and the Euro, which results in the
      recognition of foreign currency transaction gains or losses. We monitor the
      volatility of the GBP and the Euro (and all other applicable currencies)
      frequently throughout the year. While we have not engaged in foreign currency
      hedging, we may in the future use hedging programs, currency forward contracts,
      currency options and/or other derivative financial instruments commonly used
      to
      reduce financial market risks if we determine that such hedging activities
      are
      appropriate to reduce risk. We realized foreign currency transaction gains
      (losses) of ($237,699), ($147,747) and $95,856 in fiscal years 2008, 2007 and
      2006, respectively. We do not believe that foreign currency risk was material
      at
      June 30, 2008, 2007 and 2006.




**Item 8.**  ***Financial
      Statements and Supplementary Data***




Our
      consolidated financial statements and related notes required by this item are
      set forth as a separate section of this report. See Part IV, Item 15
      of this Form 10-K.




**Item 9.**  ***Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure***




None.




**Item 9A(T).** ***Controls
      and Procedures***




**Evaluation
      of Disclosure Controls and Procedures**




Based
      on
      the evaluation of our disclosure controls and procedures (as defined in the
      Rules 13a-15(e) and 15d-15(e) under the Exchange Act) required by Exchange
      Act Rules 13a-15(b) or 15d-15(b), our chief executive officer and our chief
      financial officer have concluded that as of the end of the period covered by
      this report, our disclosure controls and procedures were effective.




**Changes
      in Internal Controls**




There
      were no changes in our internal controls over financial reporting during the
      quarter ended June 30, 2008 that have materially affected, or are reasonably
      likely to affect, our internal control over financial reporting.




**Management’s
      Report on Internal Control Over Financial Reporting**




This
        annual report does not include a report of management's assessment regarding
        internal control over financial reporting or an attestation report of our
        independent registered public accounting firm with respect to our internal
        controls due to a transition period established by rules of the SEC for newly
        public companies.  The Company completed an acquisition of SouthPeak
        Interactive, L.L.C., a privately-held limited liability company, on May 12,
        2008 in a transaction accounted for as a reverse acquisition with SouthPeak
        Interactive, L.L.C. deemed to be the Company's "acquirer" for accounting
        and
        financial reporting purposes.  For the purpose of applying the requirements
        of Item 308T of Regulation S-K, SouthPeak Interactive, L.L.C. as the
        Company's "acquirer," will provide these reports beginning with the year
        ended
        June 30, 2009.




**Item 9B.** ***Other Information***




None.




32


**PART III**






**Item
      10.**  ***Directors,
      Executive Officers and Corporate Governance***




Our
      executive officers, key employees and directors and their respective ages and
      positions as of September 30, 2008 are as follows:




**Name**
            
            **Age**
            
            **Position**Terry
                Phillips*
            
            50
            
            ChairmanMelanie
                Mroz *
            
            45
            
            President,
                Chief Executive Officer and DirectorAndrea
                Gail Jones*
            
            37
            
            Chief
                Financial Officer and TreasurerDavid
                Buckel
            
            46
            
            DirectorLouis
                M. Jannetty
            
            55
            
            Director


*
              Denotes
                  an executive officer





*Terry
      Phillips* has
      served as our chairman since May 2008. Prior to that, Mr. Phillips served as
      the
      managing member of SouthPeak since 2000, when he purchased certain SouthPeak
      assets from SAS Institute. Mr. Phillips is also the managing member of Phillips
      Sales, Inc. (PSI), a company that he founded in 1991 that has become one of
      the
      largest manufacturer representative agencies specializing in the videogame
      industry. PSI represented many of the industry leading companies including,
      Sony
      Computer Entertainment America, THQ, Take-Two, Midway, Capcom Namco and Konami.
      PSI was awarded “manufacturer representative of the year” by Sony Computer
      Entertainment America in 1998 and has generated over $2 billion in sales since
      inception. In 2003, substantially all of Phillips Sales was sold to an ESOP.
      From March 1999 to present, Mr. Phillips was the manager of Capitol
      Distributing, L.L.C., a videogame distribution company. From 1987 to 1991,
      Mr.
      Phillips was Vice President of Sales for Acclaim Entertainment, a videogame
      publisher. In an administrative proceeding before the SEC, in May 2007, Mr.
      Phillips agreed to cease and desist from committing or causing any violations
      of
      Section 10(b) of the Exchange Act and Exchange Act Rules 10b-5 and 13b2-1 and
      from causing any violations of Sections 13(a) and 13(b)(2)(A) of the Exchange
      Act and Exchange Act Rules 12b-2, 13a-1 and 13a-13. This proceeding arose from
      the involvement in 2000 and 2001 of Mr. Phillips, Capital Distributing and
      another private company in which he was a principal in certain actions of
      Take-Two Interactive Software, Inc. Mr. Phillips holds a Bachelor of Science
      in
      Business Administration from Elmira College in New York.




*Melanie
      Mroz* has
      served as our president, chief executive officer and director since May 2008.
      Mr. Mroz was a member of SouthPeak from 2000 until May 2008. In 2005, she
      assumed responsibility for SouthPeak’s day-to-day operations.  In 1996, Ms.
      Mroz joined Phillips Sales, Inc., one of the largest manufacturer representative
      agencies in the videogame industry, to head its representation of Sony Computer
      Entertainment America and thereafter assumed other management duties. While
      at
      Phillips Sales, Inc., Ms. Mroz represented some of the most successful videogame
      titles in the industry to major retailers, including titles such as “Metal Gear
      Solid” from Konami America and “Grand Theft Auto” from Take-Two Interactive
      Software, Inc. From January 1995 to December 1996, Ms. Mroz was the Vice
      President of Sales for Digital Pictures, Inc., a private digital imaging,
      animation, and video products producer. From March 1992 to January 1995, Ms.
      Mroz was the national sales manager for Sony Imagesoft. Ms. Mroz entered the
      interactive software industry in 1986 with entertainment and educational
      software distributor SoftKat, then a division of W.R.Grace & Co. Ms.
      Mroz began with SoftKat as a buyer in the purchasing department and later
      became the Director of Purchasing. Ms. Mroz holds a Bachelor of Science from
      Winona State University in Minnesota.




*Andrea
      Gail Jones* has
      served as our chief financial officer and treasurer since May 2008. From June
      2007 to May 2008, Ms. Jones served as chief financial officer of SouthPeak.
      Prior to joining SouthPeak, Ms. Jones worked from 1999 until 2007 as a manager
      for Gregg and Bailey, P.C., a Richmond, Virginia based accounting firm of which
      SouthPeak was a client. From 1993 to 1999, Ms. Jones worked for Cherry, Bekaert,
      and Holland, L.L.P. as a tax specialist. She holds a Bachelor of Science in
      accounting from Virginia Tech and is a licensed Certified Public
      Accountant.




*David
      Buckel* has
      served as one of our Directors since August 2008. Since January 2008, Mr. Buckel
      has served as a senior executive in operations and finance for Smarterville,
      Inc., a portfolio company of Sterling Partners, which creates, manufactures,
      and
      sells educational products. Prior to that, Mr. Buckel served as VP and chief
      financial officer of Internap Network Services Corporation (Nasdaq: INAP),
      managing the Company’s accounting, finance, purchasing, financial planning
      analysis, investor relations, corporate development and other operating
      functions. Mr. Buckel was with Internap from July 2003 until December 2007,
      and
      led the company through its March 2004 public offering and subsequent leveraged
      financings. Mr. Buckel was also Senior VP and chief financial officer of
      Interland Corporation and Applied Theory Corporation, both NASDAQ listed
      companies, where he managed numerous financial and operational groups. Mr.
      Buckel also managed and led an IPO for Applied Theory in 1999. Mr. Buckel,
      a
      Certified Management Accountant, holds a B.S. degree in Accounting from Canisius
      College and a M.B.A. degree in Finance and Operations Management from Syracuse
      University.




33


*Louis
      M. Jannetty* has
      served as one of our Directors since August 2008. Since 1986, Mr. Jannetty
      has
      served as the chief executive officer of Jansco Marketing Inc., a manufacturer
      representative firm that specializes in the videogame industry and represents
      major publishers such as Sony, Capcom, Eidos, Midway, Konami, Take Two, THQ,
      and
      Namco Bandai. Since 2005, Mr. Jannetty has also been a principal in Janco
      Development LLC, a real estate holding and development company. Mr. Jannetty
      received his Bachelor of Arts degree from Fairfield University in
      1974.




**Information
      Relating to Corporate Governance and the Board of
      Directors**




Our
      bylaws authorize our board of directors to appoint among its members one or
      more
      committees, each consisting of one or more directors. Our board of directors
      has
      established two standing committees: an Audit Committee and a Compensation
      Committee.




Our
      Board
      of Directors has adopted charters for the Audit and Compensation Committees
      describing the authority and responsibilities delegated to each committee by
      the
      board of directors. Our board of directors has also adopted Corporate Governance
      Guidelines, a Code of Business Conduct and Ethics and a Whistleblower Policy.
      We
      post on our website, at *www.southpeakgames.com* ,
      the
      charters of our Audit and Compensation Committees and our Code of Conduct.
      These
      documents are also available in print to any stockholder requesting a copy
      in
      writing from our corporate secretary at our executive offices set forth in
      this
      report. We intend to disclose any amendments to or waivers of a provision of
      our
      Code of Business Conduct and Ethics made with respect to our directors or
      executive officers on our website.




Interested
      parties may communicate with our board of directors or specific members of
      our
      board of directors, including our independent directors and the members of
      our
      various board committees, by submitting a letter addressed to the board of
      directors of SouthPeak Interactive Corporation c/o any specified individual
      director or directors at the address listed herein. Any such letters will be
      sent to the indicated directors.




*The
      Audit Committee*




The
      purpose of the Audit Committee is (i) to oversee our accounting and
      financial and reporting processes and the audits of our financial statements,
      (ii) to provide assistance to our board of directors with respect to its
      oversight of the integrity of our financial statements, our compliance with
      legal and regulatory requirements, the independent registered public accounting
      firm’s qualifications and independence, and the performance of our internal
      audit function, if any, and independent registered public accounting firm,
      and
      (iii) to prepare the report required by the rules promulgated by the SEC.
      The primary responsibilities of the Audit Committee are set forth in its charter
      and include various matters with respect to the oversight of our accounting
      and
      financial reporting process and audits of our financial statements on behalf
      of
      our board of directors. The Audit Committee also selects the independent auditor
      to conduct the annual audit of our financial statements; reviews the proposed
      scope of such audit; reviews our accounting and financial controls with the
      independent auditor and our financial accounting staff; and, unless otherwise
      delegated by our board of directors to another committee, reviews and approves
      transactions between us and our directors, officers, and their
      affiliates.




The
      Audit
      Committee currently consists of Messrs. Buckel and Jannetty, each of whom
      is an independent director under the Nasdaq Marketplace Rules and under rules
      adopted by the SEC pursuant to the Sarbanes-Oxley Act of 2002. The board of
      directors previously determined that all members of the Audit Committee meet
      the
      requirements for financial literacy and that Mr. Buckel qualifies as an
“audit committee financial expert” in accordance with applicable rules and
      regulations of the SEC. Mr. Buckel serves as the Chairman of the Audit
      Committee.




*The
      Compensation Committee*




The
      purpose of the Compensation Committee includes determining, or recommending
      to
      our board of directors for determination, the compensation of our chairman,
      chief executive officer and president and any other executive officer of ours
      who reports directly to the board of directors, and the members of the board
      of
      directors; determining, or recommending to the board of directors for
      determination, the compensation of all of our other executive officers; and
      discharging the responsibilities of our board of directors relating to our
      compensation programs and compensation of our executives. In fulfilling its
      responsibilities, the Compensation Committee shall also be entitled to delegate
      any or all of its responsibilities to a subcommittee of the Compensation
      Committee. Information regarding our processes and procedures for the
      consideration and determination of executive and director compensation is
      addressed in the Compensation Discussion and Analysis below. The Compensation
      Committee currently consists of Messrs. Buckel and Jannetty.
      Mr. Jannetty serves as the Chairman of the Compensation
      Committee.




34


**Process
      for Selecting Nominees to the Board of Directors**




The
      board
      of directors has no standing nominating committee. It is the board of directors’
view, given its relatively small size and independent directors, that it is
      sufficient to select or recommend director nominees itself. Each director has
      the opportunity to suggest any nominee and such suggestions are comprehensively
      reviewed by the independent directors. The board of directors does not have
      a
      charter for the Company’s nominating process. However, the qualities and skills
      sought in prospective members of the board of directors generally require that
      director candidates be qualified individuals who, if added to the board of
      directors, would provide the mix of director characteristics, experience,
      perspectives and skills appropriate for us. In accordance with the Corporate
      Governance Guidelines adopted by the board of directors, criteria for selection
      of candidates include, but are not limited to:




·
            diversity,
                age, background, skills and experience deemed appropriate by the
                independent directors in their
                discretion,




·
            possession
                of personal qualities, characteristics and accomplishments deemed
                appropriate by the independent directors in their
                discretion,




·
            knowledge
                and contacts in the communities and industries in which we conduct
                business,




·
            ability
                and willingness to devote sufficient time to serve on the board of
                directors and its committees,




·
            knowledge
                and expertise in various activities deemed appropriate by the independent
                directors in their discretion, and




·
            fit
                of the individual’s skills, experience and personality with those of other
                directors in maintaining an effective, collegial and responsive board
                of
                directors.




Such
      persons should not have commitments that would conflict with the time
      commitments of a director of the Company.




The
      board
      of directors does not have a specific policy for consideration of nominees
      recommended by security holders due in part to the relatively small size of
      the
      board of directors and the lack of turnover in board of directors’ membership to
      date. However, security holders can recommend a prospective nominee for the
      board of directors by writing to our corporate secretary at our corporate
      headquarters and providing the information required by our bylaws, along with
      any additional supporting materials the security holder considers appropriate.
      There have been no recommended nominees from security holders for election
      at
      the Annual Meeting. The Company pays no fees to third parties for evaluating
      or
      identifying potential nominees.




**Board
      and Committee Meetings**




Our
      board
      of directors held a total of six meetings during the fiscal year ended June
      30,
      2008, in addition to taking action by unanimous written consent on five
      occasions. The Audit and Compensation Committees of our board of directors
      were
      formed on August 8, 2008 and accordingly held no meeting during the fiscal
      year
      ended June 30, 2008. During the fiscal year ended June 30, 2008, no director
      attended fewer than 75% of the aggregate of the total number of meetings of
      our
      board of directors.




**Section
      16(a) Beneficial; Ownership Reporting Compliance**




Section 16(a)
      of the Exchange Act requires our directors, officers, and persons that own
      more
      than 10% of a registered class of our equity securities to file reports of
      ownership and changes in ownership with the SEC. Our officers, directors and
      10%
      stockholders are required by SEC regulations to furnish us with copies of all
      Section 16(a) forms they file. We prepare Section 16(a) forms on
      behalf of our directors and officers based on the information provided by
      them.




Based
      solely on review of this information, we believe that, during the 2008 fiscal
      year, no reporting person failed to file the forms required by
      Section 16(a) of the Exchange Act on a timely basis, except for (i) a Form
      4 for Mr. Richard Jacinto to report the acquisition of shares that occurred
      on
      November 29, 2007, December 4, 2007, December 27, 2007, January 9, 2008, January
      16, 2008, and January 18, 2008, respectively, that was reported on February
      1,
      2008, (ii) a Form 4 for D.B. Zwirn & Co., L.P. to report the disposition of
      shares that occurred on March 20, 2008 that was reported on March 24, 2008,
      (iii) a Form 3 for Mr. Terry Phillips to report his becoming a 10% owner that
      occurred on April 25, 2008 that was reported on May 13, 2008, (iv) a Form 4
      for
      Mr. Richard Jacinto to report the disposition of shares that occurred on April
      25, 2008 that was reported on May 19, 2008, (v) a Form 4 for Dr. Robert Boyle
      to
      report his resignation as director that occurred on April 28, 2008 that was
      reported on June 9, 2008, (vi) a Form 4 for Mr. Rahul Prakash to report his
      resignation as officer and director that occurred on April 28, 2008 that was
      reported on June 9, 2008, (vii) a Form 4 for Mr. Avinash Vashistha to report
      his
      resignation as director that occurred on May 12, 2008 that was reported on
      June
      10, 2008, (viii) a Form 3 for Ms. Andrea Jones to report her appointment as
      chief financial officer that occurred on May 12, 2008 that was reported on
      July
      2, 2008, and (ix) a Form 4 for Mr. Terry Phillips to report the gift of his
      shares that occurred on August 29, 2008 that was reported on September 11,
      2008.


35


**Item 11.**  ***Executive
      Compensation***




**Compensation
      Discussion and Analysis**




This
      section contains a discussion of the material elements of compensation awarded
      to, earned by or paid to (i) each person who served as our chief executive
      officer, (ii) each person who served as our chief financial officer, and
      (iii) our chairman for the periods ending June 30, 2008 and
      2007.




Prior
      to
      the Acquisition, Rahul Prekash served as our chairman and chief executive
      officer, Avinash Vashistha served as our chief financial officer and executive
      vice president, and Abhishek Jain served as our president and secretary. Mr.
      Prekash resigned as our chairman and chief executive officer on April 28, 2008
      and Mr. Jain was appointed to fill the vacancies and served as our chairman
      and
      chief executive officer until the closing of the Acquisition.




After
      the
      Acquisition was consummated on May 12, 2008 and for the remainder of our fiscal
      year ended June 30, 2008, Terry Phillips served as our chairman, Melanie Mroz
      served as our president and chief executive officer and Andrea Jones served
      as
      our chief financial officer and treasurer. These three individuals are referred
      to as our “named executive officers” herein.




Prior
      to
      the Acquisition, the executive officers of SouthPeak were: Terry Phillips,
      managing member, Melanie Mroz, chief executive officer and Andrea Jones, chief
      financial officer. Prior to January 1, 2008, Mr. Phillips and Ms. Mroz did
      not
      receive compensation for services rendered to SouthPeak. Prior to the
      Acquisition, SouthPeak paid Phillips Sales, Inc., an affiliate of Mr. Phillips,
      for office space and staff services. For the years ended June 30, 2008 and
      2007,
      SouthPeak paid Phillips Sales, Inc. $920,930 and
      $1,183,195 ,
      respectively. This arrangement ceased on December 31, 2007.




Prior
      to
      the Acquisition, no executive officers received compensation for services
      rendered to the pre-Acquisition Company. Prior to the Acquisition, we paid
      $7,500 per month to Everest Telecom LLC, an affiliate of Mr. Prekash, for
      office space and certain office and administrative services. This arrangement
      ceased in April 2008.




Since
      the
      Acquisition, our current executive compensation programs are determined and
      approved by the Compensation Committee of the board of directors. None of the
      named executive officers are members of the Compensation Committee. Our Chairman
      recommends to the Compensation Committee salary, cash incentive awards,
      equity-based awards and long-term compensation levels for executives, including
      the other named executive officers. Our other named executive officers do not
      currently have any role in determining or recommending the form or amount of
      compensation paid to our named executive officers.




**Executive
      Compensation Program Objectives and Overview**




It
      is our
      intent that our executive compensation programs achieve three fundamental
      objectives: (i) attract, motivate and retain qualified executives;
      (ii) hold executives accountable for performance; and (iii) align
      executives’ interests with the interests of our stockholders. In structuring our
      executive compensation programs, we intend to be guided by the following basic
      philosophies:




·
            *Competition*.
                We should provide competitive compensation opportunities so that
                we can
                attract, motivate and retain qualified executives.




·
            *Pay
                for Performance*. A
                substantial portion of compensation should be tied to our (and/or
                particular department or segment) and individual
                performance.




·
            *Alignment
                with Stockholder Interests*. A
                substantial portion of compensation should be contingent on our
                performance. As an executive officer’s level of responsibility increases,
                a greater portion of the officer’s total compensation should be dependent
                on our performance.




As
      described in more detail below, the material elements of our executive
      compensation program will include some or a mix of the following, at the
      discretion of the Compensation Committee: a base salary, an annual cash
      incentive bonus opportunity, and a performance equity plan component. We believe
      that these elements of our executive compensation program will help us to
      achieve one or more of our compensation objectives. The executive compensation
      program is intended to attract, motivate and retain qualified executives. The
      base salary is the element of our current executive compensation program where
      the value of the benefit in any given year is generally not variable. We
      anticipate that any bonus awarded in any given year will depend on the
      performance of the individual and our performance. We believe that in order
      to
      attract, motivate and retain top-caliber executives, we need to provide
      executives with predictable benefit amounts that reward the executive’s
      continued service. The base salaries are paid out on a short-term or current
      basis. Any bonuses would generally be paid out on a short-term basis, such
      as at
      year end or upon completion of significant projects. Performance equity awards
      would generally be made on a longer-term basis. We believe that a mix of
      longer-term and short-term elements will allow us to achieve our dual goals
      of
      attracting and retaining executives (with the longer-term benefits geared toward
      retention and the short-term awards focused on recruitment).




36


Our
      cash
      incentive bonus opportunity would be primarily intended to hold executives
      accountable for performance, although we also believe it would align our
      executives’ interests with those of our stockholders and help us attract,
      motivate and retain executives. Our performance equity incentives would also
      be
      primarily intended to align our executives’ interests with those of our
      stockholders, although we believe they would help hold executives accountable
      for performance and help us motivate and retain executives.




These
      compensation elements are intended to create a total compensation package for
      each executive that we believe will achieve our compensation objectives and
      provide competitive compensation opportunities.




We
      have
      employment agreements with Terry Phillips, our Chairman, and Melanie Mroz,
      our
      president and chief executive officer.




**Current
      Executive Compensation Program Elements**




*Base
      Salaries*




As
      discussed above, the Compensation Committee was established following the
      Acquisition. Accordingly, compensation for the named executive officers prior
      to
      the Acquisition was determined by arrangements in effect between SouthPeak
      and
      such named executive officer, as determined by Terry Phillips. Mr. Phillips
      and
      Ms. Mroz did not receive salaries prior to the Acquisition, but the employment
      agreements we entered into with each of them as of May 12, 2008 provides for
      minimum base salaries. For a more complete description of current employment
      agreements with Mr. Phillips and Ms. Mroz, see “Description of Employment
      Agreements” below.




On
      a
      going-forward basis, the Compensation Committee plans to review and approve
      base
      salaries for executives, including named executive officers, annually and in
      connection with promotions or other changes in responsibilities. The
      Compensation Committee will generally review the base salaries for each
      executive in the first quarter of each year to set salaries, and intends to
      consider market data, individual compensation history, pay in relation to our
      other executives, tax deductibility, individual job performance and future
      potential, as well as evaluations and recommendations by senior management
      in
      determining base salary. The weight given to each of these factors may differ
      from individual to individual, as the Compensation Committee deems
      appropriate.




*Annual
      Bonus Awards*




There
      were no annual or other bonuses awarded to the named executive officers for
      the
      year ended June 30, 2008. However, going forward, a portion of compensation
      for
      executive officers may be based on our financial performance. Executives will
      be
      eligible for annual cash incentive bonus awards.




*Long-Term
      Equity Incentive Awards*




The
      Compensation Committee has the authority to grant stock options, restricted
      stock and other awards under our 2008 Equity Incentive Compensation Plan to
      executives. Prior to the Acquisition, there was no long-term equity incentive
      award program.




The
      Compensation Committee believes that the executives’ long-term compensation
      should be directly linked to the value provided to our stockholders.
      Consequently, the Compensation Committee will consider establishing in 2008
      a
      performance-based program whereby executives’ long-term compensation may be
      awarded in the form of stock options and/or restricted stock, at the discretion
      of the Compensation Committee. The number of shares of our common stock subject
      to each award will be intended to create a meaningful opportunity for stock
      ownership in light of the executive’s current position with us, the size of
      comparable awards to comparable executives at our peer group companies, and
      the
      individual’s personal performance.




**Severance
      and Other Benefits Upon Termination of Employment**




The
      employment agreements with Terry Phillips, our chairman, and Melanie Mroz ,
      our
      president and chief executive officer, contain certain terms and conditions
      relating to payments and continuation of health benefits in the event of the
      severance of their employment with us. The specific terms and conditions
      relating to severance payments for Mr. Phillips and Ms. Mroz are summarized
      below and graphically displayed in the section entitled “Potential Payments Upon
      Termination.” There are no provisions with respect to severance payments in any
      other employment agreement for our named executive officers. We are not and
      were
      not a party to any other change in control agreements or other severance
      arrangements.




37


In
      order
      to support our compensation objective of attracting, retaining and motivating
      qualified executives, we believe that, in certain cases, we may decide to
      provide executives with severance protections upon certain types of termination.
      These severance protections would be negotiated on an individual by individual
      basis.




**Option
      Grant Practices and Policies**




It
      is
      intended to be the practice of the Compensation Committee to grant stock options
      under the 2008 Equity Incentive Compensation Plan with an exercise price equal
      to or greater than the closing price of our common stock on the date of
      grant.




**Compensation
      Committee Report on Executive Compensation**




The
      Compensation Committee has certain duties and powers as described in its
      Charter. The Compensation Committee is currently composed of the two
      non-employee directors named at the end of this report, each of whom is
      independent as defined by Nasdaq Marketplace Rules.




The
      Compensation Committee of the Company has reviewed and discussed with management
      the Compensation Discussion and Analysis required by Item 402(b) of
      Regulation S-K of the Exchange Act and, based on such review and discussions,
      the Compensation Committee has recommended to our board of directors that the
      Compensation Discussion and Analysis section be included in this annual report
      on Form 10-K, as filed with the SEC.


By
                  the Compensation Committee,Louis
                  M. Jannetty, ChairmanDavid
                  Buckel


**Compensation
        Committee Interlocks and Insider Participation**




No
      member
      of our Compensation Committee has served as one of our officers or employees
      at
      any time. None of our executive officers serve as a member of the compensation
      committee of any other company that has an executive officer serving as a member
      of our board of directors. None of our executive officers serve as a member
      of
      the board of directors of any other company that has an executive officer
      serving as a member of our Compensation Committee.




**Summary
      Compensation Table**




The
      following table sets forth the fiscal years ended June 30, 2008 and 2007
      compensation information for: (i) each person who served as our chief executive
      officer at any time during the periods covered, (ii) each person who served
      as our chief financial officer at any time during the periods covered; and
      (iii) our chairman.


**All
                    Other****Name
                    and Position**
                
                **Year**
                
                **Salary**
                
                **Compensation**
                
                **Total**Terry
                    Phillips,
                
                
                2008
                
                $
                50,000
                (3)
                $
                9,904
                (4)
                $
                59,904Chairman
                    (1)(2)
                
                
                2007
                
                $
                -
                
                $
                -
                
                $
                -Melanie
                    Mroz,
                
                
                2008
                
                $
                75,000
                (6)
                $
                6,928
                (7)
                $
                81,928President,
                    Chief Executive Officer and Director (1)(5)
                
                
                2007
                
                $
                -
                
                $
                -
                
                $
                -Andrea
                    Gail Jones,
                
                
                2008
                
                $
                105,000
                
                $
                42,562
                (9)
                $
                147,562Chief
                    Financial Officer and Treasurer (1)(8)
                
                
                2007
                
                $
                3,500
                
                $
                -
                
                $
                3,500Rahul
                    Prekash,
                
                
                2008
                
                $
                -
                
                $
                -
                
                $
                -Former
                    Chairman and Chief Executive Officer (10)
                
                
                2007
                
                $
                -
                
                $
                -
                
                $
                -Avinash
                    Vashistha
                
                
                2008
                
                $
                -
                
                $
                -
                
                $
                -Former
                    Chief Financial Officer, Executive Vice President and Director
                    (11)
                
                
                2007
                
                $
                -
                
                $
                -
                
                $
                -Abhishek
                    Jain,
                
                
                2008
                
                $
                -
                
                $
                -
                
                $
                -Former
                    Chairman, Chief Executive Officer, President, Secretary and Director
                    (12)
                
                
                2007
                
                $
                -
                
                $
                -
                
                $
                -




38




(1)
              
              Includes
                  compensation paid by SouthPeak Interactive, L.L.C. prior to the
                  Acquisition on May 12, 2008.(2)
              
              Prior
                  to May 12, 2008, Mr. Phillips served as the managing member of
                  SouthPeak
                  Interactive, L.L.C. Mr. Phillips began as our Chairman on May 12,
                  2008.
                  Mr. Phillips’ salary is $100,000 a year.(3)
              
              Amount
                  reported includes $37,500 in distributions paid by SouthPeak Interactive,
                  L.L.C. to Mr. Phillips as member distributions between January
                  and May
                  2008.(4)
              
              Amount
                  reported includes $9,854 for the employee portion of health, dental
                  and
                  long-term care insurance premiums paid by us on the individual’s behalf,
                  and $50 for life and accidental death insurance premium paid by
                  us on the
                  individual’s behalf.(5)
              
              Prior
                  to May 12, 2008, Ms. Mroz served as Chief Executive Officer of
                  SouthPeak
                  Interactive, L.L.C. Ms. Mroz began as our President, Chief Executive
                  Officer and Director on May 12, 2008. Ms. Mroz’s salary is $150,000 a
                  year.(6)
              
              Amount
                  reported includes $56,250 in distributions paid by SouthPeak Interactive,
                  LLC to Ms. Mroz as member distributions between January and May
                  2008.(7)
              
              Amount
                  reported represents the employee portion of health and dental insurance
                  premiums paid by us on the individual’s behalf.(8)
              
              Ms.
                  Jones began as the Chief Financial Officer of SouthPeak Interactive,
                  L.L.C. on June 20, 2007. Ms. Jones began as our Chief Financial
                  Officer
                  and Treasurer on May 12, 2008. Ms. Jones’ salary is $105,000 a
                  year.(9)
              
              Amount
                  reported includes $31,855 of additional compensation paid for work
                  related
                  to the preparation of financial reports and securities filings
                  and $10,707
                  for the employee portion of health insurance premiums paid by us
                  on the
                  individual’s behalf.(10)
              
              Mr. Prekash
                  served as our Chairman and Chief Executive Officer from our formation
                  until April 28, 2008, but received no compensation from us in connection
                  with his service as an executive or Chairman. Mr. Prekashresigned
                  as our Chairman and Chief Executive Officer effective April 28,
                  2008.(11)
              
              Mr. Vashistha
                  served as our Chief Financial Officer, Executive Vice President
                  and
                  Director from our formation until April 28, 2008, but received
                  no
                  compensation from us in connection with his service as an executive
                  or
                  Director. Mr. Vashistha resigned as our Chairman and Chief Executive
                  Officer effective May 12, 2008.(12)
              
              Mr. Jain
                  served as our President and Secretary from our formation until
                  May 12,
                  2008, our Chairman and Chief Executive Officer from April 28, 2008
                  until May 12, 2008 and one of our Directors from our formation
                  until
                  August 8, 2008, but received no compensation from us in connection
                  with
                  his service as an executive or Director. Mr. Jain resigned as our
                  Chairman, Chief Executive Officer, President and Secretary effective
                  May
                  12, 2008, and he resigned as one of our Directors effective August
                  8,
                  2008.
  **Director
        Compensation and Other Information**
  Beginning
          October 1, 2008, for fiscal year 2009 we will compensate non-employee members
          of
          our board of directors through a mixture of cash and equity-based compensation.
          We will pay each non-employee director an annual retainer consisting of
          $5,000
          cash, 5,000 shares of restricted stock vesting in one year and 5,000 options
          to
          purchase our common stock vesting in one year. To the extent that a non-employee
          director serves for less than the full fiscal year, he or she would receive
          a
          pro-rated portion of the annual retainer equal to the proportionate amount
          of
          the fiscal year for which he or she served as a director.We reimburse
          our directors for reasonable travel and other expenses incurred in connection
          with attending meetings of our board of directors. Employees who also serve
          as
          directors receive no additional compensation for their services as a
          director.
  The
        following table sets forth the compensation earned by our non-employee directors
        in the fiscal year ended June 30, 2008.
  **Name**(1)
                
                **Total**Dr.
                    Brian Boyle (2)
                
                $
                -




39




(1)
            
            On
                August 8, 2008, the board of directors appointed David Buckel and
                Louis M.
                Jannetty as non-employee members of our board of
                directors(2)
            
            Dr. Brian
                Boyle served as one of our Directors from our formation until April
                28,
                2008, but received no compensation from us in connection with his
                service
                as a Director. Dr. Brian Boyle resigned as one of our Directors
                effective April 28, 2008.





**Employment
      Arrangements with Executive Officers**




In
      May
      2008, we entered into an employment agreement with Terry Phillips, pursuant
      to
      which Mr. Phillips serves as our chairman. The employment agreement has an
      initial term of three years, and will automatically renew for successive
      additional one-year periods thereafter unless either we or Mr. Phillips notifies
      the other that the term will not be extended. Mr. Phillips receives an
      initial salary of $100,000 per year, and is also eligible to receive
      bonuses and equity awards that may be granted by our board of directors or
      its
      compensation committee. The employment agreement provides for continuation
      of
      salary and benefits for a period of three months upon the termination other
      than
      for cause (as defined in the agreement) of Mr. Phillips’s employment and
      continuation of salary for a period of three months upon the termination of
      Mr.
      Phillip’s employment due to disability.




In
      May
      2008, we entered into an employment agreement with Melanie Mroz, pursuant to
      which Ms. Mroz serves as our president and chief executive officer. The
      employment agreement has an initial term of three years, and will automatically
      renew for successive additional one-year periods thereafter unless either we
      or
      Ms. Mroz notifies the other that the term will not be extended. Ms. Mroz
      receives initial salary of $150,000 per year, and is also eligible to
      receive bonuses and equity awards that may be granted by our board of directors
      or its compensation committee. The employment agreement provides for
      continuation of salary and benefits for a period of three months upon the
      termination other than for “cause” (as defined in the agreement) of Ms. Mroz’s
      employment and continuation of salary for a period of three months upon the
      termination of Ms. Mroz’s employment due to disability.




**Potential
      Payments upon Termination**




We
      are
      not a party to any employment agreement providing for payments with respect
      to
      an event that may constitute a “change of control.”




Mr.
      Phillips and Ms. Mroz are entitled to receive their applicable base salary
      and
      health benefits for three months following termination of employment other
      than
      for “cause.” Mr. Phillips and Ms. Mroz are entitled to receive their applicable
      base salary for three months following termination of employment due to
      disability.




**Termination
      of Employment by the Company other than for “Cause” (1)**





**Continuation of**
            
            **Continuation of****Name**
            
            **Salary**
            
            **Health Benefits**
            
            **Total**Terry
                Phillips
            
            $
            25,000
            
            $
            4,332
            
            $
            29,332Melanie
                Mroz
            
            $
            37,500
            
            $
            3,021
            
            $
            40,521





**Termination
      of Employment due to Disability (2)**


**Continuation of**
              
              **Continuation of****Name**
              
              **Salary**
              
              **Health Benefits**
              
              **Total**Terry
                  Phillips
              
              $
              25,000
              
              $
              -
              
              $
              25,000Melanie
                  Mroz
              
              $
              37,500
              
              $
              -
              
              $
              37,500




(1)
            
            Under
                the employment agreements, each executive may be terminated for “cause” if
                such executive: (i) commits a material breach of (a) his or her
                obligations or agreements under his or her employment agreement or
                (B) any
                of the covenants regarding non-disclosure of confidential information,
                assignment of intellectual property rights, non-competition and/or
                non-solicitation applicable to such executive under any stock option
                agreement or other agreement entered into between the executive and
                the
                Company; (ii) willfully neglects or fails to perform his or her material
                duties or responsibilities to the Company, such that the business
                or
                reputation of the Company is (or is threatened to be) materially
                and
                adversely affected; (iii) commits an act of embezzlement, theft,
                fraud or
                any other act of dishonesty involving the Company or any of its customers;
                or (iv) is convicted of or plead guilty or no contest to a felony
                or other
                crime that involves moral
                turpitude.




40




(2)
            
            Under
                the employment agreements, each executive may be terminated due to
                disability if such executive: (i) is unable, despite whatever reasonable
                accommodations the law requires, to render services to the Company
                for
                more than 90 consecutive days because of physical or mental disability,
                incapacity, or illness, or (ii) is found to be disabled within the
                meaning
                of the Company’s long-term disability insurance coverage as then in effect
                (or would be so found if he or she applied for the coverage or
                benefits).




We
      anticipate that we will generally enter into negotiated severance and release
      agreements with an executive upon the event of termination of an executive
      without cause.




**Item 12.** ******  ***Security
      Ownership of Certain Beneficial Owners and Management and Related Stockholder
      Matters***




The
      following table provides information concerning beneficial ownership of our
      common stock as of September 30, 2008, by:




·
            each
                stockholder, or group of affiliated stockholders, that we know owns
                more
                than 5% of our outstanding common
                stock;




·
            each
                of our executive officers;




·
            each
                of our directors; and




·
            all
                of our executive officers and directors as a
                group.




The
      following table lists the number of shares and percentage of shares beneficially
      owned based on 36,019,100 shares of common stock outstanding as of September
      30,
      2008.




Beneficial
      ownership is determined in accordance with the rules of the SEC, and generally
      includes voting power and/or investment power with respect to the securities
      held. Shares of common stock subject to options and warrants currently
      exercisable or exercisable within 60 days of September 30, 2008, are deemed
      outstanding and beneficially owned by the person holding such options or
      warrants for purposes of computing the number of shares and percentage
      beneficially owned by such person, but are not deemed outstanding for purposes
      of computing the percentage beneficially owned by any other person. Except
      as
      indicated in the footnotes to this table, the persons or entities named have
      sole voting and investment power with respect to all shares of our common stock
      shown as beneficially owned by them.




Unless
      otherwise indicated, the principal address of each of the persons below is
      c/o
      SouthPeak Interactive Corporation, 2900 Polo Parkway, Midlothian, Virginia
      23113.




**Number
                of****Shares**
            
            **Percentage
                of****Beneficially**
            
            **Outstanding****Owned**
            
            **Shares****Executive
                Officers and Directors**Terry
                Phillips
            
            
            17,238,660
            
            
            47.9
            %Melanie
                Mroz
            
            
            3,500,000
            
            
            9.7
            %Andrea
                Gail Jones
            
            
            5,500
            
            
            *Louis
                M. Jannetty (1)
            
            
            -
            
            
            -David
                Buckel (2)
            
            
            -
            
            
            -All
                executive officers and directors as a group (5 persons)
            
            
            20,744,160
            
            
            57.8
            %**Other
                5% Stockholders**Greg
                Phillips
            
            
            10,500,000
            
            
            29.2
            %Kathleen
                Morgan(3)
            
            
            3,500,000
            
            
            9.7
            %Hummingbird
                Management, L.L.C.(4)
            
            
            4,091,030
            
            
            10.2
            %Pentagram
                Partners, L.P.(5)
            
            
            3,516,100
            
            
            8.9
            %




*
            
            Less
                than 1% of the outstanding shares of common stock.(1)
            
            The
                address of Mr. Jannetty is 10 Cordage Park Circle, Suite 235,
                Plymouth, Massachusetts 02360.




41




(2)
            
            The
                address of Mr. Buckel is 1065 Admiral Crossing, Alpharetta, Georgia
                30005.(3)
            
            The
                address of Ms. Morgan is 24743 Senda Pajaro, Calabasas, California
                91302.(4)
            
            Includes
                2,700,000 shares of common stock issuable upon conversion of Series
                A
                Convertible Preferred Stock and 1,350,030 shares of common stock
                issuable
                upon exercise of Class W warrants and Class Z warrants, held by
                Hummingbird Value Fund, L.P. (“HVF”), Hummingbird Microcap Value Fund,
                L.P. (“Microcap Fund”), Hummingbird SPAC Partners, L.P. (“SPAC”),
                Hummingbird Concentrated Fund, L.P. (“Concentrated”) and Tarsier Nanocap
                Value Fund, L.P. (“Tarsier” together with HVF, Microcap Fund, SPAC and
                Concentrated, the “Hummingbird Funds”). As investment manager of the
                Hummingbird Funds, Hummingbird Management, LLC (“Hummingbird”) may be
                deemed to have the sole voting and investment authority over the
                shares of
                common stock and Series A Convertible Preferred Stock, and warrants
                owned
                by the Hummingbird Funds. The managing member of Hummingbird is Paul
                Sonkin. Mr. Sonkin, as the managing member and control person of
                Hummingbird, may be deemed to have the sole voting and investment
                authority over the shares of common stock and Series A Convertible
                Preferred Stock, and the warrants beneficially owned by Hummingbird.
                Hummingbird Capital, LLC (“HC”), as the general partner of each of the
                Hummingbird Funds, may be deemed to have the sole voting and investment
                owned by the Hummingbird Funds. Each of Hummingbird, Mr. Sonkin and
                HC
                disclaim any beneficial ownership of the shares of common stock and
                Series
                A Convertible Preferred Stock, and the warrants owned by the Hummingbird
                Funds. The business address of Hummingbird Manage, LLC is 460 Park
                Avenue,
                12thFloor, New York, New York 10022. The foregoing information is derived
                from
                a Schedule 13D filed on May 23, 2008.(5)
            
            Includes
                2,250,000 shares of common stock issuable upon conversion of Series
                A
                Convertible Preferred Stock and 1,131,100 shares of common stock
                issuable
                upon exercise of Class W warrants and Class Z warrants. Richard Jacinto,
                II is the General Partner of Pentagram Partners, L.P. and consequently
                may
                be deemed to be the beneficial owner of its holdings by virtue of
                controlling the voting and dispositive powers of Pentagram Partners,
                L.P.
                The business address of Pentagram Partners, L.P. is 630 Fifth Avenue,
                20thFloor, New York, New York 10111. The foregoing information is derived
                from
                a Schedule 13G filed on June 17, 2008.




**Equity
      Compensation Plan Information**




The
      following table sets forth certain information as of the end of the most
      recently completed fiscal year with respect to compensation plans (including
      individual compensation arrangements) under which our equity securities are
      authorized for issuance.


**Number of Securities**
              
              **Weighted Average****to be Issued Upon**
              
              **Exercise Price of**
              
              **Number of****Exercise of Outstanding**
              
              **Outstanding**
              
              **Securities****Options, Warrants**
              
              **Options, Warrants**
              
              **Remaining Available****Plan Category**
              
              **and Rights**
              
              **and Rights**
              
              **for Future Issuance**Equity
                  compensation plans approved by security holders
              
              
              -
              
              
              -
              
              
              5,000,000Equity
                  compensation plans not approved by security holders
              
              
              -
              
              
              -
              
              
              -




**Item 13.**  ***Certain
      Relationships and Related Transactions, and Director
      Independence***




**Certain
      Relationships and Related** **Transactions**




Other
      than the transactions described under the heading “Executive Compensation” set
      forth in Part III, Item 11 of this report (or with respect to which
      such information is omitted in accordance with SEC regulations) and the
      transactions described below, since July 1, 2005 there have not been, and
      there is not currently proposed, any transaction or series of similar
      transactions to which we were or will be a participant in which the amount
      involved exceeded or will exceed $120,000 and in which any director, executive
      officer, holder of 5% or more of any class of our capital stock or any member
      of
      the immediate family of any of the foregoing persons had or will have a direct
      or indirect material interest.




Unless
      specifically delegated by our board of directors to the Compensation Committee,
      our Audit Committee is charged with reviewing and approving all related party
      transactions and reviewing and making recommendations to the board of directors,
      or approving, any contracts or other transactions with any of our current or
      former executive officers.




42




On
      June
      5, 2008, we sold 500,000 shares of our Series A preferred stock for aggregate
      consideration of $500,000 to WTP Capital, LLC. Abhishek Jain is the chief
      executive officer and a member of WTP Capital, LLC and was a director of ours
      at
      the time of the sale.




On
      January 1, 2008, SouthPeak entered into a three year lease for office space
      for
      our headquarters in Midlothian, Virginia. The lease is with Phillips Land,
      L.C.,
      an organization in which Terry Phillips and Greg Phillips each
      beneficially own 50%. The rent is $7,542 per month. The terms of the lease
      are
      superior to those terms available from non-affiliates sources in that the price
      per square foot is equal to prevailing rates and the lease is not personally
      guaranteed by our management.




On
      January 1, 2008, SouthPeak leased office space in our Grapevine, Texas office
      to
      Phillips Sales, Inc., an organization in which Terry Phillips and Greg
      Phillips collectively own 5%. Terry Phillips is the managing member of Phillips
      Sales. The lease agreement provides for a term of three years and a rent of
      $1,302.50 per month. The terms of the lease are equal to those terms available
      to non-affiliates sources in that the price per square foot is equal to
      prevailing rates.




For
      the
      year ended June 30, 2008, SouthPeak paid a consulting fee for office space
      and
      staff services that approximated market prices to Phillips Sales. For
      the
      period from July 1, 2005 to December 31, 2006, the consulting fee was equal
      to
      10% of net revenues of SouthPeak. The consulting fee for the period January
      1,
      2007 through June 30, 2007 was based on the actual costs the organization
      incurred in providing office space and staff services.. For
      the years ended June 30, 2008, 2007 and 2006, SouthPeak incurred
      consulting fees of $920,930, $1,183,195 and $652,582, respectively. At June
      30,
      2008 and 2007, SouthPeak had consulting fees payable of $0 and $650,889,
      respectively. SouthPeak terminated its consulting fee arrangement with Phillips
      Sales, Inc. as of December 31, 2007.




SouthPeak
      has paid sales commissions, upon the sale of products, to Phillips Sales and
      West Coast Sales, Inc., an organization in which Terry Phillips
      indirectly owns 37.5%. Terry Phillips is the managing member of West
      Coast Sales. Such commissions approximated market rates and equaled
      $433,370 , $116,413
      and $20,997 for the years ended June 30, 2008, 2007 and 2006, respectively.
      The
      sales commission arrangements, which were negotiated at arms-length, are
      materially and substantially the same as SouthPeak’s sales commission
      arrangements with unrelated parties.




Kathleen
      Morgan, a former member of SouthPeak, was paid consulting fees in the amount
      of
      $5,000 and $61,400 for the years ended June 30, 2007 and 2006,
      respectively. Such fees were paid in connection with the development and
      execution of contracts with third party videogame developers. This consulting
      fee arrangement was terminated as of June 30, 2007.




SouthPeak
      received advances from West Coast Sales, Eastern Sales, LLC, an organization
      50%
      owned by Terry Phillips, Capital Distributing, LLC, an organization 22.74%
      owned
      by Terry Phillips and 22.74% by Greg Phillips, and Phillips Sales, Inc. The
      following table sets forth the amount of principal advanced by each entity,
      the
      amount of principal repaid to each entity, the amount of principal outstanding
      for each entity at period end and the largest amount of principal outstanding
      for each entity during the period for the years ended June 30, 2008, 2007 and
      2006:


**Year ended June 30, 2008****Amount of**
                **Principal**
                **Outstanding**
                **at Beginning of**
                **Year**
              
              **Amount of**
                **Principal**
                **Advanced During**
                **Year**
              
              **Amount of**
                **Principal Repaid**
                **During Year (1)**
              
              **Amount of**
                **Principal**
                **Outstanding**
                **at Year End**
              
              **Largest Principal**
                **Amount**
                **Outstanding**
                **During Year (1)**Capital
                  Distributing
              
              $
              20,000
              
              $
              -
              
              $
              20,000
              
              $
              -
              
              $
              20,000
 
 **Year ended June 30, 2007****Amount of**
                **Principal**
                **Outstanding**
                **at Beginning of**
                **Year**
              
              **Amount of**
                **Principal**
                **Advanced During**
                **Year**
              
              **Amount of**
                **Principal Repaid**
                **During Year (1)**
              
              **Amount of**
                **Principal**
                **Outstanding**
                **at Year End**
              
              **Largest Principal**
                **Amount**
                **Outstanding**
                **During Year (1)**Eastern
                  Sales
              
              $
              155,000
              
              $
              311,840
              
              $
              466,840
              
              $
              -
              
              $
              270,920Capital
                  Distributing
              
              $
              25,000
              
              $
              55,000
              
              $
              60,000
              
              $
              20,000
              
              $
              35,000Phillips
                  Sales
              
              $
              380,000
              
              $
              60,000
              
              $
              440,000
              
              $
              -
              
              $
              380,000
  43
  **Year ended June 30, 2006****Amount of**
                **Principal**
                **Outstanding**
                **at Beginning of**
                **Year**
              
              **Amount of**
                **Principal**
                **Advanced During**
                **Year**
              
              **Amount of**
                **Principal Repaid**
                **During Year (1)**
              
              **Amount of**
                **Principal**
                **Outstanding**
                **at Year End**
              
              **Largest Principal**
                **Amount**
                **Outstanding**
                **During Year (1)**West
                  Coast Sales(1)
              
              $
              -
              
              $
              104,000
              
              $
              104,000
              
              $
              -
              
              $
              84,000Eastern
                  Sales(1)
              
              $
              -
              
              $
              745,000
              
              $
              590,000
              
              $
              155,000
              
              $
              480,000Capital
                  Distributing(1)
              
              $
              -
              
              $
              61,000
              
              $
              36,000
              
              $
              25,000
              
              $
              98,000Phillips
                  Sales(1)
              
              $
              -
              
              $
              705,000
              
              $
              325,000
              
              $
              380,000
              
              $
              530,000




(1)
            In
                some periods, multiple advances and repayments were made, and therefore
                the amounts repaid during the period may exceed the largest principal
                amount outstanding.




The
      advances were made on a short-term basis to meet certain cash flow needs of
      SouthPeak, in many cases related to advanced payments to videogame developers.
      The terms of the advances were superior to those terms available from
      non-affiliates sources in that no interest was charged or paid on the principal
      amounts advanced and the outstanding principal amounts were not secured by
      any
      assets of SouthPeak.




During
      the years ended June 30, 2008 and 2007, SouthPeak received certain short-term
      advances from Terry Phillips, our chairman. These advances were unsecured and
      bore interest at the rate of 8% per annum. Interest expense under these advances
      was $19,587, $4,164 and $0 for the years ended June 30, 2008, 2007 and
      2006, respectively. The amount of principal advanced by Mr. Phillips was $0
      and $1,552,328 for the years ended June 30, 2008 and 2007, respectively. The
      amount of principal repaid to Mr. Phillips for the years ended June 30, 2008
      and
      2007 was $277,328 and $1,275,000, respectively. At June 30, 2008 and 2007,
      the
      amount due to Mr. Phillips was $0 and $277,328, respectively. The largest amount
      of principal outstanding for these advances was $277,328 and $1,000,000 for
      the
      years ended June 30, 2008 and 2007, respectively. The advances were paid in
      full
      on September 7, 2007. The advance was made on a short-term basis to meet certain
      cash flow needs of SouthPeak. The terms of the advance were superior to those
      terms available from non-affiliates sources in that the interest rate was equal
      to prevailing commercial rates and the outstanding principal amount was not
      secured by any assets of SouthPeak.




In
      connection with SouthPeak borrowing funds pursuant to a line of credit, Terry
      Phillips, our chairman and 10% owner of our capital stock, and Greg Phillips,
      a
      10% owner of our capital stock, provided personal guarantees and pledged
      personal assets to collateralize the line of credit.




In
      connection with SouthPeak entering into a mortgage payable to purchase a
      building in Grapevine, Texas, Terry Phillips, our chairman and 10% owner of
      our
      capital stock, and Greg Phillips, a 10% owner of our capital stock, personally
      guaranteed the mortgage note.




In
      August
      2005, we issued 100 shares of common stock for $500 in cash, or a purchase
      price
      of $5.00 per share. We also issued 1,537,500 Class W warrants and 1,537,500
      Class Z warrants for $153,750 in cash, at a purchase price of $0.05 per warrant.
      These securities were issued to the individuals and entities set forth below,
      as
      follows:


**Name**
              
              **Number of**
                **Shares of**
                **Common Stock**
              
              **Number of**
                **Class W**
                **Warrants**
              
              **Number of**
                **Class Z**
                **Warrants**
              
              **Relationship to the Company**(1)Rahul
                  Prakash
              
              
              0
              
              
              583,710
              
              
              583,710
              
              
              Former
                  Chairman of the Board and Chief Executive OfficerAbhishek
                  Jain
              
              
              100
              (2)
              
              363,260
              (2)
              
              363,260
              (2)
              
              Former
                  President, Secretary and DirectorAvinash
                  Vashistha
              
              
              0
              
              
              363,260
              (3)
              
              363,260
              (3)
              
              Former
                  Executive Vice President, Chief Financial Officer and
                  DirectorDr.
                  Brian Boyle
              
              
              0
              
              
              145,300
              
              
              145,300
              
              
              Former
                  Director







(1)  Each
      of
      the officers and directors resigned from their applicable position(s) with
      the
      Company between May and August, 2008.




(2)  These
      shares and warrants were acquired by WTP Capital, LLC, of which Mr. Jain is
      the
      chief executive officer and a member.




(3)  These
      warrants were acquired by Tholons Capital LLC, of which Mr. Vashistha is
      President and a member.




44




Our
      initial securityholders agreed, pursuant to a letter agreement between us and
      HCFP/Brenner Securities LLC, or HCFP/Brenner, the representative of the
      underwriters in our initial public offering, not to sell any of the foregoing
      securities until the completion of a business combination. In addition, WTP
      Capital, LLC, the sole holder of our common stock outstanding prior to our
      initial public offering, of which Mr. Jain is chief executive officer and a
      member, has agreed to waive its right to participate in any liquidation
      distribution with respect to shares of common stock acquired by it prior to
      our
      initial public offering. Each of the letter agreements entered into by our
      initial securityholders terminated pursuant to their terms in April
      2008.




Everest
      Telecom LLC, an affiliate of Mr. Prakash, agreed that until the acquisition
      of a
      target business, it will make available to us office space and certain office
      and administrative services, as we may require from time to time. We agreed
      to
      pay Everest Telecom $7,500 per month for these services. Mr. Prakash is its
      President and chief executive officer and member owns approximately 90% of
      Everest Telecom. Consequently, Mr. Prakash will benefited from this transaction
      to the extent of his interests in Everest Telecom. We believe, based on rents
      and fees for similar services in the northern Virginia area, that the fees
      charged by Everest Telecom were at least as favorable as we could have obtained
      from an unaffiliated person. This arrangement terminated pursuant to its terms
      in April 2008.




Our
      initial securityholders advanced a total of $52,500 to us in August 2005 to
      cover expenses related to our initial public offering. We issued notes to them
      which were repaid from the proceeds of our initial public offering that are
      not
      held in trust.




Prior
      to
      the Acquisition, we reimbursed our officers and directors for any reasonable
      out-of-pocket business expenses incurred by them in connection with certain
      activities on our behalf such as identifying and investigating possible target
      businesses and business combinations.




Other
      than the $7,500 per-month administrative fee paid to Everest Telecom and
      reimbursed out-of-pocket expenses paid to our officers and directors prior
      to
      the Acquisition, prior to the Acquisition no compensation or fees of any kind,
      including finder’s and consulting fees, will be paid to any of our initial
      securityholders, officers or directors or to any of their affiliates. From
      the
      consummation of our initial public offering through June 30, 2008, we paid
      an
      aggregate of $181,725 to Everest Telecom.




**Director
      Independence**




Our
      board
      of directors has determined, after considering all the relevant facts and
      circumstances, that each of Messrs. Buckel and Jannetty are independent
      directors, as “independence” is defined in the Nasdaq Marketplace Rules, because
      they have no relationship with us that would interfere with their exercise
      of
      independent judgment.




**Item 14.** ******  ***Principal
      Accountant Fees and Services***




Marcum
      & Kliegman LLP, an independent registered public accounting firm, has
      audited SouthPeak’s consolidated financial statements for the fiscal years ended
      June 30, 2007 and 2006.




On
      July
      25, 2008, we retained Reznick Group, P.C., an independent registered public
      accounting firm, as our auditors for the fiscal year ended June 30, 2008. We
      anticipate that the Reznick Group, P.C. will provide assistance during fiscal
      year 2009 with respect to review of our quarterly filings with the SEC. However,
      we, in consultation with the Audit Committee, have not yet selected an
      independent auditor with respect to the audit of its 2009 consolidated financial
      statements. We anticipate completing the selection of an independent auditor
      for
      the audit of our 2009 consolidated financial statements in consultation with
      the
      Audit Committee during the fourth quarter
      of fiscal year 2009.




The
      aggregate fees billed to SouthPeak by Marcum & Kliegman LLP for the fiscal
      years ended June 30, 2008 and 2007 are as follows:


**2008**
              
              **2007**Audit
                  Fees
              
              $
              111,000
              
              $
              369,000Audit-Related
                  Fees
              
              $
              -
              
              $
              -Total
              
              $
              111,000
              
              $
              369,000




(1)
              
              Audit
                  Fees consist of fees incurred for the audits of our annual financial
                  statements and the review of our interim financial
                  statements.(2)
              
              Audit-Related
                  Fees consist of fees incurred for assurance and related services
                  that are
                  reasonably related to the performance of the audit or review of
                  our
                  financial statements and are not reported under the category “Audit
                  Fees.”




The
      aggregate fees billed to us by Reznick Group, P.C. for the fiscal year ended
      June 30, 2008 are as follows:




45


**2008**Audit
                  Fees
              
              $
              60,000Audit-Related
                  Fees
              
              $
              –Total
              
              $
              60,000


(1)
              
              Audit
                  Fees consist of fees incurred for the audits of our annual financial
                  statements and the review of our interim financial
                  statements.(2)
              
              Audit-Related
                  Fees consist of fees incurred for assurance and related services
                  that are
                  reasonably related to the performance of the audit or review of
                  our
                  financial statements and are not reported under the category “Audit
                  Fees.”




The
      charter of our Audit Committee provides that the duties and responsibilities
      of
      our Audit Committee include the pre-approval of all audit, audit-related, tax,
      and other services permitted by law or applicable SEC regulations (including
      fee
      and cost ranges) to be performed by our independent registered public accounting
      firm. Any pre-approved services that will involve fees or costs exceeding
      pre-approved levels will also require specific pre-approval by the Audit
      Committee. Unless otherwise specified by the Audit Committee in pre-approving
      a
      service, the pre-approval will be effective for the 12-month period following
      pre-approval. The Audit Committee will not approve any non-audit services
      prohibited by applicable SEC regulations or any services in connection with
      a
      transaction initially recommended by the independent registered public
      accounting firm, the purpose of which may be tax avoidance and the tax treatment
      of which may not be supported by the Internal Revenue Code and related
      regulations.




To
      the
      extent deemed appropriate, the Audit Committee may delegate pre-approval
      authority to the Chairman of the Audit Committee or any one or more other
      members of the Audit Committee provided that any member of the Audit Committee
      who has exercised any such delegation must report any such pre-approval decision
      to the Audit Committee at its next scheduled meeting. The Audit Committee will
      not delegate to management the pre-approval of services to be performed by
      the
      independent registered public accounting firm.




Our
      Audit
      Committee requires that our independent registered public accounting firm,
      in
      conjunction with our chief financial officer, be responsible for seeking
      pre-approval for providing services to us and that any request for pre-approval
      must inform the Audit Committee about each service to be provided and must
      provide detail as to the particular service to be provided.




**PART IV**




**Item 15.** ******  ***Exhibits
      and Financial Statement Schedules***




(a)
            *Documents
                filed as part of this report:*




Consolidated
                Financial Statements:




Report
                of Independent Registered Public Accounting Firm for the year ended
                June
                30, 2008;




Consolidated
                balance sheets as of June 30, 2008 and
                2007;




Consolidated
                statements of operations for the years ended June 30, 2008, 2007
                and
                2006;


Consolidated
                  statements of cash flows for the years ended June 30, 2008, 2007
                  and
                  2006;


Consolidated
                statements of shareholders’ equity (deficit) for the years ended June 30,
                2008, 2007 and 2006; and




Notes
                to consolidated financial
                statements.




46




All
      other
      financial schedules are not required under the related instructions or are
      inappropriate and therefore have been omitted.




(b)
            *Exhibits*




The
      exhibits listed in the accompanying Index to Exhibits are filed or incorporated
      by reference as part of this report.




47


**SIGNATURES**




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


SOUTHPEAK
                  INTERACTIVE CORPORATIONBy:
              /s/
                  Melanie MrozMelanie
                  MrozPresident
                  and Chief Executive OfficerDate:
                  October
                  6,
                  2008




**POWER
      OF ATTORNEY**




KNOWN
      ALL
      MEN BY THESE PRESENTS that each person whose signature to this registration
      statement appears below hereby constitutes and appoints each of Terry Phillips
      and Melanie Mroz as such person’s true and lawful attorney-in-fact and agent,
      with full power of substitution and resubstitution, for such person and in
      such
      person’s name, place and stead, in any and all capacities, to sign any and all
      amendments to this Annual Report on Form 10-K, and to file the same, with
      all exhibits thereto, and other documents in connection therewith, with the
      SEC,
      and does hereby grant unto each said attorney-in-fact and agent full power
      and
      authority to do and perform each and every act and thing requisite and necessary
      to be done in and about the premises, as fully to all intents and purposes
      as
      such person might or could do in person, hereby ratifying and confirming all
      that each said attorney-in-fact and agents or any of them, or their substitutes,
      may lawfully do or cause to be done by virtue hereof.




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed by the following persons on behalf of the registrant and in the
      capacities and on the date indicated.




**Signature**
            **Title**
            **Date**/s/
                TERRY PHILLIPS
            Chairman
                of the Board
            October
                  6, 2008Terry
                Phillips/s/
                MELANIE MROZ
            President,
                Chief Executive Officer and Director
            October
                      6, 2008Melanie
                Mroz
            (Principal
                Executive Officer)/s/
                ANDREA GAIL JONES
            Chief
                Financial Officer and Treasurer
            October
                      6, 2008Andrea
                Gail Jones
            (Principal
                Financial and Accounting Officer)/s/
                DAVID BUCKEL
            Director
            October
                      6, 2008David
                Buckel/s/
                LOUIS M. JANNETTY
            Director
            October
                      6, 2008Louis
                M. Jannetty





48


**INDEX
      TO FINANCIAL STATEMENTS**




**Pages****SouthPeak
                Interactive Corporation**Reports
                of Independent Registered Public Accounting Firms
            
            
            F-2Balance
                Sheets, June 30, 2008 and 2007
            
            
            F-4Consolidated
                Statements of Operations, for the years ended June 30, 2008, 2007
                and
                2006
            
            
            F-5Consolidated
                Statements of Cash Flows, for the years ended June 30, 2008, 2007
                and
                2006
            
            
            F-6Consolidated
                Statements of Shareholders’ Equity (Deficit), for the years ended June 30,
                2008, 2007 and 2006
            
            
            F-7Notes
                to Consolidated Financial Statements
            
            
            F-8





F-1


**Report
      of Independent Registered Public Accounting Firm**




To
      the
      Board of Directors and Shareholders of


SouthPeak
      Interactive Corporation:




We
      have
      audited the accompanying consolidated balance
      sheet of SouthPeak Interactive Corporation and its subsidiaries as of June
      30,
      2008, and the related consolidated statements of operations, shareholders’
equity (deficit), and cash flows for the year then ended. These financial
      statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audit.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audit included consideration of internal control over
      financial reporting as a basis for designing auditing procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit includes examining,
      on a test basis, evidence supporting the amounts and disclosures in the
      financial statements. An audit also includes assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. We believe that our audit provides
      a
      reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of SouthPeak Interactive
      Corporation and its subsidiaries as of June 30, 2008, and the results of its
      operations and its cash flows for the year then ended, in conformity with
      accounting principles generally accepted in the United States of America.




/s/
      Reznick Group, P.C.




Vienna,
      Virginia


October
      3 ,
      2008




F-2


**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To
        the
        Board of Directors and Shareholders of
 SouthPeak
        Interactive Corporation
  We
        have
        audited the accompanying consolidated balance sheet of SouthPeak Interactive,
        L.L.C. and Subsidiary (the “Company”) as of June 30, 2007, and the related
        consolidated statements of operations, changes in members’ equity (deficiency)
        and cash flows for the years ended June 30, 2007 and 2006. These consolidated
        financial statements are the responsibility of the Company’s management. Our
        responsibility is to express an opinion on these consolidated financial
        statements based on our audits.
  We
        conducted our audits in accordance with the auditing standards of the Public
        Company Accounting Oversight Board (United States). Those standards require
        that
        we plan and perform the audit to obtain reasonable assurance about whether
        the
        financial statements are free of material misstatement. The Company is not
        required to have, nor were we engaged to perform, an audit of its internal
        control over financial reporting. Our audit included consideration of internal
        control over financial reporting as a basis for designing audit procedures
        that
        are appropriate in the circumstances, but not for the purpose of expressing
        an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of SouthPeak Interactive,
        L.L.C. and Subsidiary as of June 30, 2007, and the results of their operations,
        and their cash flows for the years ended June 30, 2007 and 2006, in conformity
        with accounting principles generally accepted in the United States of
        America.
  As
        discussed in Note 1 to the consolidated financial statements, the Company
        has
        retroactively adjusted its June 20, 2007 and 2006 consolidated financial
        statements for the effects of the reverse acquisition disclosed
        therein.
 
  /s/
        Marcum & Kliegman, LLP
  New
        York,
        New York
 January
        10, 2008, except for Note 1, regarding Inventories as to which the date is
        February 29, 2008 and
        October 6, 2008, as to the effect of the reverse acquisition discussed in
        Note 1
“Operations”




F-3




**SOUTHPEAK
        INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
 
 **June
                  30, 2008**
              
              **June 30, 2007****Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              4,095,036
              
              $
              510,265Restricted
                  cash
              
              
              139,104
              
              
              -Accounts
                  receivable, net of allowances of $1,108,465 and $1,943,626 at June
                  30,
                  2008 and 2007, respectively
              
              
              13,665,332
              
              
              4,864,485Inventories
              
              
              6,538,644
              
              
              839,436Current
                  portion of advances on royalties
              
              
              3,321,954
              
              
              1,461,443Current
                  portion of intellectual property licenses
              
              
              133,458
              
              
              -Related
                  party receivables
              
              
              48,243
              
              
              -Prepaid
                  expenses and other current assets
              
              
              1,281,371
              
              
              72,822Total
                  current assets
              
              
              29,223,142
              
              
              7,748,451Property
                  and equipment, net
              
              
              1,679,434
              
              
              143,197Advances
                  on royalties, net of current portion
              
              
              1,053,500
              
              
              -Intellectual
                  property licenses, net of current portion
              
              
              1,311,542
              
              
              -Other assets
              
              
              12,690
              
              
              3,959Total
                  assets
              
              $
              33,280,308
              
              $
              7,895,607**Liabilities
                  and Shareholders’ Equity (Deficit)**Current
                  liabilities:Line
                  of credit
              
              $
              4,851,819
              
              $
              4,822,872Current
                  maturities of mortgage payable
              
              
              24,252
              
              
              -Accounts
                  payable
              
              
              14,254,085
              
              
              1,964,019Accrued
                  royalties
              
              
              523,013
              
              
              1,046,505Accrued
                  expenses and other current liabilities
              
              
              1,456,915
              
              
              633,859Due
                  to shareholders
              
              
              228,998
              
              
              277,328Due
                  to related parties
              
              
              15,658
              
              
              40,793Accrued
                  expenses - related party
              
              
              4,182
              
              
              650,889Total
                  current liabilities
              
              
              21,358,922
              
              
              9,436,265Mortgage
                  payable, net of current maturities
              
              
              1,038,140
              
              
              -Total
                  liabilities
              
              
              22,397,062
              
              
              9,436,265Commitments
                  and contingencies
              
              
              -
              
              
              -Shareholders’
                  equity (deficit):Preferred
                  stock, $.0001 per value; 5,000,000 shares authorized; no shares
                  issued at June 30, 2008
              
              
              -
              
              
              -Series
                  A convertible preferred stock, $.0001 par value per share; aggregate
                  liquidation preference of $12,984,833; 15,000,000 shares authorized;
                  12,984,833 shares issued and outstanding at June 30, 2008
              
              
              1,298
              
              
              -Common
                  stock, $.0001 par value, 90,000,000 shares authorized; 35,920,100
                  shares
                  issued and outstanding at June 30, 2008
              
              
              3,592
              
              
              3,500Additional
                  paid-in capital
              
              
              20,825,105
              
              
              (3,500
              )Accumulated
                  deficit
              
              
              (9,796,709
              )
              
              (1,716,324
              )Accumulated
                  other comprehensive income (loss)
              
              
              (150,040
              )
              
              175,666Total
                  shareholders’ equity (deficit)
              
              
              10,883,246
              
              
              (1,540,658
              )Total
                  liabilities and shareholders’ equity (deficit)
              
              $
              33,280,308
              
              $
              7,895,607
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-4





**SOUTHPEAK
        INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 
 **For the Years Ended June 30,****2008**
              
              **2007**
              
              **2006**Net
                  revenues
              
              $
              40,153,094
              
              $
              12,544,046
              
              $
              6,235,148Cost
                  of goods sold:Product
                  costs
              
              
              22,280,392
              
              
              6,451,566
              
              
              3,502,832Royalties
              
              
              4,924,967
              
              
              1,864,277
              
              
              1,843,977Total
                  cost of goods sold
              
              
              27,205,359
              
              
              8,315,843
              
              
              5,346,809Gross
                  profit
              
              
              12,947,735
              
              
              4,228,203
              
              
              888,339Operating
                  expenses:Warehousing
                  and distribution
              
              
              468,008
              
              
              502,132
              
              
              62,197Sales
                  and marketing
              
              
              4,257,290
              
              
              2,128,025
              
              
              587,667Transaction
                  costs
              
              
              1,579,946
              
              
              -
              
              
              -General
                  and administrative
              
              
              3,827,621
              
              
              2,276,818
              
              
              1,007,248Total
                  operating expenses
              
              
              10,132,865
              
              
              4,906,975
              
              
              1,657,112Income
                  (loss) from operations
              
              
              2,814,870
              
              
              (678,772
              )
              
              (768,773
              )Interest
                  expense
              
              
              1,191,014
              
              
              187,440
              
              
              138,672Income
                  (loss) before income taxes
              
              
              1,623,856
              
              
              (866,212
              )
              
              (907,445
              )Income
                  tax expense
              
              
              70,298
              
              
              -
              
              
              -Net
                  income (loss)
              
              
              1,553,558
              
              
              (866,212
              )
              
              (907,445
              )Deemed
                  dividend related to beneficial conversion feature on Series A convertible
                  preferred stock
              
              
              8,405,383
              
              
              -
              
              
              -Net
                  loss attributable to common shareholders
              
              $
              (6,851,825
              )
              $
              (866,212
              )
              $
              (907,445
              )Basic
                  earnings (loss) per share:
              
              $
              (.20
              )
              $
              (.02
              )
              $
              (.03
              )Diluted
                  earnings (loss) per share:
              
              $
              (.20
              )
              $
              (.02
              )
              $
              (.03
              )Basic
                  earnings per share, weighted-average shares outstanding:
              
              
              35,125,697
              
              
              35,000,000
              
              
              35,000,000Dilutive
                  effect of warrants and convertible preferred stock
              
              
              1,716,809
              
              
              -
              
              
              -Diluted
                  earnings per share, weighted-average shares outstanding
              
              
              36,842,506
              
              
              35,000,000
              
              
              35,000,000
   The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-5
  **SOUTHPEAK
        INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
  **Year Ending June 30,****2008**
              
              **2007**
              
              **2006****Cash flows from
                  operating activities:**Net
                  income (loss)
              
              $
              1,553,558
              
              $
              (866,212
              )
              $
              (907,445
              )Adjustments
                  to reconcile net cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              92,668
              
              
              27,057
              
              
              23,432Allowances
                  for price protection, returns, doubtful accounts and defective
                  merchandise
              
              
              (835,161
              )
              
              1,158,504
              
              
              785,122Loss
                  on disposal of property and equipment
              
              
              -
              
              
              19,167
              
              
              -Non-cash
                  expenses related to the issuance of stock and
                  warrants
              
              
              800,656
              
              
              -
              
              
              -Change
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (8,236,494
              )
              
              (3,931,200
              )
              
              (2,876,911
              )Inventories
              
              
              (5,699,208
              )
              
              (450,889
              )
              
              (388,547
              )Advances
                  on royalties
              
              
              (2,914,011
              )
              
              (552,393
              )
              
              (909,050
              )Intellectual
                    property licenses
              
              
              (1,360,000
              )
              
              -
              
              
              -Related
                  party receivables
              
              
              (48,243
              )
              
              -
              
              
              -Prepaid
                  expenses and other current assets
              
              
              (1,206,099
              )
              
              6,869
              
              
              (79,691
              )Accounts
                  payable
              
              
              12,290,066
              
              
              616,610
              
              
              1,347,409Accrued
                  royalties
              
              
              (523,492
              )
              
              196,505
              
              
              850,000Accrued
                  expenses - related party
              
              
              (646,707
              )
              
              115,333
              
              
              535,556Accrued
                  expenses and other current liabilities
              
              
              568,517
              
              
              540,965
              
              
              87,680Total
                  adjustments
              
              
              (7,717,508
              )
              
              (2,253,472
              )
              
              (625,000
              )Net
                  cash and cash equivalents used in operating
                  activities
              
              
              (6,163,950
              )
              
              (3,119,684
              )
              
              (1,532,445
              )**Cash
                  flows from investing activities:**Purchase
                  of property and equipment
              
              
              (560,455
              )
              
              (111,759
              )
              
              (59,678
              )Security
                  deposits
              
              
              (8,731
              )
              
              (271
              )
              
              (3,688
              )Increase
                  in restricted cash
              
              
              (139,104
              )
              
              -
              
              
              -Net
                  cash and cash equivalents used in investing activities
              
              
              (708,290
              )
              
              (112,030
              )
              
              (63,366
              )**Cash
                  flows from financing activities:**Net
                  proceeds from (repayments of) line of credit
              
              
              28,947
              
              
              4,002,311
              
              
              820,561Repayments
                  of mortgage note payable
              
              
              (6,058
              )
              
              -
              
              
              -Proceeds
                  from issuance of secured term note payable
              
              
              2,000,000
              
              
              -
              
              
              -Net
                  increase (decrease) in cash overdraft
              
              
              -
              
              
              (81,707
              )
              
              81,707Proceeds
                  from member
              
              
              -
              
              
              1,002,328
              
              
              -Repayments
                  of amounts due to shareholder
              
              
              (277,328
              )
              
              (725,000
              )
              
              -Proceeds
                  from amounts due to related parties
              
              
              -
              
              
              1,275,133
              
              
              1,772,813Repayment
                  of amounts due to related parties
              
              
              (25,135
              )
              
              (1,877,153
              )
              
              (1,130,000
              )Proceeds
                  from the issuance of Series A convertible preferred stock, net
                  of cash
                  offering costs
              
              
              9,952,936
              
              
              -
              
              
              -Cash
                  acquired in reverse merger
              
              
              43,551
              
              
              -
              
              
              -Distributions
                  to shareholders
              
              
              (1,205,004
              )
              
              -
              
              
              -Net
                  cash and cash equivalents provided by financing
                  activities
              
              
              10,511,909
              
              
              3,595,912
              
              
              1,545,081Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              (54,898
              )
              
              102,471
              
              
              73,195Net
                  increase in cash and cash equivalents
              
              
              3,584,771
              
              
              466,669
              
              
              22,465Cash
                  and cash equivalents at beginning of year
              
              
              510,265
              
              
              43,596
              
              
              21,131Cash
                  and cash equivalents at end of year
              
              $
              4,095,036
              
              $
              510,265
              
              $
              43,596**Supplemental
                  cash flow information:**Cash
                  paid during the year for interest
              
              $
              460,556
              
              $
              154,797
              
              $
              138,770Cash
                  paid during the year for taxes
              
              $
              11,850
              
              $
              -
              
              $
              -**Supplemental
                  disclosure of non-cash activities:**Intellectual
                  property licenses included in accrued expenses and other current
                  liabilities
              
              $
              85,000
              
              $
              -
              
              $
              -Purchase
                  of land and building through the assumption of a mortgage note
                  payable
              
              $
              1,068,450
              
              $
              -
              
              $
              -Conversion
                  of secured term note payable to Series A convertible preferred
                  stock
              
              $
              2,000,000
              
              $
              -
              
              $
              -
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-6
  **SOUTHPEAK
        INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED STATEMENTS
        OF SHAREHOLDERS’ EQUITY (DEFICIT)**
 
 **Series A ConvertiblePreferred Stock**
              
              **Common Stock**
              
              **Paid-in**
              
              **RetainedEarnings(Accumulated**
              
              **AccumulatedOther**Comprehensive****
              
              **Treasury**
              
              **TotalShareholders’**
                **Equity****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit)**
              
              **Income
                  (loss)**
              
              **Stock**
              
              ****(Deficit)******Balance, July
                  1, 2005**
              
              
              -
              
              $
              -
              
              
              35,000,000
              
              $
              3,500
              
              
              (3,500
              )
              $
              57,333
              
              $
              -
              
              $
              -
              
              $
              57,333**Net
                  loss**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (907,445
              )
              
              -
              
              
              -
              
              
              (907,445
              )**Foreign
                  currency translation adjustment**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              73,195
              
              
              -
              
              
              73,195**Comprehensive
                  loss**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (834,250
              )**Balance, June 30, 2006**
              
              
              -
              
              
              -
              
              
              35,000,000
              
              
              3,500
              
              
              (3,500
              )
              
              (850,112
              )
              
              73,195
              
              
              -
              
              
              (776,917
              )**Net
                  loss**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (866,212
              )
              
              -
              
              
              -
              
              
              (866,212
              )**Foreign
                  currency translation adjustment**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              102,471
              
              
              -
              
              
              102,471**Comprehensive
                  loss**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (763,741
              )**Balance, June 30, 2007**
              
              
              -
              
              
              -
              
              
              35,000,000
              
              
              3,500
              
              
              (3,500
              )
              
              (1,716,324
              )
              
              175,666
              
              
              -
              
              
              (1,540,658
              )**Net
                  income**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,553,558
              
              
              -
              
              
              -
              
              
              1,553,558**Foreign
                  currency translation adjustment**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              (325,706
              )
              
              -
              
              
              (325,706
              )**Comprehensive
                  income**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,227,852**Stock
                  issuance in connection with reverse merger**
              
              
              -
              
              
              -
              
              
              920,100
              
              
              92
              
              
              (123,630
              )
              
              -
              
              
              -
              
              
              -
              
              
              (123,538
              )**Distributions**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,434,002
              )
              
              -
              
              
              -
              
              
              (1,434,002
              )**Capitalization
                of accumulated losses of limited liability company**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (205,442
              )
              
              205,442
              
              
              -
              
              
              -
              
              
              -**Shareholder
                  contribution of shares**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              643,418
              
              
              -
              
              
              -
              
              
              (643,418
              )
              
              -**Issuance
                  of Series A convertible preferred stock, net of offering
                  costs**
              
              
              12,984,833
              
              
              1,298
              
              
              -
              
              
              -
              
              
              11,951,638
              
              
              -
              
              
              -
              
              
              -
              
              
              11,952,936**Deemed
                  dividend related to beneficial conversion feature on Series A convertible
                  preferred stock**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              8,405,383
              
              
              (8,405,383
              )
              
              -
              
              
              -
              
              
              -**Compensatory
                  stock and warrants**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              157,238
              
              
              -
              
              
              -
              
              
              643,418
              
              
              800,65612,984,833
              
              $
              1,298
              
              
              35,920,100
              
              $
              3,592
              
              $
              20,825,105
              
              $
              (9,796,709
              )
              $
              (150,040
              )
              $
              -
              
              $
              10,883,246
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-7
  **SOUTHPEAK
        INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 
 **1.** **Summary
        of Significant Accounting Policies**
  ***Operations***
  Global
        Services Partners Acquisition Corporation (“Global Services”), was organized on
        August 10, 2005 as a blank check company whose objective was to acquire an
        operating business.
  On
        April
        25, 2008, Global Services entered into an agreement (the “Acquisition”) with
        SouthPeak Interactive, L.L.C. The agreement provided for Global Services
        to
        issue 35,000,000 shares of common stock to the members of SouthPeak Interactive,
        L.L.C. in exchange for all of the membership interests in SouthPeak Interactive,
        L.L.C.
  On
        May
        12, 2008, the shareholders of Global Services voted in favor of the Acquisition.
        Subsequent to the Acquisition, SouthPeak Interactive, L.L.C.’s business
        activities were the activities of Global Services which changed its name
        to
        SouthPeak Interactive Corporation (“SouthPeak”). The prior members of SouthPeak
        Interactive, L.L.C. own a majority of the equity of SouthPeak and
        are responsible for carrying out its current business plan. As a result,
        the transaction has been treated as a reverse merger, and a capital transaction,
        equivalent to the issuance of stock by SouthPeak Interactive, L.L.C. for
        SouthPeak’s net assets and, accordingly, the historical financial statements
        prior to May 12, 2008 are those of SouthPeak Interactive, L.L.C. The Company
        has
        retroactively presented the reverse acquisition as if it is occurred on July
        1,
        2005. All shares and per share data prior to the Acquisition have been restated
        to reflect the stock issuances and the effect of closing of the Acquisition.
        Accordingly, the June 30, 2007 consolidated balance sheet (shareholders’ equity
        (deficit)) and the June 30, 2007 and 2006 consolidated statements of
        stockholders’ equity (deficit) and basic loss per share have been adjusted to
        reflect the effect of the aforementioned reverse acquisition.
  The
        common stock issued or issuable to the prior members of SouthPeak Interactive,
        L.L.C. pursuant to the Acquisition is subject to certain transfer restrictions
        until the first anniversary of the closing of the Acquisition pursuant to
        a
        lock-up agreement with each of the prior members of SouthPeak Interactive,
        L.L.C., subject to certain limited exceptions. At the closing of the
        Acquisition, the President of SouthPeak Interactive, L.L.C., entered into
        an
        employment agreement to serve as SouthPeak Interactive Corporation’s Executive
        Chairman and the Chief Executive Officer of SouthPeak Interactive, L.L.C.,
        entered into an employment agreement to serve as SouthPeak Interactive
        Corporation’s Chief Executive Officer.
  ***Business***
  SouthPeak
        Interactive Corporation and its wholly-owned subsidiaries, SouthPeak
        Interactive, L.L.C. and SouthPeak Interactive, Ltd., (herein after collectively
        referred to as the “Company”) is an independent developer and publisher of
        interactive entertainment software. The Company develops, markets and publishes
        videogames for all leading gaming and entertainment hardware platforms,
        including Sony’s PLAYSTATION®3, or PS3, and PlayStation®2, or PS2, computer
        entertainment systems; Sony’s PSP® (PlayStation®Portable) system, or PSP;
        Microsoft’s Xbox 360® video game and entertainment system, or Xbox 360,
        Nintendo’s WiiTM, or Wii, DSTM, or DS, and Game Boy® Advance, or GBA, and for the
        PC and Games for Windows®. The Company’s titles span a wide range of categories
        and target a variety of consumer demographics ranging from casual players
        to
        hardcore game enthusiasts.
  The
        Company maintains its operations in the United States and the United Kingdom.
        The Company sells its games to retailers and distributors in North America
        and
        primarily to distributors in Europe and Australia.
  ***Principles
        of Consolidation***
  The
        consolidated financial statements include the accounts of SouthPeak Interactive
        Corporation, and its wholly-owned subsidiaries, SouthPeak Interactive L.L.C.
        and
        SouthPeak Interactive, Ltd. All intercompany accounts and transactions have
        been
        eliminated in consolidation.
  ***Segment
        Reporting***
  The
        Company has one operating segment, a publisher and distributor of interactive
        entertainment software for home video consoles, handheld platforms and personal
        computers, per the definitions of the Financial Accounting Standards Board
        (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 131,
“Disclosures about Segments of an Enterprise and Related Information.” To date,
        management has not considered discrete geographical or other information
        to be
        relevant for purposes of making decisions about allocations of resources.
  F-8
  **SOUTHPEAK
        INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 
 **1.** **Summary
        of Significant Accounting Policies** **,
        continued**
  ***Concentrations
        of Credit Risk, Major Customers and Vendors***
  The
        financial instruments which potentially subject the Company to concentrations
        of
        credit risk consist primarily of cash balances with financial institutions
        and
        accounts receivable. At various times during the years ended June 30, 2008
        and
        2007, the Company had deposits in excess of the Federal Deposit Insurance
        Corporation (“FDIC”) limit at a financial institution in the United States; and
        in excess of the Financial Services Compensation Scheme (“FSCS”) limit at a
        financial institution in the UK.
  The
        Company does not generally require collateral or other security to support
        accounts receivable. Management must make estimates of the uncollectibility
        of
        the accounts receivable. The Company considers accounts receivable past due
        based on how recently payments have been received. The Company has established
        an allowance for doubtful accounts based upon the facts surrounding the credit
        risk of specific customers, past collections history and other
        factors.
  The
        Company has two customers, Wal-Mart and SVG Distribution, that accounted
        for 12%
        and 11%, respectively, of consolidated gross revenues for the year ended
        June
        30, 2008.  SVG Distribution, Solutions 2 Go, and Wal-Mart
        accounted for 22%, 21% and 13%, respectively, of consolidated
        gross accounts receivable at June 30, 2008. For year ended June 30, 2007,
        Wal-Mart and GameStop accounted for 36% and 13%, respectively, of consolidated
        gross revenues. The Company had two customers, Wal-Mart and GameStop that
        accounted for 24% and 20%, respectively, of consolidated gross
        accounts receivable at June 30, 2007. Two of the Company’s customers, Pinnacle
        and GameStop, accounted for 18% and 12% of consolidated gross revenues for
        the
        year ended June 30, 2006.
  The
        Company publishes video games for the proprietary console and hand-held
        platforms created by Microsoft, Sony and Nintendo, pursuant to the licenses
        they
        have granted to the Company. Should the Company’s license with any of such three
        platform developers not be renewed by the developer, it would cause a disruption
        in the Company’s operations. The Company expects that such contracts will be
        renewed in the normal course of business. In addition, the Company has purchased
        a significant amount of video games for resale for such platforms from a
        single
        supplier. Such purchases amounted to $14,887,910 and $2,587,518 and $114,048
        in
        cost of goods sold - product cost for the years ended June 30, 2008, 2007
        and
        2006, respectively. Amounts included in accounts payable for this vendor
        at June
        30, 2008 and June 30, 2007 totaled $14,390,008 and $870,812, respectively.
        The
        Company pays fees to Microsoft for licensing the manufacture of games for
        Microsoft platforms. Such fees charged to cost of goods sold - product costs
        totaled $3,459,833, $1,083,964 and $184,865 for the years ended June 30,
        2008,
        2007 and 2006, respectively. Amounts payable to Microsoft for licensing
        included in accounts payable at June 30, 2008 and June 30, 2007 totaled $-0-
        and
        $30,000, respectively.
  ***Financial
        Instruments***
  The
        carrying amounts of cash, accounts receivable, accounts payable, and accrued
        expenses and other current liabilities approximate fair value due to their
        short-term nature.
  ***Cash
        and Cash Equivalents***
  Cash
        and
        cash equivalents include all highly liquid investments with maturities of
        three
        months or less when purchased.
  ***Restricted
        Cash***
  Restricted
        cash relates to deposits held as cash collateral for the line of credit at
        June
        30, 2008.
  F-9


**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**Notes
        to Consolidated Financial Statements**
 
 **1.** **Summary
        of Significant Accounting Policies** **,
        continued**
  ***Accounts
        Receivable, Allowance for Sales Returns and Price
        Protection***
  Receivables
        are stated net of allowances for price protection, sales returns, defective
        items, and doubtful accounts. The Company analyzes sales returns in accordance
        with SFAS No. 48 “Revenue Recognition When Right Of Return Exists”. The Company
        estimates the amount of future sales returns, price protection and defective
        items for current period revenue after analyzing historical returns, inventory
        remaining in the retail channel, the rate of inventory sell-through in the
        retail channel and other factors. Generally, the Company maintains a policy
        of
        giving credits for price protection, defective items and returns, but not
        cash
        refunds. Management uses significant judgment and makes estimates in connection
        with establishing allowances for price protection, defective items, sales
        returns and doubtful accounts. The Company will add to the allowance for
        doubtful accounts when it becomes apparent that a customer will not be able
        to
        pay. Actual sales returns, defective items and price protection could differ
        materially from allowance estimates due to a number of reasons such as the
        lack
        of consumer acceptance of a title, the release in the same period of a similarly
        themed title by a competitor, or technological obsolescence due to the emergence
        of new hardware platforms.
  As
        with
        any set of assumptions and estimates, there is a range of reasonably likely
        amounts that may be calculated for each allowance above. However, the Company
        believes there would be no significant difference in the amounts using other
        reasonable assumptions than what was used to arrive at each allowance. The
        Company regularly reviews the factors that influences its estimates and,
        if
        necessary, makes adjustments when it believes that actual product returns,
        credits and other allowances may differ from established reserves. Actual
        experiences associated with any of these items may be significantly different
        than the Company’s estimates.
  At
        June
        30, 2008 and 2007, accounts receivable allowances consisted of the
        following:
  **2008**
              
              **2007**Sales
                  returns
              
              $
              155,652
              
              $
              109,501Price
                  protection
              
              
              823,085
              
              
              1,768,773Defective
                  items
              
              
              107,559
              
              
              65,352Doubtful
                  accounts
              
              
              22,169
              
              
              -Total
                  reserves
              
              $
              1,108,465
              
              $
              1,943,626
  ***Inventories***
  Inventories
        are stated at the lower of cost (first-in, first-out) or market. The Company
        estimates the net realizable value of slow-moving inventory on a title by
        title
        basis and charges the excess of cost over net realizable value to “cost of goods
        sold - product costs”. Significant changes in demand for the Company’s products
        would impact management’s estimates in establishing the inventory provision.
Inventory
        costs include licensing fee paid to platform proprietors. These licensing
        fees
        include the cost to manufacture the game cartridges.These licensing fees
        included in “costs of goods sold - product costs” amounted to $4,453,831,
        $1,410,971, and $518,061 for the years ended June 30, 2008, 2007, and 2006,
        respectively. Licensing fees included in inventory at June 30, 2008 and
        2007 totaled $200,789 and $250,787, respectively.
  ***Advances
        on Royalties***
  The
        Company utilizes third parties to develop its games and makes payments to
        third-party developers as they reach certain contract milestones. The Company
        enters into contracts with third-party developers once the game design has
        been
        approved by the platform proprietors and is technologically feasible.  The
        Company capitalizes such payments to third-party developers during their
        development of games. These payments are considered non-refundable royalty
        advances and are applied against the royalty obligations owed to the third-party
        developer from the sales of the game. To the extent these prepaid royalties
        are
        sales performance related, the royalties are expensed against projected sales
        revenue at the time a game is released and charged to costs of goods sold.
        This
        normally results in expensing all prepaid royalties based upon the first
        and, on
        occasion, the second batch of shipments of the game. Any pre-release milestone
        payments that are not prepayments against future royalties are expensed when
        a
        game is released and charged to costs of goods sold. Any additional cost
        incurred beyond the milestone payments is expensed to “ cost of goods sold -
        royalties”. Capitalized costs for games that are cancelled or abandoned prior to
        product release are charged to “cost of goods sold - royalties” in the period of
        cancellation. The costs were $3,000, $-0-, and $200,000 for the years ended
        June
        30, 2008, 2007, and 2006, respectively.
  F-10


**SOUTHPEAK
        INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 
 **1.** **Summary
        of Significant Accounting Policies** **,
        continued**
  Beginning
        upon product release, advances on royalties are amortized to “cost of goods sold
– royalties” based on the ratio of current revenue to total projected revenues.
        These projected revenues are based on management’s estimates and usually result
        in an amortization period of six months or less. Periodically, the Company
        evaluates the future recoverability of games released in prior periods, based
        upon an individual game’s performance.
  Evaluating
        the recoverability of advance royalties often involves management assumptions
        and judgments that can have a significant impact on the timing and amounts
        which
        the Company reports. For example, in determining the future recoverability
        and
        timing of such advance royalties, the Company must make assumptions in the
        assessment of expected game performance which utilizes forecasted sales amounts
        and estimates of additional costs to be incurred. If actual sales or revised
        forecasted sales fall below the initial forecasted sales for a specific game,
        the charge to “cost of goods sold - royalties” may be larger than expected for
        any particular period.
  ***Intellectual
        Property Licenses***
  Intellectual
        property license costs consist of fees paid by the Company to license the
        use of
        trademarks, copyrights, and software used in the development of games by
        third
        party developers. The licenses may be used in several games or a single game.
        The
        Company analyzes intellectual property licenses in accordance with FASB Staff
        Position (FSP) FASB Interpretation (FIN) No. 45-3, “Application of FASB
        Interpretation No.45
        to
        Minimum Revenue Guarantees Granted to a Business or Its Owners*.”*As
        a
        result, the Company has recorded a minimum guaranteed liability of approximately
        $85,000 as of June 30, 2008. When no significant performance remains with
        the
        licensor, the Company initially records each of these guarantees as an asset
        and
        as a liability at the contractual amount. The Company believes that the
        contractual amount represents the fair value of the liability. When significant
        performance remains with the licensor, the Company records royalty payments
        as
        an asset when actually paid and as a liability when incurred, rather than
        upon
        execution of the contract. The Company classifies minimum royalty payment
        obligations as current liabilities to the extent they are contractually due
        within the next twelve months.
  Periodically
        the Company evaluates the future recoverability of capitalized intellectual
        property licenses, based on the expected performance of the specific games.
        Prior to the related game’s release, the Company expenses, as part of “cost of
        goods sold - intellectual property licenses,” any intellectual property license
        costs that are not recoverable. If the Company abandons a game, any capitalized
        intellectual property costs are charged to “cost of goods sold - intellectual
        property licenses,” at the time of cancellation. The Company uses various
        factors to evaluate expected game performance, including preorders for the
        game
        prior to release.
  Beginning
        with a game’s release, intellectual property license costs are amortized to
“cost of goods sold - intellectual property licenses” based on the ratio of
        current revenues for the specific game to the total of projected revenues
        for
        all the games which will use the license. Periodically, the Company evaluates
        the future recoverability of capitalized intellectual property licenses
        utilizing the main evaluative factor of actual title performance.
 Evaluating
          the recoverability of intellectual property licenses often involves management
          assumptions and judgements that can have a significant impact on the timing
          and
          amounts which the Company reports. For example, in determining the future
          recoverability and timing of such intellectual property license, t he
          Company must make assumptions in the assessment of expected game performance
          which utilizes forecasted sales amounts and estimates of additional costs
          to be
          incurred. If actual sales or revised forecasted sales fall below the initial
          forecasted sales for a specific game, the charge to “cost of goods sold -
          intellectual property licenses” may be larger than expected for any particular
          period.
  ***Property
        and Equipment***
  Property
        and equipment are recorded at cost. Depreciation and amortization is provided
        using the straight-line method over the estimated useful lives: Buildings,
        40
        years; computer equipment and software, 3 to 5 years; office furniture and
        other
        equipment, 5 to 10 years; and leasehold improvements, 5 years. When assets
        are
        retired or disposed of, the cost and accumulated depreciation and amortization
        thereon are removed and any resulting gains or losses are recognized in current
        operations. Expenditures for maintenance and repairs are charged to operations
        as incurred. Renewals and betterments are capitalized.
  ***Impairment
        of Long-lived Assets***
  In
        accordance with the provisions of SFAS No. 144, “Accounting for the Impairment
        or Disposal of Long-Lived Assets,” management reviews long-lived assets for
        impairment when circumstances indicate the carrying amount of an asset may
        not
        be recoverable based on the undiscounted future cash flows of the asset.
        If the
        carrying amount of an asset may not be recoverable, a write-down to fair
        value
        is recorded. Fair values are determined based on the discounted cash flows,
        quoted market values, or external appraisals, as applicable. Long-lived assets,
        which are assets that provide the Company with a benefit beyond one year,
        are
        reviewed for impairment at the individual asset or the asset group level
        for
        which the lowest level of independent cash flows can be identified. The Company
        has not recorded any write-downs to fair value during the years ended June
        30, 2008, 2007, and 2006, respectively.
  F-11
  **SOUTHPEAK
        INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 
 **1.** **Summary
        of Significant Accounting Policies** **,
        continued**
  ***Revenue
        Recognition***
  The
        Company recognizes revenue from the sale of video games when the title and
        risk
        of loss transfers to the customer, which in the normal business cycle occurs
        at
        the time of shipment. In consignment sales to a distributor, the Company
        does
        not record any revenue on these shipments until the distributor ships the
        games
        to its customers.  Revenue is recorded at the net amount the
        distributor is obligated to pay to the Company.
  In
        Europe, the Company has agreements that provide customers, on a title by
        title
        basis, the right to multiple copies in exchange for guaranteed minimum license
        fees, and revenue pursuant to such agreements is recognized at delivery of
        the
        product master.
  With
        respect to license agreements that provide mass retailers the right to rent
        the
        software, revenue is recognized when the rental occurs. Regarding on-line
        transactions including electronic downloads of titles and
        additional downloadable content, the Company recognizes revenue when the
        fee is paid by the on-line customer for the online product and the Company
        is
        notified by the online retailer that the product has been downloaded. In
        accordance with Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition
        in Financial Statements”, as revised by SAB No. 104, “Revenue Recognition” and
        the American Institute of Certified Public Accountants Statement of Position
        (“SOP”) 97-2 “Software Revenue Recognition”, amended by SOP 98-9 “Modification
        of SOP 97-2, Software Revenue Recognition, with respect to certain transaction”
and SOP 81-1 “Accounting for performance of construction type and certain
        production type contracts” , the Company evaluates revenue recognition using the
        following basic criteria and recognize revenue for both product sales and
        licensing transactions when all four criteria are met: (i) evidence of an
        arrangement transaction exists; (ii) the arrangement fee is fixed or
        determinable; (iii) collection of the related receivable is deemed probable;
        and, (iv) delivery has occurred in which title has passed. Revenue recognition
        also determines the timing of certain expenses including “cost of goods sold -
        product costs”, “cost of goods sold - royalties”, and “cost of goods sold -
        intellecetual property licenses”.
  ***Transaction
        Costs***
  In
        connection with the Company’s acquisition of SouthPeak Interactive L.L.C.,
        the Company has incurred certain professional fees which have been expensed
        during 2008.
  ***Shipping
        and Handling***
  The
        Company incurs shipping and handling costs in its operations. These costs
        consist of freight expenses incurred for third-party shippers to transport
        the
        product to the customers. These costs are included in the warehousing and
        distribution expenses in the accompanying consolidated statements of operations.
        Amounts billed to customers are included in net revenues.
  ***Advertising***
  The
        Company expenses advertising sales promotion expenses as incurred, except
        for
        production costs associated with media advertising which are deferred and
        charged to expense the first time the related advertisement is run. The Company
        engages in cooperative marketing with certain retail channel partners. The
        Company accrues marketing and sales incentive costs when the revenue is
        recognized and such amounts are included in sales and marketing expense when
        there is an identifiable benefit for which the Company can reasonably estimate
        the fair value of the benefit; otherwise, they are recognized as a reduction
        of
        net revenues. In addition, the Company engaged in an advertising barter
        transaction for which no revenue or expenses has been booked in accordance
        with
        Emerging Issues Task Force Issue No. 99-17 “Accounting for Advertising Barter
        Transactions”. Advertising expense for the years ended June 30, 2008, 2007, and
        2006 were $3,359,622, $1,606,247, and $446,588, respectively, and are included
        in sales and marketing expense in the accompanying consolidated statements
        of
        operations.
  F-12
  **SOUTHPEAK
        INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 
 **1.** **Summary
        of Significant Accounting Policies** **,
        continued**
  ***Income
        Taxes***
  Prior
        to
        May 12, 2008, SouthPeak Interactive, L.L.C. and its subsidiaries had
        elected to be taxed as partnership under Subchapter K of the Internal Revenue
        Code. Therefore, the results of the Company’s operations were included in the
        taxable income of the individual members. As a result, no provision for federal
        income taxes was included in the consolidated financial statements for the
        fiscal years ended June 30, 2007 and 2006. Subsequent to the Acquisition,
        the
        Company was reorganized as a C corporation under which income taxes are
        accounted for under the asset and liability method in accordance with SFAS
        No. 109, “Accounting for Income Taxes” (“SFAS 109”). Deferred tax assets
        and liabilities are recognized for the future tax consequences attributable
        to
        differences between the financial statement carrying amounts of existing
        assets
        and liabilities and their respective tax bases and operating loss and tax
        credit
        carryforwards. Deferred tax assets and liabilities are measured using enacted
        tax rates expected to apply to taxable income in the years in which those
        temporary differences are expected to be recovered or settled. The effect
        on
        deferred tax assets and liabilities of a change in tax rates is recognized
        in
        income in the period that includes the enactment date. A valuation allowance
        is
        established to reduce deferred tax assets to the amounts expected to be
        realized.
  ***Foreign
        Currency Translation***
  The
        functional currency for the Company’s foreign operations is the applicable local
        currency. 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 transaction gains and losses are included in income
        in
        the period in which they occur, except on intercompany balances considered
        to be
        long-term. Transaction gains and losses on intercompany balances considered
        to
        be long-term are recorded in other comprehensive income (loss). Foreign exchange
        transaction gains (losses) included in general and administrative expenses
        in
        the accompanying consolidated statements of operations for the years
        ended June 30, 2008, 2007, and 2006 amounted to $(237,699), $(147,747), and
        $95,856 respectively.
  ***Comprehensive
        Income(Loss)***
  SFAS
        No.
        130, “Reporting Comprehensive Income,” requires the Company to report foreign
        currency translation adjustments as a component of other comprehensive income
        or
        loss. Comprehensive income (loss) is disclosed in the consolidated statements
        of
        shareholders’ equity (deficit). Foreign currency translation adjustments have
        been the only component of comprehensive loss to date. Accordingly, accumulated
        other comprehensive income (loss) is equal to the accumulated translation
        adjustment of $(150,040) and $175,666 at June 30, 2008 and 2007, respectively.
        The
        Company's items of other comprehensive income (loss) are foreign currency
        translation adjustments, which relate to investments that are considered
        permanent in nature and therefore do not require tax
        adjustments.
  ***Stock-Based
        Compensation Plans***
  In
          December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which
          requires companies to expense the estimated fair value of employee stock
          options
          and similar awards. This statement is a revision to SFAS No. 123, “Accounting
          for Stock-Based Compensation”, supersedes Accounting Principles Board (APB)
          Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS No.
          95, “Statement of Cash Flows.”
  Prior
          to
          July 1, 2006, the Company accounted for its stock-based compensation plans
          under
          the recognition and measurement provisions of APB 25, and related
          interpretations, as permitted by SFAS 123. Effective July 1, 2006, the
          Company
          adopted SFAS 123R, including the fair value recognition provisions, using
          the
          prospective method. Under SFAS 123R, a non-public company that previously
          used
          the minimum value method for pro forma disclosure purposes is required
          to adopt
          the standard using the prospective method. Under the prospective method,
          all
          awards granted, modified or settled after the date of adoption are accounted
          for
          using the measurement, recognition and attribution provisions of SFAS 123R.
          As a
          result, stock-based awards granted prior to the date of adoption of SFAS
          123R
          will continue to be accounted for under APB 25 with no recognition of
          stock-based compensation in future periods, unless such awards are modified
          or
          settled. Subsequent to the adoption of SFAS 123R, the Company estimates
          the
          value of stock-based awards on the date of grant using the Black-Scholes
          option-pricing model. For stock-based awards subject to graded vesting,
          the
          Company has utilized the straight-line ratable method for allocating
          compensation cost by period. As of June 30, 2008, the Company has not issued
          any
          stock options.
  F-13
  **SOUTHPEAK
        INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 
 **1.** **Summary
        of Significant Accounting Policies** **,
        continued**
  ***Net
        Income (loss) Per Share***
  Basic
        earnings (loss) per share is computed by dividing income (loss) available
        to
        common stockholders by the weighted average common shares outstanding for
        the
        period. Diluted earnings per share reflects the potential dilution that could
        occur if securities or other contracts to issue common stock were exercised
        or
        converted into common stock or resulted in the issuance of common stock that
        then shared in the earnings of the entity. Since the effect of outstanding
        warrants to purchase common stock are antidilutive, they have been excluded
        from
        the Company’s computation of net loss per share.
 ***Derivative
          Financial Instruments***
  The
          Company does not use derivative instruments to hedge exposures to cash
          flow,
          market, or foreign currency risks.
  The
          Company reviews the terms of convertible debt and equity instruments issued
          to
          determine whether there are embedded derivative instruments, including
          the
          embedded conversion option, that are required to be bifurcated and accounted
          for
          separately as a derivative financial instrument. When the risks and rewards
          of
          any embedded derivative instrument are not “clearly and closely” related to the
          risks and rewards of the host instrument, the embedded derivative instrument
          is
          generally required to be bifurcated and accounted for separately. If the
          convertible instrument is debt, or has debt-like characteristics, the risks
          and
          rewards associated with the embedded conversion option are not “clearly and
          closely” related to that debt host instrument. The conversion option has the
          risks and rewards associated with an equity instrument, not a debt instrument,
          because its value is related to the value of our common stock. Nonetheless,
          if
          the host instrument is considered to be “conventional convertible debt” (or
“conventional convertible preferred stock”), bifurcation of the embedded
          conversion option is generally not required. However, if the instrument
          is not
          considered to be conventional convertible debt (or conventional convertible
          preferred stock), bifurcation of the embedded conversion option may be
          required
          in certain circumstances. Generally, where the ability to physical or net-share
          settle the conversion option is deemed to be not within the control of
          the
          Company, the embedded conversion option is required to be bifurcated and
          accounted for as a derivative financial instrument liability.
  In
          connection with the sale of convertible debt and equity instruments, the
          Company
          may also issue freestanding options or warrants. Additionally, the Company
          may
          issue options or warrants to non-employees in connection with consulting
          or
          other services they provide. Although the terms of the options and warrants
          may
          not provide for net-cash settlement, in certain circumstances, physical
          or
          net-share settlement may be deemed to not be within the control of the
          Company
          and, accordingly, the Company may be required to account for these freestanding
          options and warrants as derivative financial instrument liabilities, rather
          than
          as equity.
  Derivative
          financial instruments are required to be initially measured at their fair
          value.
          For derivative financial instruments that shall be accounted for as liabilities,
          the derivative instrument is initially recorded at its fair value and is
          then
          re-valued at each reporting date, with changes in the fair value reported
          as
          charges or credits to income.
  In
          circumstances where the embedded conversion option in a convertible instrument
          may be required to be bifurcated and there are also other embedded derivative
          instruments in the convertible instrument that are required to be bifurcated,
          the bifurcated derivative instruments are accounted for as a single, compound
          derivative instrument.
  If
          the
          embedded derivative instrument is to be bifurcated and accounted for as
          a
          liability, the total proceeds received will be first allocated to the fair
          value
          of the bifurcated derivative instrument. If freestanding options or warrants
          were also issued and are to be accounted for as derivative instrument
          liabilities (rather than as equity), the proceeds are next allocated to
          the fair
          value of those instruments. The remaining proceeds, if any, are then allocated
          to the convertible instrument itself, usually resulting in that instrument
          being
          recorded at a discount from its face amount. In circumstances where a
          freestanding derivative instrument is to be accounted for as an equity
          instrument, the proceeds are allocated between the convertible instrument
          and
          the derivative equity instrument, based on their relative fair
          values.
  F-14
 
 **SOUTHPEAK
              INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
              to Consolidated Financial Statements**
 
 **1.** **Summary
              of Significant Accounting Policies** **,
              continued**
 To
          the
          extent that the fair values of the bifurcated and/or freestanding derivative
          instrument liabilities exceed the total proceeds received, an immediate
          charge
          to income is required to be recognized, in order to initially record the
          derivative instrument liabilities at their fair value. The discount from
          the
          face value of the convertible debt instrument is required to be amortized
          over
          the life of the instrument through periodic charges to income, using the
          effective interest method. When the instrument is convertible preferred
          stock,
          the periodic amortization of the discount is charged directly to retained
          earnings.
  The
          Company reviews the classification of derivative instruments, including
          whether
          such instruments should be recorded as liabilities or as equity, at the
          end of
          each reporting period. Derivative instrument liabilities are required to
          be
          classified in the balance sheet as current or non-current based on whether
          or
          not net-cash settlement of the derivative instrument could be required
          within 12
          months of the balance sheet date. The Company currently does not have any
          derivative instruments that are required to be bifurcated and recorded
          as
          liabilities.
  ***Convertible
          Preferred Stock with Detachable Warrants and Beneficial Conversion
          Feature***
  The
          Company has accounted for the issuance of detachable stock purchase warrants
          in
          accordance with APB No. 14, whereby the Company separately measured the
          fair
          value of the convertible preferred stock and the detachable warrants and
          allocated the total proceeds on a relative fair value basis to each.
  In
          accordance with the provisions of Emerging
          Issues Task Force (EITF) Issue No. 98-5, “Accounting for convertible securities
          with beneficial conversion features or contingently adjustable conversion
          ratios”, and EITF 00-27, “Application of Issue No. 98-5 to certain convertible
          instruments,” the Company allocated a portion of the proceeds received to
          the embedded beneficial conversion feature, based on the difference between
          the
          effective conversion price of the proceeds allocated to the convertible
          preferred stock and the fair value of the underlying common stock on the
          date
          the convertible preferred stock was issued. Since the convertible preferred
          stock also had detachable stock purchase warrants, the Company first allocated
          the proceeds to the stock purchase warrants and the convertible preferred
          stock
          and then allocates the resulting convertible preferred stock proceeds between
          the beneficial conversion feature, which was accounted for as paid-in capital,
          and the initial carrying amount of the convertible preferred stock. The
          discount
          resulting from the beneficial conversion feature is recorded as a deemed
          dividend.
 ***Registration
        Rights***
  Pursuant
        to the Acquisition, the Company is obligated to file a registration statement
        with the Securities Exchange Commission (“SEC”) covering the resale of the
        shares of its common stock within 30 days following the Company’s filing of its
        Form 10-K for the year ended June 30, 2008 but no later than October 15,
        2008
        (the “Filing Deadline”).
  If
        the
        registration statement is not filed with the SEC by the Filing Deadline,
        the
        Company will make pro rata payments to each holder of Series A preferred
        stock
        in an amount equal to .5% of the aggregate amount invested by such holder
        of
        Series A preferred stock for each 30 day period (or portion thereof) for
        which
        no registration statement is filed. In
        accordance with FSP EITF 00-19-2,
        “Accounting for Registration Payment Arrangements”*,*the
        Company has not recognized a liability associated with the registration
        rightsagreement as it is not probable that a liability has been incurred.
  ***Use
        of Estimates***
  Accounting
        principles generally accepted in the United States of America require management
        to make estimates and assumptions in the preparation of financial statements.
        Such estimates and assumptions impact the reported amount of assets and
        liabilities, the disclosure of contingent assets and liabilities at the
        financial statement date, and revenue and expenses for the reporting period.
        The
        actual results could differ from those estimates. The most significant estimates
        are related to the amortization of advances for royalties and accounts
        receivable allowances. Such estimates include sales returns and allowances,
        price protection estimates, provisions for doubtful accounts, accrued
        liabilities, estimates regarding the recoverability of prepaid royalties,
        inventories, long lived assets, and deferred tax assets. These estimates
        generally involve complex issues and require the Company to make judgments,
        involve analysis of historical and future trends, can require extended periods
        of time to resolve, and are subject to change from period to period. Actual
        results could differ materially from estimated.
  F-15
 **SOUTHPEAK
          INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 
 **1.** **Summary
          of Significant Accounting Policies** **,
          continued**
  ***Recently
          Issued Accounting Standards***
  In
          September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement”
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
          it, and expands disclosures about fair value measurements. SFAS 157 emphasizes
          that fair value is a market-based measurement, not an entity-specific
          measurement, and sets out a fair value hierarchy with the highest priority
          being
          quoted prices in active markets. SFAS 157 is effective for years beginning
          after
          November 15, 2007. The Company is evaluating the impact, if any, the
          adoption of this statement will have on its consolidated results of operations,
          financial position or cash flows.
  In
          February 2007, the FASB issued Statement No. 159, “The Fair Value Option
          for Financial Assets and Financial *Liabilities —
          Including an amendment of FASB Statement No. 115”* (“SFAS
          159”). SFAS 159 allows entities to choose to measure many financial instruments
          and certain other items at fair value that are not currently required to
          be
          measured at fair value. Subsequent unrealized gains and losses on items
          for
          which the fair value option has been elected will be reported in earnings.
          The
          provisions of SFAS 159 are effective for financial statements issued for
          years
          beginning after November 15, 2007. The Company is evaluating if it will
          adopt SFAS 159 and what impact the adoption will have on consolidated results
          of
          operations, financial position or cash flows.
  In
          December 2007, the FASB issued Statement No. 141(R), “Business Combinations”, or
          SFAS 141(R), which will change the accounting for and reporting of business
          combination transactions. The most significant changes in the accounting
          for
          business combinations under SFAS 141(R) include: (1) valuation of any acquirer
          shares issued as purchase consideration will be measured at fair value
          as of the
          acquisition date; (2) contingent purchase consideration, if any, will generally
          be measured and recorded at the acquisition date, at fair value, with any
          subsequent change in fair value reflected in earnings rather than through
          an
          adjustment to the purchase price allocation; (3) acquired in-process research
          and development costs, which have historically been expensed immediately
          upon
          acquisition, will now be capitalized at their acquisition date fair values,
          measured for impairment over the remaining development period and, upon
          completion of a successful development project, amortized to expense over
          the
          asset’s estimated useful life; (4) acquisition related costs will be expensed
          as
          incurred rather than capitalized as part of the purchase price allocation;
          and
          (5) acquisition related restructuring cost accruals will be reflected within
          the
          acquisition accounting only if certain specific criteria are met as of
          the
          acquisition date; the prior accounting convention, which permitted an acquirer
          to record restructuring accruals within the purchase price allocation as
          long as
          certain, broad criteria had been met, generally around formulating, finalizing
          and communicating certain exit activities, will no longer be
          permitted.
  SFAS
          141(R) is effective for reporting periods beginning on or after December
          15,
          2008. Earlier adoption is not permitted. The Company anticipates that adoption
          of this pronouncement will significantly impact how the Company will account
          for
          business combination transactions consummated after the effective date,
          in the
          various areas outlined above.
  In
          December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
          Consolidated Financial Statements, an Amendment of ARB No. 51”, or SFAS 160,
          effective for fiscal years beginning after December 15, 2008. SFAS 160
          clarifies
          the accounting for noncontrolling interests and establishes accounting
          and
          reporting standards for the noncontrolling interest in a subsidiary, including
          the requirement that the noncontrolling interest be classified as a component
          of
          equity. SFAS 160 is required to be adopted simultaneously with SFAS 141(R).
          The
          Company does not expect that this pronouncement will have a significant
          impact
          on Company’s consolidated financial position, results of operations or cash
          flows.
  In
          March
          2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and
          Hedging Activities -an amendment of FASB Statement No. 133,” which enhances
          the disclosure requirements for derivative instruments and hedging activities.
          Entities are required to provide enhanced disclosures about (a) the location
          and
          amounts of derivative instruments in an entity’s financial statements, (b) how
          derivative instruments and related hedged items are accounted for under
          Statement 133 and its related interpretations, and (c) how derivative
          instruments and related hedged items affect an entity’s financial position,
          financial performance, and cash flows. The guidance in SFAS No. 161 is
          effective for financial statements issued for fiscal years and interim
          periods
          beginning after November 15, 2008, with early application encouraged. This
          Statement encourages, but does not require, comparative disclosures for
          earlier
          periods at initial adoption. The Company is currently evaluating the impact
          of
          SFAS No. 161.
  In
          May
          2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted
          Accounting Principles.” SFAS No. 162 identifies the sources of accounting
          principles and the framework for selecting the principles to be used in
          the
          preparation of financial statements of nongovernmental entities that are
          presented in conformity with generally accepted accounting principles (GAAP)
          in
          the United States (the GAAP hierarchy). This Statement 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.” The Company is currently evaluating
          the impact of SFAS No. 162.
 F-16
 
 **SOUTHPEAK
          INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 
 **2.** **Inventories**
  At
          June
          30, 2008 and June 30, 2007, inventories consist of the following:
  **2008**
                
                **2007**Finished
                    goods
                
                $
                6,239,060
                
                $
                742,401Purchased
                    parts and components
                
                
                299,584
                
                
                97,035Total
                
                $
                6,538,644
                
                $
                839,436
 For
            the
            years ended June 30, 2008, 2007 and 2006, inventories were written down
            in the
            amount of $33,643, 62,643 and $-0-, respectively.
  **3.** **Property
            and Equipment, net**
  At
          June
          30, 2008 and June 30, 2007, property and equipment, net was comprised of
          the
          following:
  **2008**
                
                **2007**Land
                
                $
                355,999
                
                $
                -Building
                    and leasehold improvements
                
                
                994,951
                
                
                -Computer
                    equipment and software
                
                
                421,229
                
                
                204,898Office
                    furniture
                    and other equipment
                
                
                94,177
                
                
                43,4681,866,356
                
                
                248,366Less:
                    accumulated depreciation and amortization
                
                
                186,922
                
                
                105,169Property
                    and equipment, net
                
                $
                1,679,434
                
                $
                143,197
  Depreciation
          and amortization expense for the years ended June 30, 2008, 2007, and 2006
          was $92,668, $27,057, and $23,432, respectively.
  On
          October 4, 2007 the Company purchased a building and land in Grapevine,
          Texas
          for $1,175,000. In connection with the purchase, the Company entered into
          a
          mortgage with a financial institution in the amount of $1,068,450 (see
          note
          6).
  **4.** **Intellectual
          Property Licenses**
  On
          August
          28, 2007 the Company contracted to use copyrighted images in a game that
          a third
          party developer is developing for the Company for a total cost of $100,000.
          As
          of June 30, 2008, the Company has recorded royalty payments totaling $85,000
          as
          an asset under the terms of the agreement. In addition, on October
          29, 2007, the Company contracted to license software that would be used in
          the development of games by third parties for a total cost of $2,540,000
          to be
          paid within 18 months. Pursuant to the contract, the Company has an option
          to
          convert the right and license to use the intellectual property for a specific
          number of games or for an unlimited number of games. As of June 30, 2008,
          the
          Company has opted to use the intellectual property for three games, at
          a total
          cost of $1,360,000. The first two games are expected to be released in
          August
          2008 and 2009 and no release date has been set for the other game. At June
          30, 2008, the Company has $85,000 payable against these contracts, which
          is
          included in accrued expenses and other current liabilities.
  **5.** **Line
          of Credit**
  In
          December 2005, the Company obtained a revolving line of credit from a financial
          institution in the maximum amount of $5.0 million, set to expire on April
          30, 2008. The agreement was extended in 2008 to November 1, 2008. On August
          6,
          2007, the borrowing limit of the line of credit was increased to $9.0 million
          and effective September 1, 2007, the availability of the maximum line of
          credit
          was limited to the lesser of 65% of eligible accounts receivable from North
          America operations or $9.0 million. At June 30, 2007, such terms were 75%
          and
          $5.0 million, respectively. On November 1, 2007, the borrowing limit on
          the line
          of credit decreased to $6.5 million and further decreased on December 1,
          2007 to
          $5.0 million. The line of credit bears interest at prime plus 1⁄2%, which was
          5.50% and 8.75% at June 30, 2008 and June 30, 2007, respectively. The financial
          institution processes payments received on such accounts receivable as
          payments
          on the revolving loan of credit. The line is collateralized by gross accounts
          receivable of approximately $13,629,000 and $6,036,000 at June 30, 2008
          and June
          30, 2007, respectively. The line of credit is further collateralized by
          the
          personal guarantees, and pledge of personal securities and assets by two
          shareholders. The agreement contains certain financial and non-financial
          covenants. At June 30, 2008, the Company was in compliance with these
          covenants.
  At
            June
            30, 2008 and 2007, the outstanding line of credit balance was $4,851,819
            and
            $4,822,872, respectively and the remaining availability
            under the line of credit amounted to $148,181 and $ -0-, respectively.
            For the
            years ended June 30, 2008, 2007, and 2006, interest expense relating
            to the line
            of credit was $247,357 and $183,402, and $138,672,
            respectively.
 
 F-17
 
 **SOUTHPEAK
          INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 
 **6.** **Mortgage
          Payable**
  On
          October 4, 2007 the Company purchased a building and land in Grapevine,
          Texas
          for $1,175,000. This building is being used by the Company as office space.
          In
          connection with the purchase, the Company entered into a 20 year mortgage
          with a
          financial institution in the amount of $1,068,450. The interest rate on
          the
          mortgage adjusts every five years to prime minus 1⁄4%(4.75% at June 30, 2008), and
          had an initial annual rate of 7.5%. The monthly principal and interest
          payment
          is $8,611 with interest only payments for the first six months. The mortgage
          is
          secured by the purchased land and building. Two shareholders of the Company
          have
          personally guaranteed the mortgage note.
  The
          scheduled maturities of the mortgage payable as of June 30, 2008 are as
          follows:
  Year
                    ending June 30,2009
                
                $
                24,2522010
                
                
                26,3052011
                
                
                28,3472012
                
                
                30,5472013
                
                
                32,918Thereafter
                
                
                920,023Total
                
                
                1,062,392Less:
                    current maturities
                
                
                24,252Mortgage
                    payable, net of current portion
                
                $
                1,038,140
 
 **7.** **Note
          Payable**
 On
                February 27, 2008, the Company entered into a $2,000,000 secured
                term note
                payable. The note bore interest at 14%, payable monthly. On April
                30, 2008, the
                note was modified granting a security interest in substantially all
                of the
                assets of the Company, except for certain property and equipment. On
                June
                4, 2008, the Company issued the holder 215,190 shares of common stock
                as an
                inducement to convert the entire note into Series A convertible preferred
                stock.
                The note was fully converted by the holder on June 5, 2008 into 2,093,333
                shares
                of Series A Convertible Preferred Stock. The Company recognized $643,418
                in
                interest expense related to the fair value of the common stock issued
                to the
                holder to
                induce
                conversion.
 **8.** **Related
          Party Transactions**
  ***Related
          party receivables***
  Related
          party receivables consist of short-term advances
          to employees. No allowance has been provided due to the historic short-term
          nature and recoverability of such advances.
  ***Accrued
          Expenses - Related Party***
  Accrued
          expenses due to the related party as of and for the years ended June
          30, 2008 and 2007 are as follows:
  **2008**
                
                **2007**Balance
                    at July 1
                
                $
                650,889
                
                
                535,566Expenses
                    incurred:Consulting
                    fees
                
                
                920,930
                
                
                1,188,195Commissions
                
                
                433,370
                
                
                116,413Less:
                    amounts paid
                
                
                (2,001,007
                )
                
                (1,189,275
                )Balance
                    at June 30
                
                $
                4,182
                
                
                650,889
 
 F-18
 
 **SOUTHPEAK
          INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 
 **8.** **Related
          Party Transactions** **,
          continued**
  The
          Company incurred fees for office space and staff services under an informal
          arrangement to an entity partially owned by two shareholders of the Company.
          For
          the years ended June 30, 2008, 2007, and 2006, the Company incurred fees
          totaling $920,930, $1,183,195 and $652,582 respectively, which is included
          in
          the general and administrative expenses in the accompanying consolidated
          statements of operations. For
          the
          period from July 1, 2005 to December 31, 2006, the consulting fee was equal
          to
          10% of net revenues of the Company. The consulting fee for the period January
          1,
          2007 through June 30, 2007 was based on the actual costs the organization
          incurred in providing office space and staff services.At June 30, 2008
          and June 30, 2007, the Company had fees payable of $4,182 and $650,889,
          respectively. For the years ended June 30, 2008, 2007, and 2006, the Company
          incurred sales commissions for the marketing and sale of video games of
          $433,370
          and $116,413, and $20,997, respectively, to two affiliates of a shareholder,
          which is included in sales and marketing expenses in the accompanying
          consolidated statements of operations. For
          the
          year ended June 30, 2008, the Company incurred fees for broadband usage
          of
          $69,620 to entity partially owned by shareholders of the Company, which
          is
          included in general and administrative expenses in the accompanying consolidated
          statements of operations.
  ***Due
          to Shareholder***
  During
          the year ended June 30, 2007, the Company received advances payable on
          demand
          from a shareholder of the Company. Such advances were unsecured and bore
          interest at the annual rate of 8%. Interest expense under the advances
          was
          $19,039 and $4,164 for the years ended June 30, 2008 and 2007, respectively.
          At
          June 30, 2008 and June 30, 2007, the amounts due to the shareholder were
          $-0-
          and $277,328, respectively.
  ***Due
          to Related Parties***
  The
          Company received advances, which were payable on demand, from certain affiliated
          entities of a shareholder of the Company. Such advances were non-interest
          bearing and were not collateralized. At June 30, 2008 and June 30,
          2007, the amounts due to these entities were $15,658 and $40,793,
          respectively.
  ***Distributions
          to Shareholders***
  On
          January 14, 2008, the Company entered into an agreement with the members
          prior
          to the Acquisition to distribute an amount, in cash, for the purpose of
          enabling
          existing shareholders of the Company to make tax payments on the income
          the
          Company earned while it was taxed as partnership under Subchapter K of
          the
          Internal Revenue Code. At June 30, 2008, the amounts due to these shareholders
          were $228,998.
  **9.** **Product
          Sales and Geographic Information**
  The
          Company operates in one reportable segment in which it is a publisher and
          distributor of interactive entertainment software for home video consoles,
          handheld platforms and personal computers. The Company’s published games have
          accounted for a significant portion of the net revenues of the Company.
          Net
          revenues by product groups are as follows:
  **Console**
                
                **Hand-held**
                
                **PC**
                
                **Strategy**
                  **Guide**
                
                **Total**For
                    the year endedJune
                    30, 2008
                
                $
                34,847,458
                
                $
                810,606
                
                $
                3,972,433
                
                $
                522,597
                
                $
                40,153,094June
                    30, 2007
                
                $
                9,088,118
                
                $
                1,947,591
                
                $
                1,508,337
                
                $
                -
                
                $
                12,544,046June
                    30, 2006
                
                $
                5,209,924
                
                $
                998,360
                
                $
                26,864
                
                $
                -
                
                $
                6,235,148
 
 F-19
 
 **SOUTHPEAK
          INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 
 **9.** **Product
          Sales and Geographic Information** **,
          continued**
  Geographic
          information is based on the location of the selling entity. Geographic
          information regarding net revenues for the year ended June 30, 2008, 2007,
          and
          2006 is as follows:
  **North America**
                
                **Europe**
                
                **Other**
                
                **Consolidated**As of
                    and for the year ended June 30, 2008Net
                    Revenues
                
                $
                34,453,098
                
                
                4,837,274
                
                
                862,722
                
                
                40,153,094Long-lived
                    assets
                
                
                3,673,522
                
                
                383,644
                
                
                -
                
                
                4,057,166As
                    of and for the year ended June 30, 2007Net
                    revenues
                
                $
                10,248,046
                
                
                2,103,820
                
                
                192,180
                
                
                12,544,046Long-lived
                    assets
                
                
                117,004
                
                
                30,152
                
                
                -
                
                
                147,156As
                    of and for the year ended June 30, 2006Net
                    revenues
                
                $
                3,303,723
                
                
                2,700,088
                
                
                231,337
                
                
                6,235,148Long-lived
                    assets
                
                
                182,558
                
                
                30,152
                
                
                -
                
                
                212,710
 **10.** **Commitments**
  ***Developer
          of Intellectual Property Contracts***
  The
          Company regularly enters into contractual arrangements with third parties
          for
          the development of games as well as the rights to license intellectual
          property.
          Under these agreements, the Company commits to provide specified payments
          to a
          developer or intellectual property holders, based upon contractual arrangements,
          and conditioned upon the achievement of specified development milestones.
          These
          payments to third-party developers and intellectual property
          holders typically are deemed to be advances and are recouped against future
          royalties earned by the developers based on the sale of the related game.
          On
          October 26, 2007, the Company entered into an agreement with a third party
          game
          developer in connection with certain development agreements. Pursuant to
          the
          agreement, the Company has committed to spend specified amounts for marketing
          support for the related game which is to be developed. Cost of goods sold
          -
          royalties amounted to $4,924,967, $1,864,277, and $1,843,977 for the years
          ending June 30, 2008, 2007, and 2006, respectively.
  ***Lease
          Commitments***
  In
          October 2007, the Company entered into a new one year lease for its United
          Kingdom office, beginning in December 2007, with a monthly rent of $5,188.
          Office rent expense for the years ended June 30, 2008, 2007, and 2006 was
          $50,502, $25,026, and $9,842, respectively. Prior
          to
          this lease, the United Kingdom office had a lease for office space for
          the
          period January 2006 through November 2007, with monthly rent of $
          2,151.
  The
          Company entered into a non-cancelable operating lease with an affiliate,
          on
          January 1, 2008, for offices located in Midlothian, Virginia. The lease
          includes
          monthly payments of $7,542 for 36 months. Office rent expense for the year
          ended
          June 30, 2008 was $45,250.
  The
          total
          future minimum commitments under these agreements as of June 30, 2008 are
          as
          follows:
  **Software**
                
                
                
                **Office****Developers**
                
                **Marketing**
                
                **Lease**
                
                **Total**For
                    the year ending June 30,2009
                
                $
                11,027,707
                
                $
                -
                
                $
                118,310
                
                $
                11,146,0172010
                
                
                310,000
                
                
                342,175
                
                
                90,500
                
                
                742,6752011
                
                
                -
                
                
                -
                
                
                45,250
                
                
                45,250Total
                
                $
                11,337,707
                
                $
                342,175
                
                $
                254,060
                
                $
                11,933,942
  F-20


**SOUTHPEAK
            INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements**
 
 **10.** **Commitments** **,
            continued**
  ***Solicitation
            Services***
  Prior
            to
            Global Services’ intial public offering, the Company engaged HCFP/Brenner
            Securities, LLC (“HCFP”), on a non-exclusive basis, to act as its agent for the
            solicitation of the exercise of the Class W and Class Z Warrants. In
            consideration for solicitation services, the Company agreed to pay HCFP
            a
            commission equal to 5% of the exercise price for each Class W Warrant
            and Class
            Z Warrant exercised after April 18, 2007 if the exercise is solicited
            by HCFP.
            No services have been provided as of June 30, 2008.
  In
            exchange for investment banking services related to the sale of the Series
            A
            preferred stock, the Company agreed to pay HCFP a fee consisting of,
            (a) cash in an amount equal to 6.5% of the gross proceeds received by
            the
            Company, including the conversion of indebtedness, (b) warrants with
            an exercise
            price of $1.00 to purchase a number of shares of common stock equal to
            10% of
            the total number of shares of Series A preferred stock issued by the
            Company,
            and (c) one Class Y warrant for every ten Class Y warrants issued in
            connection
            with the sale of Series A preferred stock (see Note 11).
  ***Employment
            Agreements***
  The
            Company has employment agreements with several members of senior management.
            The
            agreements, with terms ranging from approximately two to three years,
            provide
            for minimum salary levels, performance bonuses, and severance
            payments.
  **11.** **Capital
            Stock**
  ***Preferred
            Stock*** ****
  On
            May
            12, 2008 the Company amended the articles of incorporation by increasing
            the
            number of preferred stock authorized, par value $0.0001 per share, from
            5,000,000 to 20,000,000 shares of preferred stock. Of the 20,000,000
            authorized,
            15,000,000 of the preferred stock were designated Series A preferred
            stock. The
            Series A preferred stock votes together as a single class and on an as
            converted
            basis with the common stock. The Series A preferred stock has no dividend
            right.
            The Company can require the conversion of the Series A preferred stock
            if the 10
            day weighted closing price per share of the Company’s common stock is at least
            $2.00. The remaining preferred stock may be issued in one or more series
            and to
            fix the number of shares constituting any such series and the preferences,
            limitations and relative rights, including but not limited to, dividend
            rights,
            dividend rate, voting rights, terms of redemption, redemption price or
            prices,
            conversion rights and liquidation preferences of the shares constituting
            any
            series.
 ***Series
              A Convertible Preferred Stock***
  During
              the fiscal year ended June 30, 2008, the Company raised $10,891,500
              in gross
              cash proceeds through the private placement of 10,891,500 shares of
              a newly
              designated class of Series A Convertible Preferred Stock at a purchase
              price of
              $1 per share to a group of accredited investors. The Company issued
              an
              additional 2,093,333 shares of Series A Convertible Preferred Stock
              at $1 per
              share in exchange for cancellation of existing short-term indebtedness.
              See the
              disclosure in note 7, “Note Payable” on page F-18 for further
              details.
  The
              shares of Series A Convertible Preferred Stock are initially convertible
              into
              common stock at a conversion price of $1 per share. In conjunction
              with the
              private placement, for every two shares of preferred stock purchased,
              each
              purchaser was entitled to exchange one Class W or Class Z warrant in
              exchange
              for one Class Y warrant. Each Class Y warrant entitles the holder to
              purchase a
              share of common stock for $1.50 per share. The expiration date for
              the Y
              warrants is May 31, 2013. As of June 30, 2008, the Company was obligated
              to
              issue 5,445,750 Class Y warrants.
  F-21
 
 **SOUTHPEAK
                  INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
                  to Consolidated Financial Statements**
 
 **11.** **Capital
                  Stock** **,
                  continued**
 The
              Company has accounted for the warrant exchange right similar to the
              issuance of
              detachable stock purchase warrants in accordance with APB No. 14, whereby
              the
              Company separately measured the fair value of the convertible preferred
              stock
              and the warrant exchange right and allocated the total proceeds on
              a relative
              fair value basis to each.
  In
              accordance with the provisions of EITF No. 98-5 and EITF No. 00-27,
              the Company
              allocated a portion of the proceeds received to the embedded beneficial
              conversion feature, based on the difference between the effective conversion
              price of the proceeds allocated to the convertible preferred stock
              and the fair
              value of the underlying common stock on the date the convertible preferred
              stock
              was issued. Since the convertible preferred stock also had detachable
              stock
              purchase warrants, the Company first allocated the proceeds to the
              stock
              purchase warrants and the convertible preferred stock and then allocated
              the
              resulting convertible preferred stock proceeds between the beneficial
              conversion
              feature, which was accounted for as paid-in capital, and the initial
              carrying
              amount of the convertible preferred stock. The discount resulting from
              the
              beneficial conversion feature was recorded as a deemed dividend in
              the amount of
              $8,405,383, representing the beneficial conversion feature of the Series
              A
              Preferred Stock.
  The
              Company incurred a fee for the financing equal to: (a) 6.5% of the
              gross
              proceeds received for the sale of Series A preferred stock, including
              the
              conversion of indebtedness, payable in cash, (b) warrants with an exercise
              price
              of $1.00 to purchase a number of shares of common stock equal to 10%
              of the
              total number of shares of Series A preferred stock issued, and (c)
              one Class Y
              warrant for every ten Class Y warrants issued pursuant to the sale
              of Series A
              preferred stock. The fee was accounted for as a cost of capital.
  The
              Company agreed to register the resale of shares of its common stock
              issuable to
              the investors and finders upon conversion of the preferred stock and
              exercise of
              the warrants issued in the private placement. If the Company is unable
              to
              maintain the effectiveness of the registration statement related to
              the Series A
              convertible Preferred stock for more than 30 days in any given year,
              the Company
              is obligated to pay investors liquidated damages in cash equal to .5%
              of the
              stated value of the Series A convertible Preferred Stock per month.
              Liquidated
              damages will not accrue nor be payable for times during which the shares
              covered
              by the related prospectus are transferable by the holder pursuant to
              Rule 144(k)
              under the Securities Act of 1933, as amended.
 ***Common
            Stock***
  On
            May
            12, 2008 the Company amended the articles of incorporation by increasing
            the
            number of common stock authorized, par value $0.0001 per share, from
            24,000,000
            to 90,000,000 shares of common stock. Holders of the Company’s common stock are
            entitled to one vote for each share held on all matters submitted to
            a vote of
            stockholders and do not have cumulative voting rights. Holders of common
            stock
            are entitled to receive proportionately any dividends that may be declared
            by
            the Company’s board of directors, subject to the preferences and rights of any
            shares of preferred stock. In the event of the Company’s liquidation,
            dissolution or winding-up, holders of common stock will be entitled to
            receive
            proportionately any of the Company’s assets remaining after the payment of debts
            and liabilities and subject to the preferences and rights of any shares
            of
            preferred stock. Holders of common stock have no preemptive, subscription,
            redemption or conversion rights. The rights and privileges of holders
            of the
            Company’s common stock are subject to any series of preferred stock that the
            Company has issued or may issue in the future, including the Series A
            preferred
            stock.
  ***Registration
            Rights***
  Pursuant
            to the acquisition, the Company is obligated to file a registration statement
            with the SEC covering the resale of the shares of its common stock within
            30
            days following the Company’s filing of its Form 10-K for the year ended June 30,
            2008 but no later than the Filing Deadline.
  If
            the
            registration statement is not filed with the SEC by the Filing Deadline,
            the
            Company will make pro rata payments to each holder of Series A preferred
            stock
            in an amount equal to .5% of the aggregate amount invested by such holder
            of
            Series A preferred stock for each 30 day period (or portion thereof)
            for which
            no registration statement is filed. The Company expects such registration
            to be
            filed and approved by the deadline. In
            accordance with FSP EITF 00-19-2, “Accounting for Registration Payment
            Arrangements”*,*the
            Company has not recognized a liability associated with the registration
            rights
            agreement as it is not probable that a liability has been
            incurred.
  ***Treasury
            Stock***
  In
            conjunction with the conversion of the $2,000,000 note payable into preferred
            stock (see Note 7), a shareholder of the Company transferred 215,190
            shares of
            common stock to the note holder. Since
            the
            shares were transferred by a principal shareholder to settle an obligation
            of
            the Company, the economic substance of the transaction is a capital contribution
            by the shareholder for the payment of the registrant's expenses. Accordingly,
            the Company has recorded the treasury stock equal to the fair value of
            the
            shares transferred.As of June 30, 2008, the Company holds no treasury
            stock.
  F-22
  **SOUTHPEAK
            INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements**
  **11.** **Capital
            Stock** **,
            continued**
  ***Equity
            Incentive Compensation Plan***
  In
            May
            2008, the Company’s Board of Directors and its shareholders approved the 2008
            Equity Incentive Compensation Plan (the “2008 Plan”) for the grant of stock
            awards to officers, directors, employees and consultants. The 2008 Plan
            expires
            in May 2018. Shares available for future grant as of June 30, 2008 were
            5,000,000 under the 2008 Plan.
  Stock
            awards and shares are generally granted at prices which the Company’s Board of
            Directors believes approximates the fair market value of the awards or
            shares at
            the date of grant. Individual grants generally become exercisable ratably
            over a
            period of three years from the date of grant. The contractual terms of
            the
            options range from three to ten years from the date of grant.
  **12.** **Warrants
            to Purchase Common Stock**
  In
            August, 2005, the Company sold and issued Class W Warrants to purchase
            1,537,500 shares of its common stock, and Class Z Warrants to purchase
            1,537,500
            shares of its common stock to its initial securityholders, for an aggregate
            purchase price of $153,750, or $0.05 per warrant. The Class W and Class
            Z
            Warrants held by the initial securityholders are also subject to a registration
            rights agreement. The Class W Warrants and Class Z Warrants outstanding
            may be
            exercised with cash on or prior to their respective expiration dates,
            which are
            April 17, 2011 for Class W warrants and April 17, 2013 for Class Z warrants.
            Although the initial securityholders may make a written demand that the
            filing
            of a registration statement, the Company was only required to use its
            best
            efforts to cause the registration statement to be declared effective
            and, once
            effective, only to use its best efforts to maintain its effectiveness.
            Accordingly, because the Company’s obligation is merely to use its best efforts
            in connection with the registration rights agreement and upon exercise
            of the
            warrants, the Company can satisfy its obligation by delivering unregistered
            shares of common stock.
  Each
            Class W Warrant issued is exercisable for one share of common stock. Except
            as set forth below, the Class W Warrants entitle the holder to purchase
            shares
            at $5.00, subject to adjustment in the event of stock dividends and splits,
            reclassifications, combinations and similar events, for a period commencing
            on
            April 18, 2007 and ending April 17, 2011. As of June 30, 2008, there
            were
            7,517,500 Class W Warrants outstanding prior to giving effect to the
            exchange of
            Class Y warrants.
  Each
            Class Z Warrant issued is exercisable for one share of common stock. Except
            as set forth below, the Class Z Warrants entitle the holder to purchase
            shares
            at $5.00, subject to adjustment in the event of stock dividends and splits,
            reclassifications, combinations and similar events, for a period commencing
            on
            April 18, 2007 and ending April 17, 2013. As of June 30, 2008, there
            were
            6,137,500 Class Z Warrants outstanding prior to giving effect to the
            exchange of
            Class Y warrants.
  The
            Company may redeem the Class W Warrants and/or Class Z Warrants with
            the prior
            consent of HCFP, the representative of the underwriters in the Company’s
            initial public offering, in whole or in part, at a price of $.05 per
            warrant at
            any time after the warrants become exercisable, upon a minimum of 30
            days’ prior
            written notice of redemption, and if, and only if, the last sale price
            of the
            Company’s common stock equals or exceeds $7.50 per share and $8.75 per share,
            for a Class W Warrant and Class Z Warrant, respectively, for any 20 trading
            days
            within a 30 trading day period ending three business days before the
            Company
            sent the notice of redemption (the “Measurement Period”). In addition, the
            Company may not redeem the Class W Warrants and/or the Class Z Warrants
            unless
            the shares of common stock underlying such warrants are covered by an
            effective
            registration statement.
  F-23
  **SOUTHPEAK
            INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements**
 
 **12.** **Warrants
            to Purchase Common Stock** **,
            continued**
  The
            Company has no obligation to net cash settle the exercise of the warrants.
            The
            holders of Class W Warrants and Class Z Warrants do not have the rights
            or
            privileges of holders of the Company’s common stock or any voting rights until
            such holders exercise their respective warrants and receive shares of
            the
            Company’s common stock.
  In
            conjunction with the preferred stock sold during the year ended June
            30, 2008,
            for every 2 shares of preferred stock purchased, each purchaser was entitled
            to
            exchange one Class W or Class Z warrant in exchange for one Class Y warrant.
            Each Class Y warrant entitles the holder to purchase a share of common
            stock for
            $1.50 per share. The expiration date for the Y warrants is May 31, 2013.
            As of
            June 30, 2008, the Company was obligated to issue 4,945,750 Class Y
            warrants.
  *Purchase
            Option*
  In
            April
            2008, in connection with the Acquisition, the Company issued five-year
            fully
            vested warrants to purchase 500,000 shares of common stock at $1 per
            share
            valued at $63,905 in satisfaction of the underwriter purchase option.
            In
            addition, the company issued 1,843,058 fully vested warrants to purchase
            common
            stock at an average exercise price of  approximately $1.15 per share valued
            at $2,873,735 in satisfaction of the purchase option on the sale of the
            preferred stock expiring on May 31, 2013.If the holder is unable to
            exercise the warrants, the warrants will expire as worthless.
  **13.** **Income
            Taxes**
  Prior
            to
            May 12, 2008, the Company and its subsidiaries had elected to be taxed
            as
            partnerships under Subchapter K of the Internal Revenue Code. Therefore,
            the
            results of the Company’s operations are included in the taxable income of the
            individual members. As a result, no provision for federal income taxes
            was
            included in the consolidated financial statements for the years ended
            June 30,
            2007 and 2006. Subsequent to the Acquisition, the Company was reorganized
            as a C
            corporation under which income taxes are accounted for under the asset
            and
            liability method in accordance with SFAS No. 109, “Accounting for Income
            Taxes” .
  Income
            Tax provision consists of the following for the fiscal year ended June
            30, 2008:
 Current:Federal
                    
                    $
                    57,045State
                    
                    
                    13,253Foreign
                    
                    
                    -70,298Deferred:Federal
                    
                    
                    16,686State
                    
                    
                    3,877Foreign
                    
                    
                    -20,563Other:Valuation
                        Allowance
                    
                    
                    (20,563
                    )Total
                        Income Tax Expense
                    
                    $
                    70,298
  A
            reconciliation of the statutory rate and the effective tax rate follows:
 **Effective**
                      **rate**Statutory
                        Rate
                    
                    
                    35.0
                    %Permanent
                        Differences
                    
                    
                    (30.09
                    )%State
                        income taxes—net of federal benefit
                    
                    
                    0.69
                    %Change
                        in Valuation Allowance
                    
                    
                    1.27
                    %4.33
                    %
  F-24
  **SOUTHPEAK
            INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements**
 
 **13.** **Income
            Taxes** **,
            continued**
  Income
            taxes payable consist of the following:
 Current:Federal
                    
                    $
                    48,064State
                    
                    
                    8,156Income
                        taxes payable
                    
                    $
                    56,220
  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. Components of the Company's
            deferred
            tax assets and liabilities at June 30, 2008 were as follows:
 **June 30,**
                      **2008**Deferred
                        tax assets:Bad
                        debt reserves
                    
                    $
                    8,843Allowance
                        for sales returns and price protection
                    
                    
                    330,381Foreign
                        subsidiary net operating loss
                    
                    
                    322,393Currency
                        fluctuations
                    
                    
                    31,217Domestic
                          net operating less carry forwards
                    
                    
                    246,664939,498Less—valuation
                        allowance
                    
                    
                    (874,621
                    )Net
                        deferred tax assets
                    
                    $
                    64,877Deferred
                        tax liabilities:Depreciation
                        and amortization
                    
                    $
                    28,065Prepaid
                        expenses
                    
                    
                    36,812Net
                        deferred tax liabilities
                    
                    $
                    64,877Net
                        deferred tax asset
                    
                    $
                    —
  As
              of
              June 30, 2008, the Company has recorded valuation allowances for certain
              tax
              attributes and other deferred tax assets. At this time, sufficient
              uncertainty
              exists regarding the future realization of these deferred tax assets
              though
              future taxable income. If in the future the Company believes that it
              is more
              likely than not that these deferred tax benefits will be realized,
              the valuation
              allowances will be reversed.
  The
            operations of the Company in the United Kingdom (“UK”) are subject to income tax
            by the UK. However because of the history of losses in the UK operations,
            the
            Company has not paid any tax to the UK, and at June 30, 2008 and 2007, the
            company had foreign net operating loss carry forwards of approximately
            $1,075,00
            and $1,582,000, respectively. At June 30, 2008 and 2007, at the UK current
            tax
            rate of 30%, the estimated net tax benefit of the foreign net operating
            loss
            carry forwards were approximately $322,000 and $474,000, respectively,
            and have not been recorded as a deferred tax asset in the consolidated
            financial statements as a full valuation allowance has been recorded
            due to the
            uncertainty of the future realization of the tax benefit. Therefore,
            there is no
            provision for (benefit from) income taxes in the consolidated financial
            statements.
  The
            Company adopted the provisions of FIN 48 “Accounting for Uncertainty in
            Income Taxes” an interpretation of SFAS No. 109 on July 1, 2007. Implementation
            of FIN 48 did not result in a material adjustment to the liability for
            unrecognized income tax benefits.
  The
            Company recognizes interest and penalties related to uncertain tax positions
            in
            income tax expense. As of June 30, 2008, the Company has recognized no
            accrued interest related to uncertain tax positions. For the year ended
            June 30,
            2008, the Company has recorded no interest expense related to uncertain tax
            positions.
  The
            tax
            years 2005 through 2007 remain open to examination by the major taxing
            jurisdictions to which we are subject, including US and non-U.S. locations.
  F-25




**SOUTHPEAK
            INTERACTIVE CORPORATION AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements**
 **14.** **Composition
              of Certain Financial Statement Captions**
  Accrued
              expenses and other current liabilities consist of the following:
 **June 30,****2008**
                      
                      **2007**Customer
                          cash in advance deposits
                      
                      $
                      792,291
                      
                      $
                      —Commissions
                      
                      
                      342,050
                      
                      
                      172,465Guaranteed
                          royalty payments
                      
                      
                      85,000
                      
                      
                      —Accrued
                          payroll and payroll taxes
                      
                      
                      17,181
                      
                      
                      —Accrued
                          interest
                      
                      
                      1,506
                      
                      
                      32,769Other
                      
                      
                      218,887
                      
                      
                      428,660$
                      1,456,915
                      
                      $
                      633,859
 **15.
                  Employee Savings Plan**
  The
                  Company maintains an Employee Savings Plan (the “ Plan”) which
                  qualifies as a deferred salary arrangement under Section 401(k)
                  of the Internal
                  Revenue Code. The Plan is available to all United States employees
                  who meet the
                  eligibility requirements. Under the Plan, participating employees
                  may elect
                  to defer a portion of their pre tax earnings, up to the maximum amount
                  allowed by the Internal Revenue Service. The Company currently
                  does not match
                  employee contributions.
 **16.** **Subsequent
            Events**
  In
            the
            normal course of business the Company executes contracts with third parties
            for
            the development of the games. During the period from July 2008 through
            September
            2008, the Company executed four agreements with such developers for an
            aggregate
            commitment to pay royalties of $2,132,189.
  On
            July
            1, 2008, the Company issued 665,000 stock options to employees and 360,000
            options to sales representatives for a total of 1,025,000 stock options
            issued.
            These options will vest over a three year period and have a strike price
            of
            $2.30. In addition, on the same date, 99,000 shares of restricted common
            stock
            were issued to employees. These shares will vest on July 1, 2009. On
            October 1, 2008, the Company also issued 10,000 stock options to its
            non-employee directors. These options will vest on September 30, 2009
            and have a
            strike price of $2.00. In addition, on the same date, 10,000 shares of
            restricted common stock were issued to the Company’s non-employee directors.
            These shares will vest on October 1, 2009.
  Between
            July and September 2008, the Company issued 1,579,000 additional shares of
            its Series A preferred stock to certain investors for aggregate consideration
            of
            $1,579,000. Between July and September 2008, the Company issued 5,674,149
            Class
            Y warrants in exchange for an equal number of Class W and Z warrants
            to the
            holders of its Series A preferred stock.
  F-26
  **Index
        to Exhibits**
  Exhibit
                Number
              
              Description2.1(1)
              
              Membership
                  Interest Purchase Agreement, dated as of May 12, 2008, among the
                  Registrant, SouthPeak Interactive, LLC, and the members of SouthPeak
                  Interactive, L.L.C.3.1(1)
              
              Amended
                  and Restated Certificate of Incorporation of the Registrant, filed
                  with
                  the Secretary of State of the State of Delaware on May 12,
                  2008.3.2(1)
              
              Amended
                  and Restated Bylaws, dated as of May 12, 2008.3.3(1)
              
              Certificate
                  of the Designations, Powers, Preferences and Rights of the Series
                  A
                  Convertible Preferred Stock (par value $.0001 per share), filed
                  with the
                  Secretary of State of the State of Delaware on May 12,
                  2008.4.1(2)
              
              Specimen
                  Common Stock Certificate.4.2(2)
              
              Specimen
                  Class W Warrant Certificate.4.3(2)
              
              Specimen
                  Class Z Warrant Certificate.4.4(3)
              
              Specimen
                  Series A Unit Certificate.4.5(3)
              
              Form
                  of Unit Purchase Option to be granted to
                  Representative.4.6(3)
              
              Form
                  of Warrant Agreement between American Stock Transfer & Trust Company
                  and the Registrant.10.1(1)
              
              Registrant’s
                  2008 Equity Incentive Compensation Plan.10.2(1)
              
              Employment
                  Agreement, dated as of May 12, 2008 between the Registrant and
                  Terry M.
                  Phillips.10.3(1)
              
              Employment
                  Agreement, dated as of May 12, 2008 between the Registrant and
                  Melanie
                  Mroz.10.4(1)
              
              Purchase
                  Agreement, dated as of May 12, 2008 among the Registrant, SouthPeak
                  Interactive, L.L.C., and the investors set forth
                  therein.10.5(1)
              
              Registration
                  Rights Agreement, dated as of May 12, 2008 among the Registrant
                  and the
                  investors set forth therein.10.6(1)
              
              Form
                  of Lock-Up Agreement, dated as of May 12, 2008.10.7(1)
              
              Loan
                  Agreement between SouthPeak Interactive, L.L.C., SouthPeak Interactive
                  Limited and SunTrust Bank, as amended, dated December 16,
                  2005.10.8(1)
              
              Sales
                  Representative Agreement between SouthPeak Interactive, L.L.C.
                  and
                  Phillips Sales, Inc. dated July 21, 2006.10.9(1)
              
              Sales
                  Representative Agreement between SouthPeak Interactive, L.L.C.
                  and West
                  Coast Sales, Inc. dated July 21, 2006.10.10(1)
              
              Secured
                  Term Note made by SouthPeak Interactive, L.L.C. to FI Investment
                  Group,
                  LLC, dated February 27, 2008.10.11(1)
              
              Description
                  of material terms of Consulting Agreement between Phillips Sales,
                  Inc. and
                  SouthPeak Interactive, L.L.C.10.12(1)
              
              Description
                  of material terms of Consulting Agreement between Kathleen Morgan
                  and
                  SouthPeak Interactive, L.L.C.10.13(1)
              
              Description
                  of material terms of advances made by West Coast Sales to SouthPeak
                  Interactive, L.L.C.10.14(1)
              
              Description
                  of material terms of advances made by Eastern Sales, LLC to SouthPeak
                  Interactive, L.L.C.10.15(1)
              
              Description
                  of material terms of advances made by Capital Distributing, LLC
                  to
                  SouthPeak Interactive, L.L.C.10.16(1)
              
              Description
                  of material terms of advances made by Phillip Sales, Inc. to SouthPeak
                  Interactive, L.L.C.10.17(1)
              
              Description
                  of material terms of advances made by Terry Phillips to SouthPeak
                  Interactive, L.L.C.10.18*
              
              Lease
                  Agreement, dated January 1, 2008, between Phillips Land, L.C. and
                  SouthPeak Interactive, L.L.C.10.19*
              
              Lease
                  Agreement, dated January 1, 2008, between SouthPeak Interactive,
                  L.L.C.
                  and Phillips Sales, Inc.14.1(2)
              
              Code
                  of Conduct.21.1*
              
              List
                  of subsidiaries.23.1*
              
              Consent
                  of Reznick Group, P.C.23.2*
              
              Consent
                  of Marcum & Kliegman LLP24.1*
              
              Power
                  of Attorney (included on the signature page to this report).
  
 
 31.1*
              
              Certification
                  of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14
                  promulgated under the Securities Exchange Act of 1934.31.2*
              
              Certification
                  of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14
                  promulgated under the Securities Exchange Act of 1934.32.1*
              
              Certification
                  of Chief Executive Officer and Chief Financial Officer pursuant
                  to
                  18 U.S.C. Section 1350, as adopted pursuant to Section 906
                  of the Sarbanes-Oxley Act of 2002.
   *
              Filed
                  herewith
 (1)
              Incorporated
                  by reference to an exhibit to the Current Report on Form 8-K of
                  the
                  Registrant filed with the Commission on May 15, 2008.
 (2)
              Incorporated
                  by reference to an exhibit to the Quarterly Report on Form 10-Q
                  of the
                  Registrant filed with the Commission on June 16, 2008.
 (3)
              Incorporated
                  by reference to an exhibit to the Registration Statement on Form
                  S-1 of
                  the Registrant filed with the Commission on September 15,
                  2005.
 (4)
              Incorporated
                  by reference to an exhibit to the Current Report on Form 8-K of
                  the
                  Registrant filed with the Commission on August 14,
                  2008.