**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington, D.C.
      20549**




**Form 10-Q**


(Mark
                One)**þ**
            
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the quarterly period ended September 30, 2008****o**
            
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the transition period
                from          to**




**Commission
      File Number 000-51644**




**SouthPeak
      Interactive Corporation**


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




**Delaware**
              *(State
                or other jurisdiction of*
              *incorporation
                or organization)*
            
            **20-3290391**
              *(I.R.S.
                Employer*
              *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)*





**Not
      applicable**


*(Former
      name, former address and former fiscal year, if changed since last
      report)*




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


Yes þ No o




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




Large
                accelerated filero
            Accelerated
                filero
            Non-accelerated
                filero
            Smaller
                reporting companyþ


(Do
      not
      check if a smaller reporting company)




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


Yes o No þ




As
      of
      November 14, 2008, 36,029,100  shares
      of
      common stock, par value $0.0001 per share, of the registrant were
      outstanding.










**TABLE
      OF CONTENTS**





**PART I —
                FINANCIAL INFORMATION**Item
                1.
            Financial
                StatementsConsolidated
                Balance Sheets as of September 30, 2008 (unaudited) and June 30,
                2008
            1Consolidated
                Statements of Operations for the three months ended September 30,
                2008
                (unaudited) and 2007 (unaudited)
            2Consolidated
                Statements of Cash Flows for the three months ended September 30,
                2008
                (unaudited) and 2007 (unaudited)
            3Consolidated
                Statement of Shareholders’ Equity for the three months ended September 30,
                2008 (unaudited)
            4Notes to Consolidated
              Financial Statements
            5Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            20Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            29Item
                4.
            Controls
                and Procedures
            29**PART II —
                OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            30Item
                1A.
            Risk
                Factors
            30Item
                6.
            Exhibits
            31**SIGNATURES**
            32







**PART I**




**Item 1.** ***Consolidated Financial Statements***





**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





**September**
              **30, 2008**
            
            **June**
              **30, 2008**(unaudited)**Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            1,163,648
            
            $
            4,095,036Restricted
                cash
            
            
            73,790
            
            
            139,104Accounts
                receivable, net of allowances of $1,060,092 and $1,108,465 at September
                30, 2008 and June 30, 2008, respectively
            
            
            9,055,027
            
            
            13,665,332Inventories
            
            
            4,389,342
            
            
            6,538,644Current
                portion of advances on royalties
            
            
            5,963,792
            
            
            3,321,954Current
                portion of intellectual property licenses
            
            
            1,535,000
            
            
            133,458Related
                party receivables
            
            
            36,996
            
            
            48,243Prepaid
                expenses and other current assets
            
            
            3,375,535
            
            
            1,281,371Total
                current assets
            
            
            25,593,130
            
            
            29,223,142Property
                and equipment, net
            
            
            1,818,822
            
            
            1,679,434Advances
                on royalties, net of current portion
            
            
            205,175
            
            
            1,053,500Intellectual
                property licenses, net of current portion
            
            
            331,020
            
            
            1,311,542Other assets
            
            
            21,753
            
            
            12,690Total
                assets
            
            $
            27,969,900
            
            $
            33,280,308**Liabilities
                and Shareholders’ Equity**Current
                liabilities:Line
                of credit
            
            $
            2,687,628
            
            $
            4,851,819Current
                maturities of mortgage payable
            
            
            24,752
            
            
            24,252Accounts
                payable
            
            
            12,288,444
            
            
            14,254,085Accrued
                royalties
            
            
            250,000
            
            
            523,013Accrued
                expenses and other current liabilities
            
            
            822,867
            
            
            1,456,915Due
                to shareholders
            
            
            -
            
            
            228,998Due
                to related parties
            
            
            57,257
            
            
            15,658Accrued
                expenses - related party
            
            
            45,703
            
            
            4,182Total
                current liabilities
            
            
            16,176,651
            
            
            21,358,922Mortgage
                payable, net of current maturities
            
            
            1,031,477
            
            
            1,038,140Total
                liabilities
            
            
            17,208,128
            
            
            22,397,062Commitments
                and contingencies
            
            
            -
            
            
            -Shareholders’
                equity:Preferred
                stock, $.0001 per value; 5,000,000 shares authorized; no shares
                issued at September 30, 2008 and June 30, 2008,
                respectively
            
            
            -
            
            
            -Series
                A convertible preferred stock, $.0001 par value per share; aggregate
                liquidation preference of $14,563,833 and $12,984,833; 15,000,000
                shares
                authorized; 14,563,833 and 12,984,833 shares issued and outstanding
                at
                September 30, 2008 and June 30, 2008, respectively
            
            
            1,456
            
            
            1,298Common
                stock, $.0001 par value, 90,000,000 shares authorized; 35,920,100
                shares
                issued and outstanding at September 30, 2008 and June 30, 2008,
                respectively
            
            
            3,592
            
            
            3,592Additional
                paid-in capital
            
            
            23,493,029
            
            
            20,825,105Accumulated
                deficit
            
            
            (12,490,902
            )
            
            (9,796,709
            )Accumulated
                other comprehensive loss
            
            
            (245,403
            )
            
            (150,040
            )Total
                shareholders’ equity
            
            
            10,761,772
            
            
            10,883,246Total
                liabilities and shareholders’ equity
            
            $
            27,969,900
            
            $
            33,280,308





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




1


**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(UNAUDITED)**





**Three Months Ended**
              **September 30,****2008**
            
            **2007**Net
                revenues
            
            $
            8,391,611
            
            $
            18,296,462Cost
                of goods sold:Product
                costs
            
            
            5,425,553
            
            
            7,033,168Royalties
            
            
            808,921
            
            
            4,105,495Intellectual
                property licenses
            
            
            43,980
            
            
            -Total
                cost of goods sold
            
            
            6,278,454
            
            
            11,138,663Gross
                profit
            
            
            2,113,157
            
            
            7,157,799Operating
                expenses:Warehousing
                and distribution
            
            
            207,583
            
            
            223,055Sales
                and marketing
            
            
            1,898,455
            
            
            2,463,399Transaction
                costs
            
            
            18,380
            
            
            -General
                and administrative
            
            
            1,481,614
            
            
            944,555Total
                operating expenses
            
            
            3,606,032
            
            
            3,631,009Operating
                (loss) income
            
            
            (1,492,875
            )
            
            3,526,790Interest
                expense
            
            
            58,879
            
            
            149,824Net
                (loss) income
            
            
            (1,551,754
            )
            
            3,376,966Deemed
                dividend related to beneficial conversion feature on Series A convertible
                preferred stock
            
            
            1,142,439
            
            
            -Net
                (loss) income attributable to common shareholders
            
            $
            (2,694,193
            )
            $
            3,376,966Basic
                (loss) earnings per share:
            
            $
            (0.08
            )
            $
            0.10Diluted
                (loss) earnings per share:
            
            $
            (0.08
            )
            $
            0.10Weighted-average
                shares outstanding - basic:
            
            
            35,920,100
            
            
            35,000,000Dilutive
                effect of warrants and convertible preferred stock:
            
            
            17,648,624
            *
            
            -Weighted-average
                shares outstanding - diluted:
            
            
            53,568,724
            
            
            35,000,000





*
      No
      effect is given for dilutive securities for loss periods





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




2


**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**




**Three Months Ended**
              **September 30,****2008**
            
            **2007****Cash flows from
                operating activities:**Net
                (loss) income
            
            $
            (1,551,754
            )
            $
            3,376,966Adjustments
                to reconcile net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            36,209
            
            
            11,101Allowances
                for price protection, returns, doubtful accounts and defective
                merchandise
            
            
            (48,374
            )
            
            2,564,315Amortization
              of
              royalties and intellectual property licenses
            
            
            852,901
            
            
            4,105,495Non-cash
                expenses related to the issuance of stock and stock
                options
            
            
            164,362
            
            
            -Change
                in operating assets and liabilities:Accounts
                receivable
            
            
            4,552,796
            
            
            (12,792,564
            )Inventories
            
            
            2,149,302
            
            
            97,854Advances
                on royalties
            
            
            (2,602,434
            )
            
            (3,398,404
            )Intellectual
                property licenses
            
            
            (440,000
            )
            
            -Related
                party receivables
            
            
            11,247
            
            
            (180,672
            )Prepaid
                expenses and other current assets
            
            
            (2,094,164
            )
            
            (15,288
            )Accounts
                payable
            
            
            (1,965,641
            )
            
            260,478Accrued
                royalties
            
            
            (273,013
            )
            
            2,281,347Accrued
                expenses - related party
            
            
            41,521
            
            
            (650,889
            )Accrued
                expenses and other current liabilities
            
            
            (659,048
            )
            
            1,404,845Total
                adjustments
            
            
            (274,336
            )
            
            (6,312,382
            )Net
                cash and cash equivalents used in operating
                activities
            
            
            (1,826,090
            )
            
            (2,935,416
            )**Cash
                flows from investing activities:**Purchase
                of property and equipment
            
            
            (185,747
            )
            
            (107,645
            )Change
                in restricted cash
            
            
            65,314
            
            
            -Net
                cash and cash equivalents used in investing activities
            
            
            (120,433
            )
            
            (107,645
            )**Cash
                flows from financing activities:**Net
                (repayments of) proceeds from line of credit
            
            
            (2,164,191
            )
            
            3,047,999Repayments
                of mortgage note payable
            
            
            (6,163
            )
            
            -Payments
                of amounts due to shareholder
            
            
            (228,998
            )
            
            (277,328
            )Advances
                from related parties
            
            
            41,599
            
            
            6,633Proceeds
                from the issuance of Series A convertible preferred stock, net of
                cash
                offering costs
            
            
            1,361,281
            
            
            -Net
                cash and cash equivalents (used in) provided by financing
                activities
            
            
            (996,472
            )
            
            2,777,304Effect
                of exchange rate changes on cash and cash equivalents
            
            
            11,607
            
            
            (20,741
            )Net
                decrease in cash and cash equivalents
            
            
            (2,931,388
            )
            
            (286,498
            )Cash
                and cash equivalents at beginning of period
            
            
            4,095,036
            
            
            510,265Cash
                and cash equivalents at end of period
            
            $
            1,163,648
            
            $
            223,767**Supplemental
                cash flow information:**Cash
                paid during the period for interest
            
            $
            57,657
            
            $
            180,841Cash
                paid during the period for taxes
            
            $
            2,457
            
            $
            -**Supplemental
                disclosure of non-cash activities:**Intellectual
                property licenses included in accrued expenses and other current
                liabilities
            
            $
            110,000
            
            $
            -





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




3


**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED STATEMENTS
      OF SHAREHOLDERS’ EQUITY**


**(UNAUDITED)**





**Series A Convertible**
              **Preferred Stock**
            
            **Common Stock**
            
            **Paid-in**
            
            **Accumulated**
            
            **Accumulated**
              **Other**
              **Comprehensive**
            
            **Total**
              **Shareholders’****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Deficit**
            
            **Loss**
            
            **Equity****Balance, July
                1, 2008**
            
            
            12,984,833
            
            $
            1,298
            
            
            35,920,100
            
            $
            3,592
            
            $
            20,825,105
            
            $
            (9,796,709
            )
            $
            (150,040
            )
            $
            10,883,246**Net
                loss**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,551,754
            )
            
            -
            
            
            (1,551,754
            )**Foreign
                currency translation adjustment**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (95,363
            )
            
            (95,363
            )**Comprehensive
                loss**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,647,117
            )**Deemed
                dividend related to beneficial conversion feature on Series A convertible
                preferred stock**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,142,439
            
            
            (1,142,439
            )
            
            -
            
            
            -**Issuance
                of Series A convertible preferred stock, net of offering
                costs**
            
            
            1,579,000
            
            
            158
            
            
            -
            
            
            -
            
            
            1,361,123
            
            
            -
            
            
            -
            
            
            1,361,281**Compensatory
                stock and stock options**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            164,362
            
            
            -
            
            
            -
            
            
            164,36214,563,833
            
            $
            1,456
            
            
            35,920,100
            
            $
            3,592
            
            $
            23,493,029
            
            $
            (12,490,902
            )
            $
            (245,403
            )
            $
            10,761,772





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




4


**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements - (Unaudited)**





**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 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 the
      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.




***Basis
      of Presentation***





The
      accompanying unaudited consolidated financial statements as of September 30,
      2008 and for the three month periods ended September 30, 2008 and 2007 have
      been
      prepared pursuant to the rules and regulations of the Securities and Exchange
      Commission and in accordance with United States generally accepted accounting
      principles for interim financial reporting. Accordingly, they do not include
      all
      of the information and footnotes required by United States generally accepted
      accounting principles. In the opinion of management, all adjustments (all of
      which are of a normal, recurring nature) considered for a fair presentation
      have
      been included. Operating results for the three months ended September 30, 2008
      are not necessarily indicative of the results that may be expected for the
      year
      ending June 30, 2009.




5




**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements - (Unaudited)**





**1.** **Summary
      of Significant Accounting Policies** **,
      continued**





The
      accounting policies followed by the Company with respect to unaudited interim
      financial statements are consistent with those stated in the Company’s annual
      report on Form 10-K. The accompanying June 30, 2008 financial statements were
      derived from the Company’s audited financial statements. These unaudited
      consolidated financial statements should be read in conjunction with the audited
      consolidated financial statements and the notes thereto included in the
      Company’s annual report on Form 10-K for the year ended June 30, 2008 filed with
      the Securities and Exchange Commission.





***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.





***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
      September 30, 2008 and June 30, 2008, accounts receivable allowances consisted
      of the following:




**September 30,**
              **2008**
            
            **June 30,**
              **2008**Sales
                returns
            
            $
            82,397
            
            $
            155,652Price
                protection
            
            
            902,410
            
            
            823,085Defective
                items
            
            
            48,978
            
            
            107,559Doubtful
                accounts
            
            
            26,307
            
            
            22,169Total
                reserves
            
            $
            1,060,092
            
            $
            1,108,465




6




**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements - (Unaudited)** ****





**1.** **Summary
      of Significant Accounting Policies** **,
      continued**





***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
      $1,406,758 and $3,326,244 for the three months ended September 30, 2008 and
      2007, respectively. Licensing fees included in inventory at September 30, 2008
      and June 30, 2008 totaled $832,671 and $200,789, 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.
      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. he
      Company did not recognize any impairment charges during
      the
      three months ended September 30, 2008 and 2007 .




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 the majority of the amortization taking place within the first six months
      of
      release. 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
      $110,000 and $85,000 as of September 30, 2008 and June 30, 2008, respectively.
      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.




7




**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements - (Unaudited)** ****





**1.** **Summary
      of Significant Accounting Policies** **,
      continued**




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. The Company did not recognize any impairment charges during
      the three months ended September 30, 2008 and 2007.




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 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 intellectual property license, 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 -
      intellectual property licenses” may be larger than expected for any particular
      period.





***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 -
      intellectual property licenses”.




***Acquisition
        Costs***
 
 The
        Company capitalizes certain fees related to mergers and acquisitions. These
        fees
        include costs directly related to acquisition
        activity, primarily investment advisory services. All internal costs associated
        with merger or acquisition are expensed as incurred. For the
        three months ended September 30, 2008 costs
        related to the acquisition of Gone Off Deep, LLC (see Note 11) totaling $18,380
        were expensed as incurred due to their nature.






***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.”




8




**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements - (Unaudited)** ****





**1.** **Summary
      of Significant Accounting Policies** **,
      continued**





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.




***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.




***Recently
      Issued Accounting Standards***




In
      December 2007, the FASB issued SFAS No. 141 (Revised 2007) (“SFAS
      No. 141(R)”), “Business Combinations”, which requires the recognition of
      assets acquired, liabilities assumed, and any noncontrolling interest in an
      acquiree at the acquisition date fair value with limited exceptions. SFAS
      No. 141(R) will change the accounting treatment for certain specific items
      and includes a substantial number of new disclosure requirements. SFAS
      No. 141(R) applies prospectively to business combinations for which the
      acquisition date is on or after the beginning of the first annual reporting
      period beginning on or after December 15, 2008. The adoption of SFAS
      No. 141(R) will have a material impact on the Company’s Consolidated
      Financial Statements for material acquisitions consummated on or after June
      30,
      2009.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
      in Consolidated Financial Statements — an amendment of ARB No. 51”, which
      establishes new accounting and reporting standards for noncontrolling interests
      (e.g., minority interests) and for the deconsolidation of a subsidiary. SFAS
      No. 160 also includes expanded disclosure requirements regarding the
      interests of the parent and its noncontrolling interests. SFAS No. 160 is
      effective for fiscal years, and interim periods within those fiscal years,
      beginning on or after December 15, 2008. The Company does not expect the
      adoption of SFAS No. 160 to have a material impact on its Consolidated
      Financial Statements.





9





**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements - (Unaudited)** ****





**1.** **Summary
      of Significant Accounting Policies** **,
      continued**





In
      December 2007, the FASB ratified Emerging Issues Task Force’s (“EITF”)
      consensus conclusion on EITF 07-01, “Accounting for Collaborative Arrangements”.
      EITF 07-01 defines collaborative arrangements and establishes reporting
      requirements for transactions between participants in a collaborative
      arrangement and between participants in the arrangement and third parties.
      Under
      this conclusion, a participant to a collaborative arrangement should disclose
      information about the nature and purpose of its collaborative arrangements,
      the
      rights and obligations under the collaborative arrangements, the accounting
      policy for collaborative arrangements, and the income statement classification
      and amounts attributable to transactions arising from the collaborative
      arrangement between participants for each period an income statement is
      presented. EITF 07-01 is effective for interim or annual reporting periods
      in
      fiscal years beginning after December 15, 2008 and requires retrospective
      application to all prior periods presented for all collaborative arrangements
      existing as of the effective date. While the Company has not yet completed
      its
      analysis, the Company does not anticipate the implementation of EITF 07-01
      to
      have a material impact on its Consolidated Financial Statements.





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





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





In
      April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful
      Life of Intangible Assets”. FSP FAS 142-3 amends the factors an entity should
      consider in developing renewal or extension assumptions used in determining
      the
      useful life of recognized intangible assets under SFAS No. 142, “Goodwill
      and Other Intangible Assets”. This guidance for determining the useful life of a
      recognized intangible asset applies prospectively to intangible assets acquired
      individually or with a group of other assets in either an asset acquisition
      or
      business combination.





FSP
      FAS
      142-3 is effective for fiscal years, and interim periods within those fiscal
      years, beginning after December 15, 2008, and early adoption is prohibited.
      The Company is currently evaluating the impact FSP FAS 142-3 will have on its
      Consolidated Financial Statements.





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





10





**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements - (Unaudited)** ****





**2.**  **Fair
      Value Measurements**





On
      July
      1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,”
except as it applies to the nonfinancial assets and nonfinancial liabilities
      that are subject to FASB Staff Position (“FSP”) Financial Accounting Standard
      (“FAS”) 157-2, “Effective Date of FASB Statement No. 157”.





These
      nonfinancial items include assets and liabilities such as a reporting unit
      measured at fair value in a goodwill impairment test and nonfinancial assets
      acquired and liabilities assumed in a business combination. SFAS No. 157
      defines fair value, establishes a framework for measuring fair value and expands
      disclosure requirements regarding fair value measurements. SFAS No. 157
      establishes a three-tier hierarchy that draws a distinction between market
      participant assumptions based on (1) observable quoted prices in active
      markets for identical assets or liabilities (Level 1), (2) inputs other
      than quoted prices in active markets that are observable either directly or
      indirectly (Level 2), and (3) unobservable inputs that require us to use
      other valuation techniques to determine fair value (Level 3).





As
      of
      September 30, 2008, the Company’s financial assets and liabilities measured
      and recorded at fair value were as follows:





**Fair Value Measurements at Reporting Date Using****Quoted Prices****in****Active Markets**
            
            **Significant****for Identical**
            
            **Other**
            
            **Significant****As of**
            
            **Financial**
            
            **Observable**
            
            **Unobservable**
            
            **Balance****September**
            
            **Instruments**
            
            **Inputs**
            
            **Inputs**
            
            **Sheet****30, 2008**
            
            **(Level 1)**
            
            **(Level 2)**
            
            **(Level 3)**
            
            **Classification**AssetsMoney
                market funds
            
            $
            404,749
            
            $
            404,749
            
            $
            -
            
            $
            -
            
            
            Cash
                and cash equivalentsTotal
                assets at fair value
            
            $
            404,749
            
            $
            404,749
            
            $
            -
            
            $
            -





The
      Company’s money market funds are measured and recorded on a recurring basis.





**3.** **Inventories**




At
      September 30, 2008 and June 30, 2008, inventories consist of the
      following:




**September 30,**
              **2008**
            
            **June 30,**
              **2008**Finished
                goods
            
            $
            4,290,229
            
            $
            6,239,060Purchased
                parts and components
            
            
            99,113
            
            
            299,584Total
            
            $
            4,389,342
            
            $
            6,538,644




11




**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements - (Unaudited)** ****





**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 September 30, 2008, the Company has recorded royalty payments totaling
      $100,000 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 September 30, 2008,
      the Company has opted to use the intellectual property for five games, at a
      total cost of $1,810,000. The first game was released in the quarter ending
      September 30, 2008, three future games are expected to be released by quarter
      end September 30, 2009. The final game’s release date is yet to be determined.
      At September 30, 2008 and June 30, 2008, the Company has $110,000 and
      $85,000, respectively, 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 September 2008 to November 30, 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 5.50% at September 30, 2008 and June 30, 2008, 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 $9,796,000 and $13,629,000 at September
      30,
      2008 and June 30, 2008, 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 September 30, 2008, the Company was in compliance
      with these covenants.




At
      September 30, 2008 and June 30, 2008, the outstanding line of credit balance
      was
      $2,687,628 and $4,851,819, respectively. As of September 30, 2008 and June
      30,
      2008, the Company had $707,459 and $148,181, respectively, available under
      its
      credit facility. For the three months ended September 30, 2008 and 2007,
      interest expense relating to the line of credit was $31,132 and $132,490,
      respectively.




**6.** **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.




12





**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**


**(UNAUDITED)**





**6.** **Related
      Party Transactions** **,
      continued**





***Accrued
      Expenses - Related Party***




Accrued
      expenses due to the related party as of September 30, 2008 and June 30,
      2008 consisted of:




**As of**
              **September**
              **30, 2008**
            
            **As of**
              **June 30,**
              **2008**Balance
                atbeginning
                of period
            
            $
            4,182
            
            $
            650,889Expenses
                incurred:Consulting
                fees
            
            
            -
            
            
            920,930Commissions
            
            
            147,599
            
            
            433,370Less:
                amounts paid
            
            
            (106,078
            )
            
            (2,001,007
            )Balance
                at end of period
            
            $
            45,703
            
            $
            4,182





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 three months ended September 30, 2008 and 2007, the Company incurred fees
      totaling $0 and $350,215 respectively, which is included in the general and
      administrative expenses in the accompanying consolidated statements of
      operations. The consulting fee for the period July 1, 2007 through September
      30,
      2007 was based on the actual costs the organization incurred in providing office
      space and staff services.





For
      the
      three months ended September 30, 2008 and 2007, the Company incurred sales
      commissions for the marketing and sale of video games of $147,599 and $153,662,
      respectively, to two affiliates of a shareholder, which is included in sales
      and
      marketing expenses in the accompanying consolidated statements of operations. At
      September 30, 2008 and June 30, 2008, the Company had accrued commissions
      payable of $45,703 and $4,182, respectively.





For
      the
      three months ended September 30, 2008, and September 30, 2007, the Company
      incurred fees for broadband usage of $20,850 and $0, respectively to an entity
      partially owned by shareholders of the Company, which is included in sales
      and marketing expenses in the accompanying consolidated statements of
      operations.






***Due
      to Shareholder***




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. As of September 30, 2008 no amounts were outstanding .




***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 September 30, 2008 and June
      30, 2008, the amounts due to these entities were $56,221 and $15,658,
      respectively.





13





**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements - (Unaudited)** ****





**7.** **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 $808,921 and $4,105,495 for the three months ended
      September 30, 2008 and 2007, 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.
      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. Office
      rent expense for the three months ended September 30, 2008 and 2007, was $17,099
      and $6,432, respectively.





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 three
      months ended September 30, 2008 was $22,625.




The
      total
      future minimum commitments under these agreements as of September 30, 2008
      are
      as follows:




**Software**
            
            
            
            **Office****Developers**
            
            **Marketing**
            
            **Lease**
            
            **Total**2009
            
            $
            10,704,469
            
            $
            214,167
            
            $
            100,671
            
            $
            10,019,3072010
            
            
            1,121,151
            
            
            -
            
            
            90,500
            
            
            1,211,6512011
            
            
            -
            
            
            -
            
            
            22,622
            
            
            22,622Total
            
            $
            11,825,620
            
            $
            214,167
            
            $
            213,793
            
            $
            12,253,580




***Solicitation
      Services***





Prior
      to
      Global Services’ initial 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 September 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).




14




**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements - (Unaudited)** ****





**8.** **Equity
      Transactions**





***Series
      A Convertible Preferred Stock***




During
      the three months ended September 30, 2008, the Company raised $1,579,000 in
      gross cash proceeds through the private placement of shares of Series A
      Convertible Preferred Stock at a purchase price of $1 per share to a group
      of
      accredited investors.




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 September 30, 2008, the Company issued 5,960,149
      Y warrants and was obligated to issue an additional 225,000 Class Y
      warrants.





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
      $1,142,439, 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.





***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 September 30, 2008 were
      3,876,000 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.





We
      are
      required to recognize compensation costs for the stock-based payments to
      employees, based on the fair value at their grant-date. The fair value is
      determined using the Black-Sholes valuation model. The determination of fair
      value is affected by our stock price and volatility, employee exercise behavior,
      and the time for the shares to vest.





15





**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements - (Unaudited)** ****





**8.** **Equity
      Transactions** **,
      continued**





The
      assumptions used in the Black-Sholes valuation model to value the option grants
      were as follow:




**Stock Option Grants****Three Months Ended**
              **September 30,**
              **2008**Risk-free
                interest rate
            
            
            4.01
            %Weighted-average
                volatility
            
            
            57.56
            %Expected
                Term
            
            
            6
                yearsExpected
                Dividends
            
            
            None





The
      following table summarizes the stock-based compensation expense resulting from
      stock options and restricted stock in our Consolidated Statement of
      Operations:





**Three Months Ended**
              **September 30,**
              **2008**Marketing
                and sales
            
            $
            37,734General
                and administrative
            
            
            126,628Stock-based
                compensation expense
            
            $
            164,362





As
      of
      September 30, 2008 unrecognized stock-based compensation was $1.36 million
      and
      will be recognized over a weighted average of 2.2 years. As of September 30,
      2008 there is no unrecognized stock-based compensation related to restricted
      stock granted to employees.





The
      following table summarizes the stock option activity for the three months ended
      September 30, 2008:





**Options**
            
            **Weighted-**
              **Average**
              **Exercise Price**
            
            **Weighted-**
              **Average**
              **Remaining**
              **Contractual**
              **Term**
              **(in years)**
            
            **Aggregate**
              **Intrinsic Value**Outstanding
                as of June 30, 2008
            
            
            —
            
            $
            —Activity
                for the three months ended September 30, 2008Granted
            
            
            1,025,000
            
            
            2.30Exercised
            
            
            —
            
            
            -Forfeited,
                cancelled or expired
            
            
            —
            
            
            -Outstanding
                as of September 30, 2008
            
            
            1,025,000
            
            $
            2.30
            
            
            9.75
            
            $
            —Exercisable
                as of September 30, 2008
            
            
            —
            
            $
            —
            
            
            —
            
            $
            —





The
      aggregate intrinsic value represents the total pre-tax intrinsic value based
      on
      our closing stock price as of September 30, 2008, which would have been received
      by the option holders had all option holders exercised their options as of
      that
      date.





16





**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements - (Unaudited)** ****





**8.** **Equity
      Transactions** **,
      continued**





The
      following table summarizes our restricted stock activity for the three months
      ended September 30, 2008:





**Options**
            
            **Weighted-**
              **Average**
              **Exercise Price**Outstanding
                as of June 30, 2008
            
            
            —
            
            $
            —Activity
                for the three months ended September 30, 2008Granted
            
            
            99,000
            
            
            2.30Exercised
            
            
            —
            
            
            —Forfeited,
                cancelled or expired
            
            
            —
            
            
            —Outstanding
                as of September 30, 2008
            
            
            99,000
            
            $
            2.30Exercisable
                as of September 30, 2008
            
            
            —
            
            $
            —





**9.** **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 September 30, 2008, there were
      3,027,550 Class W Warrants outstanding after 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 September 30, 2008, there were
      4,667,301 Class Z Warrants outstanding after 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.




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.




17




**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements - (Unaudited)** ****





**9.** **Warrant
      to Purchase Common Stock** **,
      continued**





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
      September 30, 2008, the Company issued 5,960,149 Class Y warrants and was
      obligated to issue an additional 225,000 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 236,850 fully vested warrants to purchase common
      stock at an average exercise price of approximately $1.15 per share valued
      at $320,158 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.




**10.** **Income
      Taxes**




Deferred
      tax assets and liabilities on the balance sheets reflect the net tax effect
      of
      temporary differences between carrying amounts of assets and liabilities for
      financial statement purposes and the amounts used for income tax purposes.
      The
      deferred tax assets and liabilities are classified on the balance sheets as
      current or non-current based on the classification of the related assets and
      liabilities.





Management
      regularly evaluates the realizability of its deferred tax assets given the
      nature of its operations and the tax jurisdictions in which it operates. The
      Company adjusts its valuation allowance from time to time based on such
      evaluations. Based upon the Company’s historical taxable income, when adjusted
      for non-recurring items, net operating loss carryback potential and estimates
      of
      future profitability, management has concluded that, in its judgment, the
      deferred tax asset should remain fully reserved at September 30, 2008.





The
      Company adopted Financial Accounting Standards Board Interpretation No. 48
      (FIN 48), Accounting for Uncertainty in Income Taxes, as of July 1, 2007. This
      standard modifies the previous guidance provided by Financial Accounting
      Standards Board Statement No. 5 (FAS 5), Accounting for Contingencies and
      Financial Accounting Standards Board Statement No. 109 (FAS 109),
      Accounting for Income Taxes for uncertainties related to the company’s income
      tax liabilities. The implementation of FIN 48 did not result in a material
      adjustment to the liability for unrecognized income tax benefits.





There
      was
      no increase recorded through September 30, 2008 related to material changes
      to
      the measurement of unrecognized tax benefits in various taxing jurisdictions.
      The Company recognizes interest and penalties related to uncertain tax positions
      as a component of income tax expense in the consolidated statements of
      operations. For the three months ended September 30, 2008, the Company has
      not recorded any material interest or penalty expense related to income
      taxes.





The
      tax
      return years from 2005 forward in the Company’s major tax jurisdictions are not
      settled as of September 30, 2008; no changes in settled tax years have
      occurred through September 30, 2008. Due to the existence of tax attribute
      carryforwards (which are currently offset by a full valuation allowance), the
      Company treats certain post-2005 tax positions as unsettled due to the taxing
      authorities’ ability to modify these attributes.





The
      Company estimates that it is reasonably possible that no reduction in
      unrecognized tax benefits may occur in the next twelve months due primarily
      to
      the expiration of the statute of limitations in various state and local
      jurisdictions. The Company does not currently estimate any additional material
      reasonably possible uncertain tax positions occurring within the next
      twelve-month time frame.





18




**SOUTHPEAK
      INTERACTIVE CORPORATION AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements - (Unaudited)** ****





**11.** **Subsequent
      Events**





On
      October 10, 2008, the Company acquired all of the outstanding membership
      interests of Gone Off Deep, LLC, doing business as Gamecock Media Group
      (“Gamecock”), an independent videogame publisher based in Austin, Texas,
      pursuant to a definitive purchase agreement with Vid Agon, LLC (the “Seller”)
      and Vid Sub, LLC (the “Member”). The Member is a wholly-owned subsidiary of the
      Seller and owner of approximately 96% of Gamecock’s outstanding membership
      interests. Pursuant to the terms of the purchase agreement, the Company acquired
      all of the outstanding membership interests of the Member in exchange for
      aggregate consideration of 7% of the revenue from sales of certain videogames
      of
      Gamecock, net of certain fees and expenses, and a warrant to purchase 700,000
      shares of the Company’s common stock.





On
      October 1, 2008, the Company 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. On October 1, 2008, 10,000 shares of restricted common stock were
      issued to the Company’s non-employee directors. These shares will vest on
      October 1, 2009. On October 1, 2008, the Company issued 68,000 stock options
      to
      employees. These options will vest over a three year period and have a strike
      price of $2.00.




19


**Item 2.** ***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 and in our
      annual report on Form 10-K for the year ended June 30, 2008.*




*This
      report includes forward-looking statements that are made pursuant to the safe
      harbor provisions of the Private Securities Litigation Reform Act of 1995.
      These
      forward-looking statements can be identified by the use of words such as
“anticipate,” “believe,” “estimate,” “may,” “intend,” “expect,” “will,”
“should,” “seeks” or other similar expressions. Forward-looking statements
      reflect our plans, expectations and beliefs, and involve inherent risks and
      uncertainties, many of which are beyond our control. You should not place undue
      reliance on any forward-looking statement, which speaks only as of the date
      made. 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 of Part II.*




**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 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® videogame 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 portfolio of videogames extends across a variety of consumer
      demographics, ranging from adults to children and hard-core videogame
      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
      Interactive, L.L.C., 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
      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. We also intend to identify and
      acquire companies which would either expand our portfolio of proprietary
      software content, provide access to new customers or markets, or both. On
      October 10, 2008, we acquired Gone Off Deep, LLC, doing business as Gamecock
      Media Group, or Gamecock, an independent videogame publisher based in Austin,
      Texas.




**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.




20




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 in the United Kingdom. For the three months
      ended September 30, 2008 and 2007, international operations contributed
      approximately 10.9% and 22.1%, respectively, to consolidated net revenues.
      We
      sell our videogames directly to retailers and distributors in North America.
      In
      Europe and Australia, we primarily sell our videogames directly to distributors.
      We operate in one business segment, interactive videogame
      publishing.




**First
      Quarter 2009 Releases**




We
      released the following videogames in the three month period ended September
      30,
      2008:




**Title**
            
            **Platform**
            
            **Date
                Released***Mr.
                Slime*
            
            NDS
            
            7/14*B-Boy*
            
            PS2
            
            7/28*Monster
                Madness – Grave Danger*
            
            PS3
            
            8/4*Two
                Worlds Epic*
            
            PC
            
            8/19*B-Boy*
            
            PSP
            
            9/12*Igor*
            
            NDS
            
            9/15*Igor*
            
            Wii
            
            9/16*Igor*
            
            PC
            
            9/23




**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 videogames that command prices that are similar to those
      obtained by our major competitors in the front-line/premium videogame 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 videogame for their platform. They charge their license fee
      for
      each videogame based on the expected retail sales price of the videogame. Such
      license fee is paid by us based on the number of videogames manufactured. Should
      some of the videogames 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 videogame for which a license has been paid, or if the price
      to
      the retailer is reduced.




21




We
      utilize third-parties to develop our videogames on a royalty payment basis.
      We
      enter into contracts with third party developers once the videogame 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 videogame. To the extent these prepaid royalties are sales
      performance related, the royalties are expensed against projected sales revenue
      at the time a videogame 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 videogame. Any pre-release
      milestone payments that are not prepayments against future royalties are
      expensed when a videogame is released and then charged to costs of goods sold.
      Capitalized costs for videogames 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 videogames, rather than directly
      employing videogame 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 videogame 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, videogames that do not meet our sales expectations, and
      by
      videogames that require more significant royalty payments to
      developers.




*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 videogames 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 videogames with
      third parties, which often takes 12-18 months. Additionally, such costs are
      used
      to finance the accounts receivables prior to payment by customers.




**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.




22




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.




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 videogames released in prior periods,
      based upon an individual videogame’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
      videogames 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.




23




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.




*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 videogames
      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 September 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 September 30, 2008.




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




Deferred
      income taxes are provided for the effect of temporary differences between the
      amounts of assets and liabilities recognized for financial reporting purposes
      and the amounts recognized for income tax purposes. We measure assets and
      liabilities using enacted tax rates that, if changed, would result in either
      an
      increase or decrease in the provision for income taxes in the period of change.
      A valuation allowance is recorded when it is more likely than not that deferred
      tax assets will not be realized. In assessing the likelihood of realization,
      management considers estimates of future taxable income, the character of income
      needed to realize future tax benefits, historical financial results adjusted
      for
      non-recurring items and all other available evidence.




24




Management
      believes that based on the weight of the evidence, including estimates of future
      profitability, that a 100% valuation allowance should be recorded against the
      deferred tax asset. Management
      will continue to monitor our historical results when adjusted for non-recurring
      items, estimates of future profitability and all other evidence to assess the
      realizability of its net deferred tax assets based on evolving business
      conditions. Should management determine it is more likely than not that some
      portion or all of the deferred tax assets will be realized, we would reduce
      the
      valuation allowance.




*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.




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.




25




**Results
      of Operations**




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


**Three Months****Ended September  30,****2008**
              
              **2007**Net
                  revenues
              
              
              100.0
              %
              
              100.0
              %Cost
                  of goods sold:Product
                  costs
              
              
              64.7
              %
              
              38.4
              %Royalties
              
              
              9.6
              %
              
              22.4
              %Intellectual
                  property expense
              
              
              0.5
              %
              
              -
              %Total
                  cost of goods sold
              
              
              74.8
              %
              
              60.9
              %Gross
                  profit
              
              
              25.2
              %
              
              39.1
              %Operating
                  expenses:Warehousing
                  and distribution
              
              
              2.5
              %
              
              1.2
              %Sales
                  and marketing
              
              
              22.6
              %
              
              13.5
              %Transaction
                  costs
              
              
              0.2
              %
              
              -
              %General
                  and administrative
              
              
              17.7
              %
              
              5.2
              %Total
                  operating expenses
              
              
              43.0
              %
              
              19.8
              %Operating
                  (loss) income
              
              
              (17.8
              )%
              
              19.3
              %Interest
                  expense
              
              
              0.7
              %
              
              0.8
              %Net
                  (loss) income
              
              
              (18.5
              )%
              
              18.5
              %Deemed
                  dividend related to beneficial conversion feature on Series A convertible
                  preferred stock
              
              
              13.6
              %
              
              -
              %Net
                  (loss) income attributable to common shareholders
              
              
              (32.1
              )%
              
              18.5
              %




***Three
      Months Ended September 30, 2008 and 2007***




*Net
      Revenues* .  Net
      revenues for the three months ended September 30, 2008 were $8,391,611, a
      decrease of $9,904,851, or 54%, from net revenues of $18,296,462 for the
      comparable period in 2007.  The decrease in net revenues was primarily
      driven by the successful release of *Two
      Worlds* on the
      Xbox 360 platform during the comparable period in 2007.  For the three
      months ended September 30, 2008, the number of videogame units sold decreased
      to
      approximately 530,000 units, down approximately 171,000 units from approximately
      701,000 units sold for the comparable period in 2007, primarily attributed
      to
      the reason discussed above.  Average net revenue per videogame unit sold
      decreased approximately 39%, from $26.10 to $15.83 for the three month periods
      ended September 30, 2007 and 2008, respectively.  This is primarily
      attributed to our sales of *Two
      Worlds* on
      the
      next generation Xbox 360 platform in the prior comparable period, which has
      a
      higher retail price than software for other hardware platforms.




*Cost
      of Goods Sold.* Cost of
      goods sold for the three months ended September 30, 2008 decreased to
      $6,278,454, down $4,860,209, or 44%, from $11,138,663 for the comparable period
      in 2007. The cost of royalty expense for the three months ended September 30,
      2008 decreased 80% from the cost of royalty expense for the three months ended
      September 30, 2007. The decrease is a result of the successful launch of *Two
      Worlds* on the
      Xbox 360 platform in which the high profit margin resulted in increased royalty
      expense to the third party game developer.




26




*Gross
      Profit.* For
      the three month periods ended September 30, 2008 and 2007, gross profit
      decreased to $2,113,157 from $7,157,799, or 70%, and gross profit margin
      decreased to 25.2% from 39.1%, or 36%. The decrease in gross profit is largely
      due to a decrease in net revenue. The decrease in gross profit margin is
      primarily due to sales of *Grid* ,
      which
      has a lower gross margin than our other videogames resulting from higher
      co-publishing and distribution 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 videogames 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.




*Warehousing
      and Distribution Expenses.* For the
      three months ended September 30, 2008 and 2007, warehousing and distribution
      expenses were $207,583 and $223,055, 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
      the three months ended September 30, 2008, sales and marketing expenses
      decreased 23% to $1,898,455 from $2,463,399 for the comparable period in 2007.
      This decrease is primarily due to larger marketing budgets for *Two
      Worlds* released
      in the comparable period in 2007.  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. For
      the
      current quarter ending September 30, 2008, we incurred $811,818 in marketing
      costs for future game releases which are included in marketing expenses.
      Included in sales and marketing expenses for the three months ended September
      30, 2008 is a noncash charge of $37,734 for stock options granted to vendors
      during the period.




*General
      and Administrative Expenses.* For the three months ended September 30, 2008, general and administrative
      expenses increased 57% to $1,481,614 from $944,555 for the comparable period
      in
      2007. Wages included in general and administrative expenses increased from
      $188,314 for the three months ended September 30, 2007 to $660,938 for the
      three
      months ended September 30, 2008, an increase of 251%. In addition to employees,
      for the comparable prior year a consulting fee was incurred by us in payment
      for
      staff related expenses, occupancy costs, telephones and communications expenses,
      and office supplies. Such consulting fee totaled $354,732 for the three months
      ended September 30, 2007 and $0 for the three months ended September 30, 2008.
      Professional fees increased 182% from $79,637 for the three months ended
      September 30, 2007 to $224,490 for the three months ended September 30, 2008
      as
      a result of increased costs associated with being a public company. Travel
      and
      entertainment expenses were $138,593 for the three months ended September 30,
      2007, decreasing 37% to $87,120 for the three months ended September 30, 2008.
      General and administrative expenses as a percentage of net revenues increased,
      to 18.2% for the three months ended September 30, 2008 from 5.2% for the same
      period in fiscal year 2008. In addition, for the three months ended Sept. 30,
      2008, general and administrative expenses include a $126,628 charge for noncash
      compensation related to employee stock options and restricted stock granted.




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.* For the three months ended September 30, 2008, we incurred $18,380 in costs
      related to the Acquisition. These costs included professional fees to accounting
      firms, law firms and advisors.




*Operating
      Income (Loss)* .  
      For the three months ended September 30, 2008, our operating loss was $1,492,875
      versus operating income of $3,526,790 in the prior year period. The decrease
      in
      operating income is principally due to fewer videogame units sold in the quarter
      compared to the quarter ending September 30, 2007. For the three months ended
      September 30, 2008, operating loss as a percentage of net revenue was
      17.8%.




*Interest
      and Financing Costs.* For the three months ended September 30, 2008, interest and financing costs
      decreased to $58,879 from $149,824 for the prior year period due to a decrease
      in average borrowings as a result of the increase in working capital provided
      by
      the sale of preferred stock in 2008.




*Income
      Taxes* .
      Following the Acquisition, SouthPeak became subject to the payment of corporate
      income taxes. As a result of the federal net operating loss generated for the
      three months ended September 30, 2008 and other timing differences, there are
      no
      income taxes payable for the three months ended September 30, 2008. For the
      2007
      comparable period, no income taxes were incurred since the Company was filing
      as
      a partnership and the LLC members paid the respective income taxes on the income
      of the Company.




27




*Net
      Loss* .  
      For the three months ended September 30, 2008, we generated a net loss of
      $1,551,754 as compared to net income of $3,376,966 in the same period of the
      prior year. ****




**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 $1,163,648 at September 30, 2008
      and
      $4,095,036  at
      June
      30, 2008. 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 three months ended September
      30,
      2008, we sold additional shares of preferred stock which provided additional
      liquidity to fund our continued growth through investment in videogame
      development. As of September 30, 2008, our operating activities combined with
      the additional 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
      additional 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, SouthPeak has enhanced
      its
      ability to finance future operations and future growth through access to the
      public securities markets.




*Line
      of Credit* .
      SouthPeak has a revolving loan due to a financial institution, with a maximum
      outstanding amount of $5.0 million at September 30, 2008. The loan bears
      interest at prime plus 1⁄2%, which was 5.50% and 5.50% at September 30, 2008 and
      2007, respectively. 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 $9,795,681
      and
      $13,629,000 at September 30, 2008 and June 30, 2008, respectively. The line
      of
      credit is further collateralized by the personal guarantees, and pledge of
      personal securities and assets, by two of our stockholders. The note contains
      certain financial and non-financial covenants, and at September 30, 2008 and
      2007, we were in compliance with the covenants.




At
      September 30, 2008 and June 30, 2008, the loan outstanding totaled $2,687,628
      and $4,851,819, respectively, and the remaining available under the line of
      credit amounted to $707,459 and $148,180, respectively. 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 the three months ended September 30, 2008 and 2007, interest
      expense relating to the line of credit was $31,132 and $148,035, respectively.
      All interest is expensed. The termination date of the line of credit has been
      extended to November 30, 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. 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.




28




For
      the
      three months ended September 30, 2008, we had net cash used in operating
      activities of $1,826,090 compared to $2,935,416 for the three months ended
      September 30, 2007. Although there is a large decrease in net income between
      the
      periods, there are other factors that have led to the negative cash flow from
      operations, which include a large amount of inventory on hand at September
      30,
      2008 and large accounts receivable balances as a result of sales for both
      periods. The largest increase in cash provided by operating activities for
      the
      three months ended September 30, 2008 was a decrease in accounts receivable
      of
      $4,552,796. 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. Accounts
      payable were paid down for the period ended September 30, 2008, as payment
      was
      received on outstanding accounts receivable at June 30, 2008.




The
      cash
      used in investing activities for the three months ended September 30, 2008
      and
      2007 was $120,433 and $107,645, respectively. The cash used in both periods
      primarily related to the purchase of office and computer equipment.




During
      the three months ended September 30, 2008, financing activities resulted in
      net
      cash used of $996,472 and net cash provided of $2,777,304 for the three months
      ended September 30, 2007. For the three months ended September 30, 2008, the
      sale of the preferred stock provided additional cash flow for the period, while
      available cash for the period went in part to pay down the line of credit.
      Conversely, for the period ended September 30, 2007, we had additional
      borrowings on the line of credit to fund cash needs for the launch of *Two
      Worlds* on the
      Xbox 360 platform.




We
      are
      able to meet a substantial portion of our capital needs through operating cash
      flows, our line of credit and the sale of additional 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.




**Item 3.** ***Quantitative and Qualitative Disclosures about Market
      Risk***




For
      quantitative and qualitative disclosures about market risk, see Item 7A,
“Quantitative and Qualitative Disclosures About Market Risk,” of our annual
      report on Form 10-K for the year ended June 30, 2008. Our exposures to
      market risk have not changed materially since June 30, 2008.




**Item 4T.** ***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 Securities Exchange Act of 1934, as
      amended (the “Exchange Act”)), our Chief Executive Officer and our Chief
      Financial Officer have concluded that our disclosure controls and procedures
      were effective to ensure that the information required to be disclosed by us
      in
      this quarterly report on Form 10-Q was recorded, processed, summarized and
      reported within the time periods specified in the Securities and Exchange
      Commission’s rules and Form 10-Q.




Our
      management, including our Chief Executive Officer and Chief Financial Officer,
      does not expect that our disclosure controls and procedures or our internal
      controls will prevent all errors and all fraud. A control system, no matter
      how
      well conceived and operated, can provide only reasonable, not absolute,
      assurance that the objectives of the control system are met. Further, the design
      of a control system must reflect the fact that there are resource constraints,
      and the benefits of controls must be considered relative to their costs. Because
      of the inherent limitations in all control systems, no evaluation of controls
      can provide absolute assurance that all control issues and instances of fraud,
      if any, have been detected.




**Changes
      in Internal Controls**




There
      were no changes in our internal controls over financial reporting that occurred
      during the quarter covered by this report that have materially affected, or
      are
      reasonably likely to materially affect, our internal controls over financial
      reporting.




29




**PART II**




**Item 1.** ***Legal Proceedings***




We
      are
      not currently subject to any material legal proceedings. From time to time,
      however, we are 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 positions, operating results or cash
      flows.




**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.




“Item
      1A.
      Risk Factors” of our annual report on Form 10-K for the year ended June 30,
      2008 includes a discussion of our risk factors. The information presented below
      updates, and should be read in conjunction with, the risk factors and
      information disclosed in our annual report on Form 10-K for the year ended
      June 30, 2008. Except
      as
      presented below, there have been no material changes from the riskfactors
      described in our annual report on Form 10-K for the year ended June 30,
      2008.




***We
      may not be able to realize the benefits we anticipate from the acquisition
      of
      Gamecock Media Group.***




We
      acquired Gamecock in October 2008 with the expectation that the acquisition
      would both grow and enhance our product pipeline. We may not realize these
      benefits, as rapidly as, or to the extent, anticipated by our management.
      Operations and costs incurred in connection with the integration of Gamecock
      with our operating subsidiary could have an adverse effect on our business,
      financial condition and operating results. If these risks materialize, our
      stock
      price could be materially adversely affected. The acquisition, as with all
      acquisitions, involves numerous risks, including:




●
            difficulties
                in integrating operations, technologies, products and personnel of
                Gamecock;




●
            diversion
                of financial and management resources from existing
                operations;




●
            potential
                loss of key employees of Gamecock;




●
            integrating
                personnel with diverse business and cultural
                backgrounds;




●
            preserving
                the development, distribution, marketing and other important relationships
                of Gamecock; and




●
            inability
                to generate sufficient revenue and cost savings to offset acquisition
                costs.




The
      acquisition of Gamecock may also cause us to:




●
            make
                large and immediate one-time write-offs and restructuring and other
                related expenses;




●
            become
                subject to litigation; and




●
            create
                goodwill or other intangible assets that could result in significant
                impairment charges and/or amortization
                expense.




As
      a
      result, if we fail to properly execute and integrate the Gamecock acquisition,
      the acquisition may result in our not achieving its anticipated benefits. As
      a
      result, our business and prospects may be seriously harmed.




30




***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.




**Item
      6.** ***Exhibits***




**Exhibit****Number**
            
            **Exhibit**3
            .1(1)
            
            Amended
                and Restated Certificate of Incorporation.3
            .2(1)
            
            Amended
                and Restated Bylaws.31
            .1*
            
            Certification
                of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a)
                and Rule 15d-14(a), promulgated under the Securities Exchange Act of
                1934, as amended.31
            .2*
            
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a) and
                Rule 15d-14(a), promulgated under the Securities Act of 1934, as
                amended.32
            .1*
            
            Certification
                of Chairman and 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 Securities and Exchange Commission on May
                15,
                2008.




31





**SIGNATURES**




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




SOUTHPEAK
                INTERACTIVE CORPORATIONBy:
            /s/ Melanie
                MrozMelanie
                Mroz
              President
                and Chief Executive Officer
              (Principal
                Executive Officer)




By:
            /s/ Andrea
                Gail JonesAndrea
                Gail Jones
              Chief
                Financial Officer
              (Principal
                Financial and Accounting Officer)


Date: November
      14, 2008




32


**INDEX
      TO EXHIBITS**





**Exhibit****Number**
            
            **Exhibit**3
            .1(1)
            
            Amended
                and Restated Certificate of Incorporation.3
            .2(1)
            
            Amended
                and Restated Bylaws.31
            .1*
            
            Certification
                of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a)
                and Rule 15d-14(a), promulgated under the Securities Exchange Act of
                1934, as amended.31
            .2*
            
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a) and
                Rule 15d-14(a), promulgated under the Securities Act of 1934, as
                amended.32
            .1*
            
            Certification
                of Chairman and 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 Securities and Exchange Commission on May
                15,
                2008.