SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





ý    QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934





For
Quarterly Period Ended June 30, 2009





or





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 000-51430





WoozyFly,
Inc.


(Exact
name of registrant issuer as specified in its charter)





Nevada
            
            20-3768799(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)244 Fifth Avenue,
      Suite 1878, New York, NY, 10001(Address
      of principal executive offices, including zip code)Registrant’s
      phone number, including area code    (949)
      903-0468


59 West
19thStreet,
6thFloor, New
York, NY, 91406


(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 ý    
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 Filer o
Accelerated Filer o
Non-accelerated Filer o Smaller reporting
company ý





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





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.





Class
            
            Outstanding
      at August 13, 2009Common
      Stock, $.001 par value
            
            17,610,672




















WOOZYFLY,
INC.





INDEX





PART
      I
            FINANCIAL
      INFORMATIONITEM
      1.
            FINANCIAL
      STATEMENTS:Condensed
      Consolidated Balance Sheets — June 30, 2009 (Unaudited) and December 31,
      2008Condensed
      Consolidated Statements of  Operations (Unaudited) — Three and
      six months ended June 30, 2009 and 2008Condensed
      Consolidated Statements of Cash Flows (Unaudited) —Three and six months
      ended June 30, 2009 and 2008Notes
      to Condensed Consolidated Financial StatementsITEM
      2.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONSITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM
      4.
            CONTROLS
      AND PROCEDURESPART
      II
            OTHER
      INFORMATION











PART I -
FINANCIAL INFORMATION





ITEM I — FINANCIAL STATEMENTS





WOOZYFLY,
INC. AND SUBSIDIARY


(Debtor-in-Possession)


CONDENSED CONSOLIDATED BALANCE
SHEETS







June
      30,
              
              
              December
      31,2009
              
              
              2008ASSETS
              
              (Unaudited)CURRENT
      ASSETSCash
      and cash equivalents
              
              $
              547
              
              
              $
              37,842TOTAL
      CURRENT ASSETS
              
              
              547
              
              
              
              37,842TOTAL
      ASSETS
              
              $
              547
              
              
              $
              37,842LIABILITIES
      AND STOCKHOLDERS' DEFICITCURRENT
      LIABILITIES:Debtor-in-possession
      debt facility
              
              $
              35,000
              
              
              $
              -Accounts
      payable
              
              
              12,752
              
              
              
              -Accrued
      interest
              
              
              894
              
              
              
              -TOTAL
      CURRENT LIABILITIES
              
              
              48,646
              
              
              
              -Pre-petition
      liabilities subject to compromise
              
              
              162,624
              
              
              
              76,925Pre-petition
      accrued interest
              
              
              85,465
              
              
              
              48,120Pre-petition
      notes payable
              
              
              1,697,507
              
              
              
              1,697,507TOTAL
      LIABILITIES
              
              
              1,994,242
              
              
              
              1,822,552STOCKHOLDERS'
      EQUITY/(DEFICIT):Preferred
      stock, $0.001 par value, 10,000,000 shares authorized, no shares issued
      andoutstanding,
      no rights or privileges designated
              
              
              -
              
              
              
              -Common
      stock, $0.001 par value, 100,000,000 shares authorized, 17,610,672 issued
      and outstanding at June 30, 2009 and December 31, 2008
              
              
              17,610
              
              
              
              17,610Additional
      paid in capital
              
              
              2,248,604
              
              
              
              2,248,604Accumulated
      deficit
              
              
              (4,259,909
              )
              
              
              (4,050,924
              )Total
      stockholders' deficit
              
              
              (1,993,695
              )
              
              
              (1,784,710
              )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
              
              $
              547
              
              
              $
              37,842







See
accompanying notes to the condensed consolidated financial
statements.














WOOZYFLY,
INC.


(Debtor-in-Possession)


CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


(UNAUDITED)




Three
      Months Ended June 30,
            
            Six
      Months Ended June 30,2009
            
            2008
            
            2009
            
            2008REVENUES
            
            $
            
            
            $
            
            
            $
            
            
            $COST
      OF SALES
            
            
            —
            
            
            —
            
            
            —
            
            
            —GROSS
      PROFIT
            
            
            —
            
            
            —
            
            
            —
            
            
            —OPERATING
      EXPENSESSelling,
      general and administrative expenses
            
            
            58,457
            
            
            —
            
            
            90,956
            
            
            —LOSS
      FROM OPERATIONS
            
            
            (58,457
            )
            
            —
            
            
            (90,956
            )
            
            —Interest
      expense and other, net
            
            
            (12,777
            )
            
            —
            
            
            (35,586
            )
            
            —Loss
      from continuing operations
            
            
            (71,234
            )
            
            
            
            
            (126,544
            )Loss
      from discontinued operations
            
            
            —
            
            
            (7,078
            )
            
            (82,441
            )
            
            (12,870
            )NET
      LOSS APPLICABLE TO COMMON STOCKHOLDERS
            
            $
            (71,234
            )
            $
            (7,078
            )
            $
            (208,985
            )
            $
            (12,870
            )NET
      LOSS PER SHARE OF COMMON STOCK—Basic and diluted
            
            $
            (0.00
            )
            $
            (0.00
            )
            $
            (0.00
            )
            $
            (0.00
            )WEIGHTED
      AVERAGE SHARES OUTSTANDING—Basic and diluted
            
            
            17,610,672
            
            
            5,455,000
            
            
            17,610,672
            
            
            5,455,000





See
accompanying notes to the condensed consolidated financial
statements.











WOOZYFLY,
INC.


(Debtor-in-Possession)


CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS


(UNAUDITED)





Six
      months Ended June 30,2009
            
            
            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Loss
      from continuing operations
            
            $
            (126,544
            )
            
            $
            —Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Pre-petition
      accrued interest
            
            
            37,345
            
            
            
            —Pre-petition
      accounts payable
            
            
            40,010Changes
      in operating assets and liabilities:Accrued
      interest
            
            
            894Accounts
      payable
            
            
            12,752
            
            
            
            —Net
      cash provided by operating activities from continuing
      operations
            
            
            (35,543
            )
            
            
            —Net
      cash used in operating activities from discontinued
    operations
            
            
            (36,752
            )
            
            
            (12,007
            )Net
      cash used in operating activities
            
            
            (72,295
            )
            
            
            (12,007
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds from issuance of note payable
            
            
            35,000
            
            
            
            —Net
      cash provided by financing activities
            
            
            35,000
            
            
            
            —NET
      (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            (37,295
            )
            
            
            (12,007
            )CASH
      AND CASH EQUIVALENTS, Beginning of period
            
            
            37,842
            
            
            
            20,386CASH
      AND CASH EQUIVALENTS, End of period
            
            $
            547
            
            
            $
            8,379





Six
      months Ended June 30,2009
            
            2008SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      received/(paid) during the period for:Interest
            
            $
            —
            
            
            $
            —Income
      taxes
            
            $
            —
            
            
            $
            —SUPPLEMENTAL
      DISCLOSURE OF NON CASH TRANSACTIONSNone





See
accompanying notes to the condensed consolidated financial
statements.











WOOZYFLY,
INC.


(Debtor-in-Possession)


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
1.    SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Current
Operations and Background— Woozyfly, Inc. and its subsidiary, which are
collectively referred to as “Woozyfly,” “Company,” “we,” “us,” or “our,” unless
the context otherwise requires.  Woozyfly, Inc. was organized
September 11, 2003 (Date of Inception) under the laws of the State of Nevada, as
GPP Diversified, Inc.  The business of the Company was to sell pet products
via the Internet.




The
Company was initially authorized to issue 25,000,000 shares of its no par value
common stock.  On November 9, 2005, the Company amended its articles of
incorporation to increase its authorized capital to 100,000,000 shares with a
par value of $0.001.  Concurrently, the Company changed its name from GPP
Diversifed, Inc. to Pet Express Supplies, Inc.





On July
28, 2008, Pet Express Supply, Inc. entered into an Exchange Agreement with each
of the shareholders of CJ Vision Enterprises, Inc., a Delaware corporation doing
business as Woozyfly.com, pursuant to which (i) the Company's shareholder
contributed back to the Company's treasury all but 700,000 issued and
outstanding shares of the Company's common stocks, and (ii) Pet Express Supply,
Inc. purchased from the shareholders of CJ Vision Enterprises, Inc. all issued
and outstanding shares of CJ Vision Enterprises, Inc.’s, common stock, preferred
stock and warrants to purchase CJ Vision Enterprises, Inc. stock, in
consideration for the issuance of 13,410,672 shares of common stock of Pet
Express Supply, Inc. and, to one of the shareholders of CJ Vision Enterprises,
Inc., warrants to purchase 3,776,544 shares of common stock of Pet Express. The
Share Exchange resulted in a change in control of Pet Express Supply, Inc. with
the shareholders of CJ Vision Enterprises, Inc. owning 13,410,672 shares of
common stock of Pet Express Supply, Inc. out of a total of 17,610,672
issued and outstanding shares after giving effect to the Share
Exchange.  Also, the shareholders of CJ Vision Enterprises, Inc. were
elected directors of Pet Express Supply, Inc. and appointed as its executive
officers.  As a result of the Exchange Agreement, (i) CJ Vision
Enterprises, Inc. became a wholly-owned subsidiary of Pet Express Supply, Inc.
and (ii) Pet Express Supply, Inc. succeeded to the business of CJVE as its sole
business.  Following the closing of the above transactions, Pet
Express Supply, Inc. changed its corporate name to Woozyfly,
Inc. effectuated a 6:1 stock split.





On
January 15, 2009, the Company ceased operations.  Since ceasing
operations, we have been seeking to restructure the Company’s capitalization in
order to find suitable candidates for a business combination with a private
company.  We have been unsuccessful in this attempt.  We
have a substantial amount of secured and unsecured debt. Failure to settle this
debt has caused us to petition for bankruptcy protection.





On May
12, 2009, Woozyfly or the “Debtor” filed a voluntary petition in the United
States Bankruptcy Court for the Southern District of New York (the “ Bankruptcy
Court ”) seeking reorganization relief under the provisions of Chapter 11
of Title 11 of the United States Code (the “ Bankruptcy Code ”). The
Chapter 11 case is being administered under the caption In re Woozyfly,
Inc. Case No. 09-13022 (JMP) (the “ Chapter 11 Case ”). The Debtor
will continue to operate its business as debtor in possession under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code and orders of the Bankruptcy
Court.




In
connection with the Chapter 11 Case, the Debtor filed a motion seeking
Bankruptcy Court approval of (a) an arrangement pursuant to which the
Debtor has entered into an agreement with MKM Opportunity Master Fund Ltd, as
the lender (the “DIP Loan”).  MKM lent significant monies to the Debtor
prior to the Petition Date, and has agreed to advance $100,000 as a DIP Loan to
the Company, $35,000 of which was already lent to the Debtor in order to enable
it to file the chapter 11 petition.  The Court has approved an initial
disbursement post petition, of $35,000 of the DIP Loan to the Debtor, and the
remaining $30,000 is subject to further Court determination. David Skriloff, the
Company’s Chairman of the Board is the portfolio manager for Lender. Lender is
also a creditor and stockholder of the Company. Proceeds of the loans under the
DIP Credit Agreement will be used by the Debtor for working capital and other
general corporate purposes of the Debtors and for the costs of administration of
the Chapter 11 Case. The arrangement for the use of the DIP Loan contains
certain financial and other covenants and certain events of default. On June16,
2009, the court issued an order granting the motion and authorized the Debtor to
utilize up to $35,000 on an interim basis and possibly up too $100,000 under the
DIP Loan.








The
filing of the Chapter 11 Case constituted an event of default or otherwise
triggered repayment obligations under the Company's 6% Secured Convertible Notes
due June 30, 2011 ("Convertible Notes". As a result, all indebtedness
outstanding under these facilities and the notes became automatically due and
payable, subject to an automatic stay of any action to collect, assert, or
recover a claim against the Company and the application of applicable bankruptcy
law.





Basis of
Presentation and Principles of Consolidation — The accompanying financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America. All significant intercompany
transactions have been eliminated in consolidation.





We have
prepared the unaudited condensed consolidated financial statements included
herein pursuant to the rules and regulations of the Securities and Exchange
Commission.  Certain information and footnote disclosures normally included
in statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations,
although we believe that the disclosures are adequate to make the information
presented not misleading.  These financial statements should be read in
conjunction with the financial statements and notes thereto included in our
Annual Report on Form 10-K for the year ended December 31,
2008.




The
accompanying unaudited condensed consolidated financial statements presented
herewith reflect all adjustments (consisting of only normal and recurring
adjustments unless otherwise disclosed) which, in the opinion of management, are
necessary for a fair presentation of the results of operations for the three and
six month periods ended June 30, 2009 and 2008.  The results of
operations for interim periods are not necessarily indicative of results to be
expected for an entire year.




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ materially from those
estimates.





The
accompanying consolidated financial statements for the prior period contain
certain reclassifications to conform to the presentation used in the current
period.  The reclassifications had no impact on stockholders’ equity,
working capital, gross profit or net loss.





Going
Concern—The ability of the Company
to continue as a going concern is dependent upon, among other things,
(i) the Company’s ability to comply with the terms and conditions of its
DIP financing; (ii) the ability of the Company to maintain adequate cash on
hand; (iii) the ability of the Company to generate cash from operations;
(iv) the ability of the Company to obtain confirmation of and to consummate
a plan of reorganization under the Bankruptcy Code; (v) the ability of the
Company to find a merger candidate; (vi) the cost and outcome of the
reorganization process; (vii) the Company’s ability to obtain alternative
financing; and (viii) the Company’s ability to achieve profitability. 
Uncertainty as to the outcome of these factors raises substantial doubt about
the Company’s ability to continue as a going concern.  The Company is
currently evaluating various courses of action to address the issues the Company
is facing.  There can be no assurance that any of these efforts will be
successful.




The
accompanying consolidated financial statements do not purport to reflect or
provide for the consequences of our Chapter 11 proceedings.  In
particular, the financial statements do not purport to show (i) as to
assets, their realizable value on a liquidation basis or their availability to
satisfy liabilities; (ii) as to pre-petition liabilities, the amounts that
may be allowed for claims or contingencies, or the status and priority thereof;
(iii) as to shareowners’ equity accounts, the effect of any changes that
may be made in our capitalization; or (iv) as to operations, the effect of
any changes that may be made to our business.







In
accordance with accounting principles generally accepted in the United States
(“GAAP”), we have applied American Institute of Certified Public Accountants’
Statement of Position (“SOP”) 90-7, Financial Reporting by Entities in
Reorganization under the Bankruptcy Code, in preparing the consolidated
financial statements.  SOP 90-7 requires that the financial
statements, for periods subsequent to the Chapter 11 filing, distinguish
transactions and events that are directly associated with the reorganization
from the ongoing operations of the business.  Accordingly, certain expenses
(including professional fees), realized gains and losses and provisions for
losses that are realized or incurred in the bankruptcy proceedings are recorded
in reorganization items on the accompanying Condensed Consolidated Statements of
Operations.  In addition, pre-petition obligations that may be impacted by
the bankruptcy reorganization process have been classified on the Condensed
Consolidated Balance Sheet at June 30, 2009 in “pre-petition liabilities
subject to compromise”.  These liabilities
are reported at the amounts expected to be allowed by the Bankruptcy Court, even
if they may be settled for lesser amounts.




As a
result of the Bankruptcy Filing, realization of assets and liquidation of
liabilities are subject to uncertainty.  While operating as a
debtor-in-possession under the protection of Chapter 11, and subject to
Bankruptcy Court approval or otherwise as permitted in the normal course of
business, the Debtors may sell or otherwise dispose of assets and liquidate or
settle liabilities for amounts other than those reflected in the condensed
consolidated financial statements.  Further, a plan of reorganization could
materially change the amounts and classifications reported in our consolidated
financial statements.  Our historical consolidated financial statements do
not give effect to any adjustments to the carrying value of assets or amounts of
liabilities that might be necessary as a consequence of confirmation of a plan
of reorganization.




The
potential adverse publicity associated with the Bankruptcy Filing and the
resulting uncertainty regarding the Company’s future prospects may hinder the
Company’s ongoing business activities and its ability to operate, fund and
execute its business plan by impairing relations with existing and potential
customers; negatively impacting the ability of the Company to attract, retain
and compensate key executives and employees and to retain employees generally;
limiting the Company’s ability to obtain trade credit; and impairing present and
future relationships with vendors and service providers.





Use of Estimates— The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.





Cash and Cash
Equivalents— We consider investments with original maturities of
90 days or less to be cash equivalents.





Income Taxes—We record income taxes in accordance with the provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income
Taxes.”  The standard requires, among other provisions, an asset and
liability approach to recognize deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the financial
statement carrying amounts and tax basis of assets and
liabilities.  Valuation allowances are provided if, based upon the
weight of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.





Stock-Based
Compensation—On January 1, 2006, the Company adopted SFAS No. 123
(revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which was issued in
December 2004. SFAS 123(R) revises SFAS No. 123, “Accounting for Stock Based
Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued
to Employees,” and its related interpretations. SFAS 123(R) requires recognition
of the cost of employee services received in exchange for an award of equity
instruments in the financial statements over the period the employee is required
to perform the services in exchange for the award. SFAS 123(R) also requires
measurement of the cost of employee services received in exchange for an award.
SFAS 123(R) also amends SFAS No. 95, “Statement of Cash Flows,” to require the
excess tax benefits be reported as financing cash inflows, rather than as a
reduction of taxes paid, which is included within operating cash flows. The
Company adopted SFAS 123(R) using the modified prospective method. Accordingly,
prior period amounts have not been restated. Under this application, the Company
recorded the cumulative effect of compensation expense for the unvested portion
of previously granted awards that remain outstanding at the date of adoption and
recorded compensation expense for all awards granted after the date of
adoption.








SFAS
123(R) provides that income tax effects of share-based payments are recognized
in the financial statements for those awards that will normally result in tax
deduction under existing law. Under current U.S. federal tax law, the Company
would receive a compensation expense deduction related to non-qualified stock
options only when those options are exercised and vested shares are received.
Accordingly, the financial statement recognition of compensation cost for
non-qualified stock options creates a deductible temporary difference which
results in a deferred tax asset and a corresponding deferred tax benefit in the
income statement. The Company does not recognize a tax benefit for compensation
expense related to incentive stock options unless the underlying shares are
disposed in a disqualifying disposition.





Net Income (Loss)
Per Share— The Company computes net loss per share in accordance with
SFAS No. 128, “Earnings per Share,” and Securities and Exchange Commission
(“SEC”) Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of
SFAS No. 128 and SAB 98, basic and diluted net loss per share is computed by
dividing the net loss available to common stockholders for the period by the
weighted average number of shares of common stock outstanding during the
period.  Common equivalent shares related to stock options and warrants
have been excluded from the computation of basic and diluted earnings per share
for the quarters ended June 30, 2009 and 2008 because their effect is
anti-dilutive.





Concentration of
Credit Risk — Financial instruments that potentially subject the Company
to a concentration of credit risk consist of cash.  The Company
maintains its cash with high credit quality financial institutions; at times,
such balances with any one financial institution may exceed FDIC insured
limits.





Financial
Instruments — Our financial instruments consist of cash, accounts
payable, and notes payable.  The carrying values of cash, accounts
payable, and notes payable are representative of their fair values due to their
short-term maturities.





Recently Issued
Accounting Pronouncements—





In April
2009, the FASB issued FSP FAS 107-1/APB 28-1 (“FSP 107-1”), which is entitled
“Interim Disclosures about Fair Value of Financial Instruments.” This
pronouncement amended SFAS No 107, Disclosures about Fair Value of Financial
Instruments, to require disclosure of the carrying amount and the fair value of
all financial instruments for interim reporting periods and annual financial
statements of publicly traded companies (even if the financial instrument is not
recognized in the balance sheet), including the methods and significant
assumptions used to estimate the fair values and any changes in such methods and
assumptions. FSP 107-1 also amended APB Opinion No. 28, Interim Financial
Reporting, to require disclosures in summarized financial information at interim
reporting periods. FSP 107-1 is effective for interim reporting periods ending
after June 15, 2009, with early adoption permitted for periods ended after
March 15, 2009 if a company also elects to early adopt FSP FAS 157-4,
Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Indentifying Transactions That Are
Not Orderly, and FSP FAS 115-2/FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. We do not expect that the adoption of FSP FAS
107-1 and APB 28-1 will have a material impact on our financial position,
results of operations or cash flows.





In April
2009, the FASB also issued FSP FAS 157-4, which generally applies to all assets
and liabilities within the scope of any accounting pronouncements that require
or permit fair value measurements. This pronouncement, which does not change
SFAS No. 157’s guidance regarding Level 1 inputs, requires the entity to
(i) evaluate certain factors to determine whether there has been a
significant decrease in the volume and level of activity for the asset or
liability when compared with normal market activity, (ii) consider whether
the preceding indicates that transactions or quoted prices are not determinative
of fair value and, if so, whether a significant adjustment thereof is necessary
to estimate fair value in accordance with SFAS No. 157, and
(iii) ignore the intent to hold the asset or liability when estimating fair
value. FSP FAS 157-4 also provides guidance to consider in determining whether a
transaction is orderly (or not orderly) when there has been a significant
decrease in the volume and level of activity for the asset or liability, based
on the weight of available evidence. This pronouncement is effective for interim
and annual reporting periods ending after June 15, 2009, and shall be
applied prospectively. Early adoption of FSP FAS 157-4 also requires early
adoption of the pronouncement described in the following paragraph. However,
early adoption for periods ended before March 15, 2009 is not permitted. We
have not yet evaluated the impact, if any, the adoption of this Statement will
have on our financial position, results of operations or cash
flows.







The
Sarbanes-Oxley Act of 2002 (“the Act”) introduced new requirements regarding
corporate governance and financial reporting. Among the many requirements of the
Act is for management to annually assess and report on the effectiveness of its
internal control over financial reporting under Section 404(a) and for its
registered public accountant to attest to this report under Section 404(b).
The SEC has modified the effective date and adoption requirements of
Section 404(a) and Section 404(b) implementation for non-accelerated
filers multiple times, such that we were first required to issue our management
report on internal control over financial reporting in our annual report on Form
10-K for the fiscal year ending December 31, 2008. Based on current SEC
requirements, we will be required to have our auditor attest to internal
controls over financial reporting in our fiscal year ending December 31,
2009.




In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles—A
Replacement of FASB Statement No. 162 (“SFAS 168”), which
established the FASB Accounting Standards Codification as the source of
authoritative accounting principles recognized by the FASB to be applied in the
preparation of financial statements in conformity with generally accepted
accounting principles. SFAS 168 explicitly recognizes rules and interpretative
releases of the Securities and Exchange Commission (“SEC”) under federal
securities laws as authoritative GAAP for SEC registrants. SFAS 168 will become
effective in the third quarter of 2009 and will not have a material impact on
the Company’s results of operations, financial position or
liquidity.





In May
2009, the FASB issued SFAS No. 165 entitled “Subsequent
Events.”  Transactions and events that occur after the balance sheet
date but before the financial statements are issued or are available to be
issued (which are generally referred to as subsequent events) that are addressed
by other GAAP, such as those governed by FASB Interpretation No. 48, SFAS No. 5
and SFAS No. 128, are not within the scope of SFAS No. 165.  Companies
are now required to disclose the date through which subsequent events have been
evaluated by management.  Public entities (as defined) must conduct
the evaluation as of the date the financial statements are issued, and provide
disclosure that such date was used for this evaluation.  SFAS No. 165
provides that financial statements are considered “issued” when they are widely
distributed for general use and reliance in a form and format that complies with
GAAP.  SFAS No. 165 is effective for interim or annual periods ending
after June 15, 2009, and must be applied prospectively. The adoption of SFAS No.
165 during the quarter ended June 30, 2009 did not have a significant effect on
the Company’s consolidated financial statements as of that date or for the
quarter or year-to-date period then ended.   In connection with
preparing the accompanying unaudited condensed consolidated
financial statements as of and for the quarter and six-month period ended
June 30, 2009, management evaluated subsequent events through August 6, 2009
which is the date that such financial statements were issued (filed with the
Securities and Exchange Commission).




Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the American Institute of Certified Public Accountants, and
the United States Securities and Exchange Commission did not or are not believed
by management to have a material impact on the Company’s present or future
financial statements.




In
April 2009, the FASB issued FASB Staff Position (“FSP”) No. FAS 107-1
and APB 28-1 (“FSP No. 107-1 and APB 28-1”), Interim Disclosures about Fair Value
of Financial Instruments, which requires disclosures about fair value of
financial instruments for interim reporting periods.  This guidance is
effective for interim or annual reporting periods ending after June 15,
2009.  We adopted FAS No. 107-1 and APB 28-1 in the second quarter of
2009.  The adoption of FAS No. 107-1 and APB 28-1 did not have a
material impact on our financial statements.





NOTE
2 - NOTE PAYABLE.





Pre-petition
Debt





Convertible
Notes




On July
25, 2008, Woozyfly, Inc. entered into a Loan and Security Agreement (the "Loan
Agreement") providing for the issuance to several accredited investors by
Woozyfly, Inc. of its 6% Convertible Notes due June 30, 2011 ("Convertible
Notes"). Pursuant to the Loan Agreement an aggregate principal amount of
$1,400,000 of Convertible Notes have been issued; all but $150,000 in aggregate
principal amount of such Convertible Notes were issued in the third quarter. An
aggregate principal amount of $350,000 of such Convertible Notes were issued
pursuant to the Exchange Agreement dated July 25, 2008 to Corporation
Communication Network, Inc., Lynn Cole Capital, and MKM Opportunity Master Fund,
LP in exchange for convertible notes issued in the same principal amount to such
investors by C J Vision Enterprises, Inc. The entire principal amount under the
Convertible Notes plus all accrued and unpaid interest is due on June 30, 2011.
Interest is payable on the last day of each calendar quarter, commencing
September 30, 2008. Woozyfly, Inc. may make interest payments in cash, or at its
option through the reduction of the conversion price discussed
below.







The
Convertible Notes may be converted at a time, at the option of the holder, into
shares of common stock of Woozyfly, Inc. at $0.67 per share. The conversion
price is subject to adjustment in event Woozyfly, Inc. issues shares (or
securities convertible into shares) at a price that is lower than the then
applicable conversion price.




Woozyfly,
Inc. has the right to force conversion of the entire outstanding principal
amount (or a portion thereof), provided, generally that there is then an
effective registration statement in effect with the respect to the shares
issuable upon conversion of the Convertible Notes, the trading price of
Woozyfly, Inc.'s common stock is greater than $1.17 and the average daily
trading volume for the preceding 15 trading days exceeds 50,000.




The
Convertible Notes are subject to mandatory prepayment by Woozyfly, Inc. in the
event of a financing, and the proceeds of such financing exceed $4,000,000, in
which case all of the proceeds of such financing(s) in excess of $4,000,000 must
be used to prepay the Convertible Notes, with the holders of Convertible Notes
receiving a proportionate share of such proceeds.




In
connection with the issuance of the Convertible Notes, Woozyfly, Inc. granted to
the investors five-year warrants to purchase an aggregate of 1,602,066 shares
of common stock of Woozyfly, Inc. at $0.75 per share. We valued these
warrants at zero.  The warrants contain cashless exercise provisions
that enable the holder to exercise the warrants without paying additional
consideration and to receive a reduced number of shares in accordance with a
formula set forth in the warrant.




Exchange
Notes




Pursuant
to the Exchange Agreement, Woozyfly, Inc. issued to two accredited investors
(assignees of Peter Newman) an aggregate principal amount of $297,504.00 of 6%
Promissory Notes due June 30, 2009 ("Exchange Notes") in exchange for a
convertible note issued to Peter Newman in the same principal amount by C J
Vision Enterprises, Inc. The principal and accrued interest are payable on the
maturity date, June 30, 2009.




One of
the Exchange Notes, in an aggregate principal amount of $36,000, is subject to
mandatory prepayment by Woozyfly, Inc. when at least. $800,000 has been raised
by Woozyfly, Inc. in connection with the issuance of Convertible Notes pursuant
to the Loan Agreement (the "Funding"). That condition has been met, and
consequently, such Exchange Note is immediately prepayable.




The other
Exchange Note, in an aggregate principal amount of $261,504, is subject to
mandatory prepayment by Woozyfly, Inc. as follows: (i) if more than $2,000,000
is raised in the Funding, 50% of the aggregate amount of the Funding that was
not introduced by MKM Capital, any present or former affiliate of MKM or its
principals, or any officer or director of Woozyfly, Inc., shall be applied to
prepayment of such Exchange Note, up to a maximum prepayment amount equal to the
excess of the total amount raised in the Funding over $2,000,000; and (ii) the
balance of unpaid principal and interest is mandatorily prepayable from the
first amounts in excess of $3,000,000 raised in the Funding or in any subsequent
financing by Woozyfly, Inc.




The
Convertible Notes and the Exchange Notes rank senior to all current and future
indebtedness of Woozyfly, Inc. and are secured by substantially all of the
assets of Woozyfly, Inc.





The
filing of the Chapter 11 Case constituted an event of default or otherwise
triggered repayment obligations under the Company's 6% Secured Convertible Notes
due June 30, 2011 ("Convertible Notes". As a result, all indebtedness
outstanding under these facilities and the notes became automatically due and
payable, subject to an automatic stay of any action to collect, assert, or
recover a claim against the Company and the application of applicable bankruptcy
law.





Interest
expense in 2009 includes interest on our pre-petition Convertible Notes and
Exchange Notes up to the date of our bankruptcy filing and interest on our
post-petition DIP Facility.  Because we do not believe that interest on our
Convertible Notes and Exchange Notes will be allowed as a claim past the
Petition Date, we discontinued recognizing interest expense on our Notes as of
that date.   Contractual interest amounts disclosed in our Condensed
Consolidated Statement of Operations reflects the cost of borrowings without
regard to what the Bankruptcy Court may allow as a claim.








Debtor-in-possession Debt
Facility




In
connection with the Chapter 11 Case, the Debtor filed a motion seeking
Bankruptcy Court approval of (a) an arrangement pursuant to which the
Debtor has entered into an agreement with MKM Opportunity Master Fund Ltd, as
the lender (the “DIP Loan”).  MKM lent significant monies to the Debtor
prior to the Petition Date, and has agreed to advance $100,000 as a DIP Loan to
the Company, $35,000 of which was already lent to the Debtor in order to enable
it to file the chapter 11 petition.  The Court has approved an initial
disbursement post petition, of $35,000 of the DIP Loan to the Debtor, and the
remaining $30,000 is subject to further Court determination. David Skriloff, the
Company’s Chairman of the Board is the portfolio manager for Lender. Lender is
also a creditor and stockholder of the Company. Proceeds of the loans under the
DIP Credit Agreement will be used by the Debtor for working capital and other
general corporate purposes of the Debtors and for the costs of administration of
the Chapter 11 Case. The arrangement for the use of the DIP Loan contains
certain financial and other covenants and certain events of default. On June16,
2009, the court issued an order granting the motion and authorized the Debtor to
utilize up to $35,000 on an interim basis and possibly up too $100,000 under the
DIP Loan.





NOTE
3 - WARRANTS





We have
5,378,610 warrants issued and outstanding at June 30, 2009.The following
summarizes pricing and term information for warrants issued to investors which
are outstanding as of June 30, 2009:





Options
      Outstanding
            
            Options
      ExercisableRange
      of Exercise Prices
            
            Number
      Outstanding at December 31, 2008
            
            Weighted
      Average Remaining Contractual
              Life
            
            Weighted
      Average Exercise Price
            
            Number
      Exercisable at December 31, 2008
            
            Weighted
      Average Exercise Price$0.01
            
            
            3,776,544
            
            
            4.00
            
            
            $0.01
            
            
            3,776,544
            
            
            $0.01$0.75
            
            
            1,602,066
            
            
            4.00
            
            
            $0.75
            
            
            1,602,066
            
            
            $0.75





NOTE
4 - STOCK OPTION PLANS





We have
issued non-plan options to various employees, directors and
consults.  We believe these options have no value.  The
Board of directors administers the options grants, selects the individuals to
whom options will be granted, determines the number of options to be granted,
and the term and exercise price of each option.





The
Company has elected to adopt the detailed method provided in SFAS No. 123(R) for
calculating the beginning balance of the additional paid-in capital pool (“APIC
pool”) related to the tax effects of employee stock-based compensation, and to
determine the subsequent impact on the APIC pool and Consolidated Statements of
Cash Flows of the income tax effects of employee stock-based compensation awards
that are outstanding upon the adoption of SFAS No. 123(R).





The fair
value of each stock option granted is estimated on the date of the grant using
the Black-Scholes option pricing model.  The Black-Scholes option
pricing model has assumptions for risk free interest rates, dividends, stock
volatility and expected life of an option grant.  The risk free
interest rate is based upon market yields for United States Treasury debt
securities at a 7-year constant maturity.  Dividend rates are based on
the Company’s dividend history.  The stock volatility factor is based
on the last 60 days of market prices prior to the grant date.  The
expected life of an option grant is based on management’s
estimate.  The fair value of each option grant, as calculated by the
Black-Scholes method, is recognized as compensation expense on a straight-line
basis over the vesting period of each stock option award.








The
following summarizes pricing and term information for options issued to
employees and directors which are outstanding as of June 30, 2009:





Options
      Outstanding
            
            Options
      ExercisableRange
      of Exercise Prices
            
            Number
      Outstanding at December 31, 2008
            
            Weighted
      Average Remaining Contractual
              Life
            
            Weighted
      Average Exercise Price
            
            Number
      Exercisable at December 31, 2008
            
            Weighted
      Average Exercise Price$0.67
            
            
            606,000
            
            
            4.25
            
            
            $0.67
            
            
            606,000
            
            
            $0.67





During
the quarter ended June 30, 2009, the Company we issued no options.  We have
606,000 options issued and outstanding at June 30, 2009.





Balance
      at December 31, 2007
            
            
            -Issued
            
            
            4,177,002Expired
            
            
            3,571,002Balance
      at December 31, 2008
            
            
            606,000Issued
            
            
            -Expired
            
            
            -Balance
      at June 30, 2009
            
            
            606,000





NOTE
5 – EARNINGS PER SHARE





The following table sets forth common
stock equivalents (potential common stock) for the quarters ended June 30, 2009
and 2008 that are not included in the loss per share calculation above because
their effect would be anti-dilutive for the periods indicated:





Quarters
      Ended June 30,2009
            
            
            2008Weighted
      average common stock equivalents:Stock
      options
            
            
            606,000
            
            
            
            -Warrants
            
            
            5,378,610
            
            
            
            -





NOTE
6 – CONCENTRATION OF CREDIT RISK





We maintain our cash balances in various
financial institutions that from time to time exceed amounts insured by the
Federal Deposit Insurance Corporation up to $250,000, per financial
institution.  As of June 30, 2009, our deposits did not exceed insured
amounts.  We have not experienced any losses in such accounts and
believe we are not exposed to any significant credit risk on
cash.








NOTE
7 – REORGANIZATION ITEMS





SOP 90-7
requires separate disclosure of reorganization items such as realized gains and
losses from the settlement of pre-petition liabilities, provisions for losses
resulting from the reorganization and restructuring of the business, as well as
professional fees directly related to the process of reorganizing the Debtors
under Chapter 11.  The Debtors’ reorganization items for the three and six
months ended June 30, 2009 consist of the following:




Three
      months
              ended
            
            
            Six
      months
              endedJune 30,2009
            
            
            2009Provision
      for rejected executory contracts and leases
            
            $
            -
            
            
            $
            -Professional
      fees directly related to reorganization (a)
            
            
            69,500
            
            
            
            69,500Other
      (b)
            
            
            325
            
            
            
            325Total
      reorganization items
            
            $
            69,325
            
            
            $
            69,325




(a)          
      Professional fees directly related to the reorganization include
      post—petition fees associated with advisors to the Debtors, the statutory
      committee of unsecured creditors and certain secured creditors.
      Professional fees are estimated by the Debtors and will be reconciled to
      actual invoices when received.





(b)          
      Represents United States Trustee
Fees




NOTE
8 – PRE-PETITION LIABILITIES SUBJECT TO COMPROMISE




Pre-petition
liabilities subject to compromise refers to unsecured obligations that will be
accounted for under a plan of reorganization.  Generally, actions to
enforce or otherwise effect payment of pre-Chapter 11 liabilities are
stayed.  SOP 90-7 requires pre-petition liabilities that are subject to
compromise to be reported at the amounts expected to be allowed, even if they
may be settled for lesser amounts.  These liabilities represent the
estimated amount expected to be allowed on known or potential claims to be
resolved through the Chapter 11 process, and remain subject to future
adjustments arising from negotiated settlements, actions of the Bankruptcy
Court, rejection of executory contracts and unexpired leases, the determination
as to the value of any potential collateral securing the claims, proofs of
claim, or other events.  Pre-petition liabilities subject to compromise
also include certain items that may be assumed under the plan of reorganization,
and as such, may be subsequently reclassified to liabilities not subject to
compromise.  At hearings held in June 2009, the Court granted final
approval of many of the Debtors’ First Day Motions covering, among other things,
insurance, business operations, certain tax matters, cash management, utilities,
case management and retention of professionals.  Obligations associated
with these matters are not classified as pre-petition liabilities subject to
compromise.




In
accordance with SOP 90-7, debt issuance costs associated with borrowing
classified as pre-petition liabilities subject to compromise should be viewed as
valuation adjustments to the related debt.  When the debt has become an
allowed claim and the allowed claim differs from the net carrying amount of the
debt, the recorded amount should be adjusted to the amount of the allowed claim
(thereby adjusting existing debt issuance costs to the extent necessary to
report the debt at this allowed amount).  Through June 30, 2009, the
Bankruptcy Court had not classified any of the Debtors’ outstanding debt as
allowed claims. Therefore, the Company has classified the Debtors’ Notes as
“pre-petition liabilities subject to compromise” on the Condensed
Consolidated Balance Sheet.  The Company may be required to expense these
amounts or a portion thereof upon determination of the allowed claim by the
Bankruptcy Court.




The
Debtors may reject certain pre-petition executory contracts and unexpired leases
with respect to the Debtors’ operations with the approval of the Bankruptcy
Court and may reject additional agreements in the future.  Damages
resulting from rejection of executory contracts and unexpired leases are
generally treated as general unsecured claims and will be classified as
“pre-petition liabilities subject to compromise”.  Holders of pre-petition
claims (excluding governmental claims) are required to file proofs of claims by
the “general bar date”, which is September 8, 2009.  A bar date is the
date by which certain claims against the Debtors must be filed if the claimants
wish to receive any distribution in the Chapter 11 cases.  Creditors have
been notified of the general bar date and the requirement to file a proof of
claim with the Bankruptcy Court.  Differences between liability amounts
estimated by the Debtors and claims filed by creditors will be investigated and,
if necessary, the Bankruptcy Court will make a final determination of the
allowable claim.  The determination of how liabilities will ultimately be
treated cannot be made until the Bankruptcy Court approves a Chapter 11 plan of
reorganization.  Accordingly, the ultimate amount or treatment of such
liabilities is not determinable at this time.




Pre-petition
liabilities subject to compromise consist of the following:




June 30,
              2009Secured
      notes payable
            
            $
            1,697,507Pre-petition
      accounts payable
            
            162,624Accrued
      interest on Notes
            
            85,465Total
      pre-petition liabilities subject to compromise
            
            $
            1,945,596





Pre-petition
liabilities subject to compromise include trade accounts payable related to
pre-petition purchases.  As a result, the Company’s cash flows from
operations were favorably affected by the stay of payment related to these
accounts payable.  Accrued interest represents amounts due on the Notes as
of the Petition Date.  No interest has been accrued on the Notes subsequent
to the Petition Date because such amounts are not expected to become part of an
allowed claim.











ITEM
2 .  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS





The
information contained in this Form 10-Q is intended to update the information
contained in our Annual Report on Form 10-K for the year ended December 31, 2008
and presumes that readers have access to, and will have read, the “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
other information contained in such Form 10-K.  The following
discussion and analysis also should be read together with our condensed
consolidated financial statements and the notes to the condensed consolidated
financial statements included elsewhere in this Form 10-Q.





The
following discussion contains certain statements that may be deemed
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995.  Such statements appear in a number of
places in this Report, including, without limitation, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”  These
forward-looking statements can be identified by the use of words such as
“believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,”
“projects,” “expects,” “may,” “will,” or “should” or other variations or similar
words. These statements are not guarantees of future performance and involve
risks, uncertainties and requirements that are difficult to predict or are
beyond our control.  Forward-looking statements speak only as of the
date of this quarterly report. You should not put undue reliance on any
forward-looking statements.  Forward-looking statements reflect
management’s current expectations and are inherently uncertain.  We
strongly encourage investors to carefully read the factors described in our
Annual Report on Form 10-K for the year ended December 31, 2008 in the section
entitled “Risk Factors” for a description of certain risks that could, among
other things, cause actual results to differ from these forward-looking
statements. We assume no responsibility to update the forward-looking statements
contained in this quarterly report on Form 10-Q. The following should also be
read in conjunction with the unaudited Consolidated Financial Statements and
notes thereto that appear elsewhere in this report.





Overview





Woozyfly,
Inc. was organized September 11, 2003 (Date of Inception) under the laws of the
State of Nevada, as GPP Diversified, Inc.  The business of the Company was
to sell pet products via the Internet.




The
Company was initially authorized to issue 25,000,000 shares of its no par value
common stock.  On November 9, 2005, the Company amended its articles of
incorporation to increase its authorized capital to 100,000,000 shares with a
par value of $0.001.  Concurrently, the Company changed its name from GPP
Diversifed, Inc. to Pet Express Supplies, Inc.





On July
28, 2008, Pet Express Supply, Inc. entered into an Exchange Agreement with each
of the shareholders of CJ Vision Enterprises, Inc., a Delaware corporation doing
business as Woozyfly.com, pursuant to which (i) the Company's shareholder
contributed back to the Company's treasury all but 700,000 issued and
outstanding shares of the Company's common stocks, and (ii) Pet Express Supply,
Inc. purchased from the shareholders of CJ Vision Enterprises, Inc. all issued
and outstanding shares of CJ Vision Enterprises, Inc.’s, common stock, preferred
stock and warrants to purchase CJ Vision Enterprises, Inc. stock, in
consideration for the issuance of 13,410,672 shares of common stock of Pet
Express Supply, Inc. and, to one of the shareholders of CJ Vision Enterprises,
Inc., warrants to purchase 3,776,544 shares of common stock of Pet Express. The
Share Exchange resulted in a change in control of Pet Express Supply, Inc. with
the shareholders of CJ Vision Enterprises, Inc. owning 13,410,672 shares of
common stock of Pet Express Supply, Inc. out of a total of 17,610,672
issued and outstanding shares after giving effect to the Share
Exchange.  Also, the shareholders of CJ Vision Enterprises, Inc. were
elected directors of Pet Express Supply, Inc. and appointed as its executive
officers.  As a result of the Exchange Agreement, (i) CJ Vision
Enterprises, Inc. became a wholly-owned subsidiary of Pet Express Supply, Inc.
and (ii) Pet Express Supply, Inc. succeeded to the business of CJVE as its sole
business.  Following the closing of the above transactions, Pet
Express Supply, Inc. changed its corporate name to Woozyfly,
Inc. effectuated a 6:1 stock split.








On
January 15, 2009, the Company ceased operations.  Since ceasing
operations, we have been seeking to restructure the Company’s capitalization in
order to find suitable candidates for a business combination with a private
company.  We have been unsuccessful in this attempt.  We
have a substantial amount of secured and unsecured debt. Failure to settle this
debt has caused us to petition for bankruptcy protection.





On May
12, 2009, Woozyfly or the “Debtor” filed a voluntary petition in the United
States Bankruptcy Court for the Southern District of New York (the “ Bankruptcy
Court ”) seeking reorganization relief under the provisions of Chapter 11
of Title 11 of the United States Code (the “ Bankruptcy Code ”). The
Chapter 11 case is being administered under the caption In re Woozyfly,
Inc. Case No. 09-13022 (JMP) (the “ Chapter 11 Case ”). The Debtor
will continue to operate its business as debtor in possession under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code and orders of the Bankruptcy
Court.




In
connection with the Chapter 11 Case, the Debtor filed a motion seeking
Bankruptcy Court approval of (a) an arrangement pursuant to which the
Debtor has entered into an agreement with MKM Opportunity Master Fund Ltd, as
the lender (the “DIP Loan”).  MKM lent significant monies to the Debtor
prior to the Petition Date, and has agreed to advance $100,000 as a DIP Loan to
the Company, $35,000 of which was already lent to the Debtor in order to enable
it to file the chapter 11 petition.  The Court has approved an initial
disbursement post petition, of $35,000 of the DIP Loan to the Debtor, and the
remaining $30,000 is subject to further Court determination. David Skriloff, the
Company’s Chairman of the Board is the portfolio manager for Lender. Lender is
also a creditor and stockholder of the Company. Proceeds of the loans under the
DIP Credit Agreement will be used by the Debtor for working capital and other
general corporate purposes of the Debtors and for the costs of administration of
the Chapter 11 Case. The arrangement for the use of the DIP Loan contains
certain financial and other covenants and certain events of default. On June16,
2009, the court issued an order granting the motion and authorized the Debtor to
utilize up to $35,000 on an interim basis and possibly up too $100,000 under the
DIP Loan.





The
filing of the Chapter 11 Case constituted an event of default or otherwise
triggered repayment obligations under the Company's 6% Secured Convertible Notes
due June 30, 2011 ("Convertible Notes". As a result, all indebtedness
outstanding under these facilities and the notes became automatically due and
payable, subject to an automatic stay of any action to collect, assert, or
recover a claim against the Company and the application of applicable bankruptcy
law.





Going Concern
Matters




The
ability of the Company to continue as a going concern is dependent upon, among
other things, (i) the Company’s ability to comply with the terms and
conditions of its DIP financing; (ii) the ability of the Company to
maintain adequate cash on hand; (iii) the ability of the Company to
generate cash from operations; (iv) the ability of the Company to obtain
confirmation of and to consummate a plan of reorganization under the Bankruptcy
Code; (v) the ability of the Company to find a suitable merger candidate;
(vi) the cost and outcome of the reorganization process; (vii) the
Company’s ability to obtain alternative financing; and (viii) the Company’s
ability to achieve profitability.  Uncertainty as to the outcome of these
factors raises substantial doubt about the Company’s ability to continue as a
going concern.  The Company is currently evaluating various courses of
action to address the issues the Company is facing.  There can be no
assurance that any of these efforts will be successful.




The
accompanying consolidated financial statements do not purport to reflect or
provide for the consequences of our Chapter 11 proceedings.  In
particular, the financial statements do not purport to show (i) as to
assets, their realizable value on a liquidation basis or their availability to
satisfy liabilities; (ii) as to pre-petition liabilities, the amounts that
may be allowed for claims or contingencies, or the status and priority thereof;
(iii) as to shareowners’ equity accounts, the effect of any changes that
may be made in our capitalization; or (iv) as to operations, the effect of
any changes that may be made to our business.







In
accordance with accounting principles generally accepted in the United States
(“GAAP”), we have applied American Institute of Certified Public Accountants’
Statement of Position (“SOP”) 90-7, Financial Reporting by Entities in
Reorganization under the Bankruptcy Code, in preparing the consolidated
financial statements.  SOP 90-7 requires that the financial
statements, for periods subsequent to the Chapter 11 filing, distinguish
transactions and events that are directly associated with the reorganization
from the ongoing operations of the business.  Accordingly, certain expenses
(including professional fees), realized gains and losses and provisions for
losses that are realized or incurred in the bankruptcy proceedings are recorded
in reorganization items on the accompanying Condensed Consolidated Statements of
Operations.  In addition, pre-petition obligations that may be impacted by
the bankruptcy reorganization process have been classified on the Condensed
Consolidated Balance Sheet at June 30, 2009 in “pre-petition liabilities
subject to compromise”.  These liabilities
are reported at the amounts expected to be allowed by the Bankruptcy Court, even
if they may be settled for lesser amounts.




As a
result of the Bankruptcy Filing, realization of assets and liquidation of
liabilities are subject to uncertainty.  While operating as a
debtor-in-possession under the protection of Chapter 11, and subject to
Bankruptcy Court approval or otherwise as permitted in the normal course of
business, the Debtors may sell or otherwise dispose of assets and liquidate or
settle liabilities for amounts other than those reflected in the condensed
consolidated financial statements.  Further, a plan of reorganization could
materially change the amounts and classifications reported in our consolidated
financial statements.  Our historical consolidated financial statements do
not give effect to any adjustments to the carrying value of assets or amounts of
liabilities that might be necessary as a consequence of confirmation of a plan
of reorganization.




The
potential adverse publicity associated with the Bankruptcy Filing and the
resulting uncertainty regarding the Company’s future prospects may hinder the
Company’s ongoing business activities and its ability to operate, fund and
execute its business plan by impairing relations with existing and potential
customers; negatively impacting the ability of the Company to attract, retain
and compensate key executives and employees and to retain employees generally;
limiting the Company’s ability to obtain trade credit; and impairing present and
future relationships with vendors and service providers.




Results of
Operations





For
the Three Months Ended June 30, 2009 and 2008





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses were $58,457 and zero for the three months
ended June 30, 2009 and 2008, respectively.





Interest
Income, Interest Expense and Other





Interest
expense and other, net was $12,777 and zero for the three months ended June 30,
2009 and 2008, respectively, an increase in expense of $12,777.  The
increase is principally due to increased debt.





Discontinued
Operations


Loss from
discontinued operations was $zero and $7,078 for the three months ended June 30,
2009 and 2008, respectively.




For
the Six Months Ended June 30, 2009 and 2008





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses were $90,956 and zero for the six months
ended June 30, 2009 and 2008, respectively.





Interest
Income, Interest Expense and Other





Interest
expense and other, net was $35,586 and zero for the six months ended June 30,
2009 and 2008, respectively, an increase in expense of $35,586.  The
increase is principally due to increased debt.





Discontinued
Operations


Loss from
discontinued operations was $82,441 and $12,870 for the six months ended June
30, 2009 and 2008, respectively.








Bankruptcy




As
described in more detail elsewhere in this Form 10-Q, Woozyfly filed
voluntary petitions under Chapter 11 of the Bankruptcy Code on May 12,
2009.  No assurance can be provided as to what values, if any, will be
ascribed in Woozyfly’s bankruptcy proceedings to the pre-petition liabilities,
common stock and other securities.  Accordingly, caution should be
exercised with respect to existing and future investments in any of these
liabilities or securities.




In order
to successfully exit Chapter 11 bankruptcy, Woozyfly will need to propose, and
obtain confirmation by the Bankruptcy Court of a plan of reorganization that
satisfies the requirements of the Bankruptcy Code.  A plan of
reorganization could, among other things, resolve Woozyfly’s pre-petition
obligations, set forth the revised capital structure of the newly reorganized
entity and provide for corporate governance subsequent to exit from
bankruptcy.  Although Woozyfly expects to file a reorganization plan that
provides for emergence from Chapter 11 bankruptcy some time in the future, there
can be no assurance that a reorganization plan will be proposed by Woozyfly or
confirmed by the Bankruptcy Court, or that any such plan will be
consummated.




The
Company has incurred and will continue to incur significant costs associated
with the reorganization.  The amount of these costs, which are being
expensed as incurred, are expected to significantly affect the Company’s results
of operations.




Liquidity and Capital
Resources





Overview
and Outlook




As a
result of our Bankruptcy Filing and the circumstances leading to our Bankruptcy
Filing as described elsewhere in this report, we face uncertainty regarding the
adequacy of our liquidity and capital resources and have limited access to
financing.  The Bankruptcy Filing constituted an event of default under our
pre-petition secured revolving credit facility and the indenture governing our
Notes, and the debt obligations under those agreements became automatically and
immediately due and payable, subject to the automatic stay provisions of
Section 362 of the Bankruptcy Code.




During
the pendency of the Bankruptcy Cases, we expect that our primary sources of
liquidity will be cash flows from borrowings under our DIP Facility.  In
addition to the cash requirements necessary to fund ongoing operations, we have
incurred significant professional fees and other costs in connection with the
Bankruptcy Filing and expect that we will continue to incur significant
professional fees and costs.  We cannot assure you that the amounts of cash
available from operations, together with our DIP Facility, will be sufficient to
fund our operations, including operations during the period until such time as
we are able to propose a plan of reorganization that will receive the requisite
acceptance by creditors and be confirmed by the Bankruptcy Court.  Our
long-term liquidity requirements and the adequacy of our capital resources are
difficult to predict at this time and ultimately cannot be determined until a
plan of reorganization has been developed and is confirmed by the Bankruptcy
Court.




Funds
available under our DIP Facility are expected to be sufficient to fund
operations of our business through the end of 2009.  However, funds
available under our DIP Facility cannot be used for capital expenditures beyond
those permitted in our DIP Facility budget, absent consent from the
post-petition lenders and modification of the DIP Facility
budget.





Sources
of Liquidity





Net cash used in operating activities
was $72,295 and $12,007 in the six months ended June 30, 2009 and 2008,
respectively.  The increase of $60,288 was due to the expenses
incurred in the shutting down of previous activities and preparation for
bankruptcy.





Net cash provided by financing
activities was $35,000 and zero in the six months ended June 30, 2009 and 2008,
respectively.  The increase was due to amounts borrowed under the DIP
Credit Facility








We suffered recurring losses from
operations and have an accumulated deficit of $4,259,909 at June 30,
2009.  Currently, we are a non-operating public company. We are
seeking out suitable candidates for a business combination with a private
company.  We anticipate that our existing cash and cash equivalents will
not be sufficient to fund our business needs.   Our ability to
continue may prove more expensive than we currently anticipate and we may incur
significant additional costs and expenses in connection with seeking a suitable
transaction. Since the ceasing operations, we have been seeking to restructure
the Company’s capitalization in order to find suitable candidates for a business
combination with a private company.  We have been unsuccessful in this
attempt.





On May
12, 2009, Woozyfly or the “Debtor” filed a voluntary petition in the United
States Bankruptcy Court for the Southern District of New York (the “ Bankruptcy
Court ”) seeking reorganization relief under the provisions of Chapter 11
of Title 11 of the United States Code (the “ Bankruptcy Code ”). The
Chapter 11 case is being administered under the caption In re Woozyfly,
Inc. Case No. 09-13022 (JMP) (the “ Chapter 11 Case ”). The Debtor
will continue to operate its business as debtor in possession under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code and orders of the Bankruptcy
Court.




In
connection with the Chapter 11 Case, the Debtor filed a motion seeking
Bankruptcy Court approval of (a) an arrangement pursuant to which the
Debtor has entered into an agreement with MKM Opportunity Master Fund Ltd, as
the lender (the “DIP Loan”).  MKM lent significant monies to the Debtor
prior to the Petition Date, and has agreed to advance $100,000 as a DIP Loan to
the Company, $35,000 of which was already lent to the Debtor in order to enable
it to file the chapter 11 petition.  The Court has approved an initial
disbursement post petition, of $35,000 of the DIP Loan to the Debtor, and the
remaining $30,000 is subject to further Court determination. David Skriloff, the
Company’s Chairman of the Board is the portfolio manager for Lender. Lender is
also a creditor and stockholder of the Company. Proceeds of the loans under the
DIP Credit Agreement will be used by the Debtor for working capital and other
general corporate purposes of the Debtors and for the costs of administration of
the Chapter 11 Case. The arrangement for the use of the DIP Loan contains
certain financial and other covenants and certain events of default. On June16,
2009, the court issued an order granting the motion and authorized the Debtor to
utilize up to $35,000 on an interim basis and possibly up too $100,000 under the
DIP Loan.





The
filing of the Chapter 11 Case constituted an event of default or otherwise
triggered repayment obligations under the Company's 6% Secured Convertible Notes
due June 30, 2011 ("Convertible Notes". As a result, all indebtedness
outstanding under these facilities and the notes became automatically due and
payable, subject to an automatic stay of any action to collect, assert, or
recover a claim against the Company and the application of applicable bankruptcy
law.





As of
June 30, 2009, the Debtors are in compliance with the terms of the DIP
Facility.





Inflation and
Seasonality





Inflation
has not been material to us during the past five years. Seasonality has not been
material to us.





Recent Accounting
Pronouncements





Please see Notes to Unaudited Condensed
Financial Statements, Note 1, Significant Recent Accounting
Pronouncements.





Off-Balance
Sheet Arrangements– We have no
off-balance sheet arrangements.








ITEM 3 – QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK





A smaller
reporting company is not required to provide the information required by this
Item.





ITEM
4 - CONTROLS AND PROCEDURES





EVALUATION OF DISCLOSURE CONTROLS AND
PROCEDURES.  We maintain disclosure controls and procedures
that are designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms and that such information is accumulated
and communicated to our management, including our interim President, who serves
as our principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required
disclosure.





Our
interim President reviewed and evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined by Rule
240.13a-15(e) or 15d-15(e)) of the Exchange Act Rule 13a-15 as of the end of the
period covered by this report.  Based upon this evaluation, our interim
President concluded that, as of the end of such period, our disclosure controls
and procedures are effective as of the end of the quarter
covered by this Form 10-Q.





CHANGES IN INTERNAL CONTROL OVER
FINANCIAL REPORTING.  There were no changes
in the Company’s internal control over financial reporting that occurred during
the quarter or six months ended June 30, 2009 that have materially affected, or
that are reasonably likely to materially affect, the Company’s internal control
over financial reporting.








PART II - OTHER INFORMATION





ITEM
1. Legal Proceedings





On May
12, 2009, Woozyfly or the “Debtor” filed a voluntary petition in the United
States Bankruptcy Court for the Southern District of New York (the “Bankruptcy
Court”) seeking reorganization relief under the provisions of Chapter 11 of
Title 11 of the United States Code (the “ Bankruptcy Code ”). The
Chapter 11 case is being administered under the caption In re Woozyfly,
Inc. Case No. 09-13022 (JMP) (the “Chapter 11 Case”). The Debtor will
continue to operate its business as debtor in possession under the jurisdiction
of the Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code and orders of the Bankruptcy Court.





ITEM
1A. Risk Factors





The
Company included in its Annual Report on Form 10-K as of December 31,
2008 and in its Quarterly Report on Form 10-Q for the three months ended
March 31, 2009 a description of certain risks and uncertainties that could
affect the Company’s business, future performance or financial condition (“Risk
Factors”).  There have been no material changes to the risk factors
previously disclosed.





ITEM
3. Defaults Upon Senior Securities





The
filing of the Chapter 11 Case constituted an event of default or otherwise
triggered repayment obligations under the Company's 6% Secured Convertible Notes
due June 30, 2011 ("Convertible Notes". As a result, all indebtedness
outstanding under these facilities and the notes became automatically due and
payable, subject to an automatic stay of any action to collect, assert, or
recover a claim against the Company and the application of applicable bankruptcy
law.





ITEM
      6.
            
            Exhibits10.1
            Debt
      in Possession Credit Facility between Woozyfly, Inc. and MKM Opportunity
      Master Fund, LTD.31
            Certification
      of President pursuant to Exchange Act Rule 13a-14 and 15d-14 as adopted
      pursuant to section 302 of the Sarbanes-Oxley Act of
  2002.32
            Certification
      of the Company’s Chief Executive Officer, pursuant to 18 U.S.C. Section
      1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.








SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant has caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





WOOZYFLY,
      INC.Date:
      August 13, 2009
            /s/  ERIC STOPPENHAGENName:
      Eric StoppenhagenTitle: Interim
      President














EXHIBIT
INDEX





Exhibit
            
            Description10.1
            
            Debt
      in Possession Credit Facility between Woozyfly, Inc. and MKM Opportunity
      Master Fund, LTD.31
            
            Certification
      of President pursuant to Exchange Act Rule 13a-14 and 15d-14 as adopted
      pursuant to section 302 of the Sarbanes-Oxley Act of
  2002.32
            
            Certification
      of the Company’s Chief Executive Officer, pursuant to 18 U.S.C. Section
      1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.