10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2009

OR

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

For the Transition Period from                      to

Commission File No.  333-124829

ZOO ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

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

3805 Edwards Road, Suite 400

Cincinnati, Ohio  45209

(Address of principal executive office)

Registrant’s telephone number, including area code (513) 824-8297

Securities registered pursuant to Section 12(b) of the Act: NONE

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

Common Stock, Par Value $0.001

(Title of class)

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

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 has submitted electronically and posted on its corporate web site, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein and, will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer   o (Do not check if a smaller reporting company) Smaller reporting company þ

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

     The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which the common stock was last sold on the OTC Bulletin Board on June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter was $17.4 million.

     As of March 30, 2010, the registrant had 2,778,409,829 shares of common stock outstanding.

TABLE OF CONTENTS

	Page
PART I
Item 1. Business	1
Item 1A. Risk Factors	8
Item 1B. Unresolved Staff Comments	22
Item 2. Properties	22
Item 3. Legal Proceedings	23
Item 4. (Removed and Reserved)	23
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23
Item 6. Selected Financial Data	25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	41
Item 8. Financial Statements and Supplementary Data	41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	41
Item 9A(T). Controls and Procedures	42
Item 9B. Other Information	43
PART III
Item 10. Directors, Executive Officers and Corporate Governance	44
Item 11. Executive Compensation	48
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	51
Item 13. Certain Relationships and Related Transactions and Director Independence	54
Item 14. Principal Accountant Fees and Services	59
PART IV
Item 15. Exhibits, Financial Statement Schedules	60

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995  

Information included in this Annual Report on Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical facts included in this Annual Report on Form 10-K regarding our strategy, future operations, future financial position, projected expenses, prospects and plans and objectives of management are forward-looking statements. These statements may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from our future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology. Forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that any projections or other expectations included in any forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors, including the risk factors described in greater detail in the section entitled “Risk Factors.” Except as required by applicable laws, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

PART I

Item 1.  Business.

In this section, unless the context otherwise indicates, references to “we,” “us,” “our,” “ours,” and “the Company” refer to Zoo Entertainment, Inc. (formerly known as Driftwood Ventures, Inc.) and its operating and wholly-owned subsidiary, Zoo Games, Inc. (formerly known as Green Screen Interactive Software, Inc.) and its operating and wholly-owned subsidiary, Zoo Publishing, Inc. (formerly known as Destination Software, Inc.).

Company History

Zoo Entertainment, Inc. (“Zoo” or the “Company”) was originally incorporated in the State of Nevada on February 13, 2003 under the name Driftwood Ventures, Inc.  On December 20, 2007, through a merger, the Company reincorporated in the State of Delaware as a public shell company with no operations.

On September 12, 2008, our wholly-owned subsidiary, DFTW Merger Sub, Inc., merged with and into Zoo Games, Inc. (“Zoo Games”), with Zoo Games being the surviving corporation, through an exchange of common stock of Zoo Games for common stock of the Company.  Effective as of the closing of the merger, Zoo Games became our wholly-owned subsidiary.  As a result thereof, the historical and current business operations of Zoo Games now comprise the Company’s principal business operations.   

On December 3, 2008, the Company changed its name to “Zoo Entertainment, Inc.”

Zoo Games commenced operations in March 2007 as Green Screen Interactive Software, LLC, a Delaware limited liability company, and in May 2008, converted to a Delaware corporation. On August 14, 2008, it changed its name to Zoo Games, Inc. Since its initial organization and financing, Zoo Games embarked on a strategy of partnering with and acquiring companies with compelling intellectual property, distribution capabilities, and management with demonstrated records of success.

In June 2007, Zoo Games acquired the assets of Supervillain Studios, Inc. which were held by a wholly-owned subsidiary of Zoo Games, Supervillain Studios, LLC (“Supervillain”).  The acquisition provided Zoo Games with access to proprietary high end casual gaming content, established video game designers, technical experts and producers capable of providing Zoo Games with high quality, original casual games. On July 22, 2008, Zoo Games released Order Up!, its first offering from Supervillain.   In our effort to refocus our cash on our core business, we sold Supervillain back to its original owners on September 16, 2008.

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In December 2007, Zoo Games acquired the capital stock of Destination Software, Inc. (now known as Zoo Publishing, Inc., “Zoo Publishing”). The acquisition of Zoo Publishing provided Zoo Games with a core business, North American distribution, and further enhanced its experienced management team. Zoo Publishing distributes software titles throughout North America and generated over $30 million in annual revenue in 2007. Zoo Publishing expects to exploit its development expertise, in combination with its sales, marketing and licensing expertise, to target the rapidly expanding market for casual games, particularly on Nintendo’s platforms, where Zoo Publishing has experienced considerable success. By nurturing and growing this business unit, Zoo Games believes it will be able to rapidly build a much larger distribution network, enabling it to place a significant number of software titles with major retailers.

In April 2008, Zoo Games acquired the capital stock of Zoo Digital Publishing Limited (“Zoo Digital”), a business operated in the United Kingdom. This acquisition provided Zoo Games with a profitable core business in the United Kingdom, European distribution, and further enhanced its experienced management team. Zoo Digital distributes software titles throughout Europe and generated over $6.8 million in annual revenue in 2007.  In our effort to refocus our cash on our core business operations, Zoo Publishing, we sold Zoo Digital back to its original owners on November 28, 2008.

In June 2009, we formed a new company in the United Kingdom that is a wholly-owned subsidiary of Zoo Games called Zoo Entertainment Europe Ltd. (“Zoo Europe”), to focus on the sales and distribution of our products in Europe. In our effort to refocus our cash on our core business operations, we decided to discontinue operations of Zoo Europe effective December 2009.

Our principal executive offices are located at 3805 Edwards Road, Suite 400 Cincinnati, OH 45209 and our telephone number is (513) 824-8297. Our web site address is www.zoogamesinc.com.

Overview

We are a developer, publisher and distributor of video game software for use on major platforms including Nintendo’s Wii, DS, GBA, Sony’s PSP, PlayStation 2 and iPhone.  We are also a distributor of video game software for use on Microsoft’s Xbox 360.   In addition, we intend to publish packaged entertainment software titles for use on a variety of other gaming platforms including Sony’s PlayStation 3. We will also seek to create and sell downloadable games for Microsoft’s Xbox Live Arcade, Sony’s PlayStation Network, Nintendo’s Virtual Console, and for use on personal computers (PCs).

Our current video game titles are targeted at various demographics but primarily at the lower-priced “value” market. In some instances, these titles are based on licenses of well-known properties and, in other cases based on original properties. We collaborate and enter into agreements with content providers and video game development studios for the creation of our video games.

We also operate a site called 2beegames.com which can be found at www.2beegames.com .  We hold contests for independent developers whereby they can enter their games to win monetary prizes and potential publishing arrangements with us.  This site allows us to attract fresh intellectual property, lower production costs, decrease time to market, and improve margins.

Industry Overview

The interactive entertainment industry is mainly comprised of video game hardware platforms, video game software and peripherals. Within this industry, combined sales of video game hardware, video game software and video game peripherals in the United States totaled $19.66 billion in 2009 according to the NPD Group, a retail market research firm. Of that total, hardware sales reached $7.3 billion, software sales totaled $10.5 billion, and peripheral accessory sales summed $1.8 billion. The industry, which started in the 1970’s and 80’s with titles such as Pong and Pac-Man, continues to expand at a rapid pace.  Even in difficult economic times, the video game industry finished strongly in 2009.  The NPD Group reports industry sales in the U.S. were $5.53 billion for the month of December 2009, up 5% from the month of December 2008.  This was driven primarily by $2.19 billion in hardware sales and software sales totaling $2.58 billion for the month of December 2009.  65% of all Americans claim to play PC and video games. The average video game player is 32 years old and has been playing for nearly 12 years.

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The introductions of new gaming platforms such as the PS3, Xbox 360, Wii, and the Internet have created additional opportunities for overall market growth. Throughout the world, consumers are spending significant time and money playing video games that range from the traditional console titles, to “massively multiplayer” online role-playing games (MMOs), to hand-held cell phone games. The online gaming experience has expanded both the audience and the revenue opportunities for games - offering at one end of the spectrum new types of games for more casual gamers - and, at the other end, large-scale subscription multi-player experiences for more sophisticated gamers. The online games business was projected by PricewaterhouseCoopers to almost double from worldwide revenues of $5.2 billion in 2005 to $9.8 billion in 2009. Gaming on mobile phones, still relatively new, is anticipated to hit $10 billion in 2009. PricewaterhouseCoopers projects the total worldwide gaming market to approach $49 billion by 2011.

The interactive entertainment software market is composed of two primary markets. The first is the console systems market, which is comprised of software created for dedicated game consoles that use a television as a display. The most recently released console systems include Sony’s PS3, Microsoft’s Xbox360, and Nintendo’s Wii. The second primary market is software created for use on personal computers (PCs). In addition to these primary markets, additional viable markets exist for the Internet, mobile/handheld systems (mobile phones, Sony PSP, Nintendo DS, Nintendo DSi) and for interactive play on home DVD machines.

The overall growth trends within the interactive entertainment software industry are strong. The content is becoming more broadly appealing, allowing the industry to continue to capture the younger consumer while retaining the older player with content that is more relevant to them. In addition, we believe that the global popularity of video games coupled with the growing base of available markets will continue to permit publishers to substantially grow revenues and profits for the foreseeable future.

Interactive Entertainment Software Markets:

Console Systems : The console systems market is currently dominated by three major platforms: Microsoft’s Xbox 360, Sony’s PlayStation 3 and Nintendo’s Wii. These systems are now installed on an aggregate worldwide basis in well over 100 million households. The console market is characterized by generational transitions in the hardware (i.e., Sony’s PlayStation 2 to PlayStation 3), which traditionally have been times of adaptation for existing publishers and times of opportunity for emerging publishers.

With the launch of the Xbox 360 platform in late 2005, and the 2007 launches of Sony’s PS3 and Nintendo’s Wii, the next console transition is in full force.  Cumulative worldwide sales for the Nintendo Wii reached 50 million units in March 2009, making this the fastest-selling games console in history, surpassing Sony’s Playstation 2.  Sales for all three major consoles have continued to be very strong.  As of February 2010, Nintendo Wii, Xbox 360, and Sony’s PlayStation 3 have reached worldwide cumulative sales of over 68 million, 38 million, and 32 million units respectively.  Improvements on next-generation peripherals such as the Wii Balance Board or the Playstation 3 Eyetoy have also contributed to increased sales in the total industry.  In 2010, two highly anticipated peripherals will be hitting the market—Microsoft’s Project Natal and Sony’s Playstation Move.  These additions to the next-gen consoles will push both hardware and software sales through the 2010 holiday season, and allow for unprecedented creative and market opportunities with software developers and publishers. We believe that video game publishers will be able to generate increased margins as the installed base of Xbox 360, PS3 and Wii achieves critical mass.

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PC Systems : The Gartner Group, a market research firm, estimates that by the end of 2012 nearly 77% of US households will have at least one broadband connected computer. The increase in PC ownership appears to be spurred by lower-cost Pentium-based processing systems, which incorporate higher-speed CD-ROM or DVD drives, modems and increasingly sophisticated graphics capabilities, and by the continued growth and interest in the Internet.  PC games are also becoming more accessible for players due to websites such as Steam.  Steam allows developers and publishers to post downloadable games in which consumers can purchase and download directly through the site in an efficient manner. Revenue from PC games in 2009 reached $13.1 billion (up 3% from 2008) according to the PC Gaming Alliance's 2009 Horizons Report.  This total not only includes retail sales but also online ads and digital distribution.  The survey also finds that over 70% of PC Gamers in North America and Europe have purchased a full game online, and over 50% say they have purchased a virtual item.

Mobile/Handheld Systems : With more than five million units sold worldwide within months of launch, the Sony PSP and Nintendo DS demonstrated the vitality of the handheld games business, previously dominated by Nintendo’s Gameboy product line.  The Nintendo DS has been the most successful handheld gaming console in the marketplace, selling over 127 million units worldwide as of February 2010.  As of November 26, 2008, 396 titles have released for Sony PSP with an average of 133,000 units sold per title, while 653 titles have released for Nintendo DS with an average of 163,000 units sold per title, as reported in NPD Data.  This success has fueled Nintendo to release a new handheld platform, the DSi along with DS 3D.  The portable gaming system sold two million units in Japan during the first five months of availability.  The U.S. launch was April 5, 2009.  According to Nintendo, 6.16 million Nintendo DSi units were sold in the US in 2009, bringing the worldwide sales to 16.43 million units through December 2009.  The Sony PSP has seen strong sales numbers as well, reaching sales of over 56 million units worldwide as of February 2010.  The market for “portable” games has been substantially enhanced by the rise of more powerful mobile phones (i.e. Apple’s iPhone) and the increased bandwidth of mobile networks (i.e. the 3G & 4G Networks).  The Apple iPhone has not only revolutionized portable gaming, but it has also dominated the market. According to a July 2009 report from FADE LLC, the iPhone gaming market controls $250 million in revenue since its launch in July of 2008, making it larger than any console’s digital game service (XBLA, PSN, WiiWare/VC).

Internet : The next generation of hardware is resulting in a significantly higher percentage of consoles connected to the Internet. Publishers will be able to generate new revenue streams from the sale of downloadable games and from subscription revenues for participation in MMOs and other micro-transaction based games. Using systems such as Xbox Live Arcade and PS3 Network (Home), publishers now have the ability to distribute downloadable products over the Internet. In addition, the MMO genre continues on its high growth path, with revenue expected to grow over 150% from 2006 through 2011 according to DFC Intelligence, a market research firm.  Social gaming has become a more recent phenomena. Social games are generally casual yet structured online games through which users can engage with one another. In February 2010, Information Services Group (ISG) released survey results on U.S. and U.K. online social gaming. According to the survey, one hundred million people are playing social games online. Facebook is the most popular destination for online games, with 83% of respondents saying they have played games there. ISG also finds that social games are quite the lucrative business. Twenty-eight percent have purchased in-game currency with real-world money, and social games are expected to generate $1 billion in revenue this year.

In-Game Advertising Revenues : In-game advertising revenue is expected to be an additional area of growth with the widespread adoption of the new console systems. Advertisers have become aware of the increasing popularity of video games as they look to expand into alternative platforms. According to analysts at CitiGroup, the in-game advertising market should reach $1.0 billion in revenue by 2014, marking a 40% growth from an expected $600 million in revenue in 2009. PricewaterhouseCoopers estimates in-game advertising revenue to reach $1.4 billion by 2013.

We believe the outlook for the various gaming market segments is very strong, growing rapidly, and accessible to us.

Products

We are a developer, publisher and distributor of casual gaming software for use on major platforms including Nintendo’s Wii, DS, GBA Sony’s PSP and PlayStation 2 and PCs, X-Box 360, and iPhone.

In 2009, we released the following games:

On the Nintendo Wii Platform:

ARCADE SHOOTING GALLERY

ATV QUAD KINGS

BIGFOOT COLLISION COURSE

BUILD N RACE

CHICKEN BLASTER

CHRYSLER CLASSIC RACING

COLDSTONE SCOOP IT UP

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DEAL OR NO DEAL

DEER DRIVE

DODGE RACING

DREAM DANCE & CHEER

GLACIER 2

GROOVIN BLOCKS

JELLY BELLY BALLISTIC BEAN

M&M'S BEACH PARTY

MONSTER TRUCK MAYHEM

PACIFIC LIBERATOR

PUZZLE KINGDOMS

SMILEY WORLD ISLAND CHALLENGE

ULTIMATE DUCK HUNTING

YAMAHA SUPERCROSS

On the Nintendo Wii Platform with Peripherals:

CHICKEN BLASTER WITH GUN

CHICKEN SHOOT WITH GUN

DEER DRIVE W ITH GUN

ULTIMATE  DUCK HUNTING WITH GUN

On the Nintendo DS Platform:

ANIMAL PARADISE WILD

BIGFOOT COLLISION COURSE

CHICKEN BLASTER

DINER DASH: FLO ON THE GO

DODGE RACING

DREAM DANCER

DREAM SALON

GARFIELD GETS REAL

HELLO KITTY BIG CITY DREAMS

HISTORY CHANNEL GREAT EMPIRE

JELLY BELLY BALLISTIC BEAN

MARGOTS BEPUZZLED

PUZZLE KINGDOMS

SMILEY WORLD ISLAND CHALLENGE

WEDDING DASH

YAMAHA SUPER CROSS RACING

On the Sony PS2 Platform:

SUZUKI TT SUPERBIKES 2

On the Microsoft Xbox Platform:

RAIDEN FIGHTER ACES

SKI DOO SNOWMOBILE CHALLENGE

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Product Development

We use third party development studios to create our video game products. We carefully select third parties to develop video games based on their capabilities, suitability, availability and cost. We usually have broad rights to commercially utilize products created by the third party developers we work with. Development contracts are structured to provide developers with incentives to provide timely and satisfactory performance by associating payments with the achievement of substantive development milestones, and sometimes by providing for the payment of royalties to them based on sales of the developed product, only after we recoup development costs.

Customers

Our customers are comprised of national and regional retailers, specialty retailers and video game rental outlets. We believe we have developed close relationships with a number of retailers, including GameStop, Kmart and Target.  We also have strong relationships with Atari, Jack of All Games (“JOAG”). Cokem and Filpoint SVG, who act as resellers of our products to smaller retail outlets and provide program buying for Wal-Mart, Best Buy and other larger customers. For the year ended December 31, 2009, our most significant customers were Cokem, JOAG (via Atari) and GamesSop, which accounted for approximately 29%, 21% and 11% of our net revenue, respectively.  For the fiscal year ended 2008, our most significant customers were JOAG and Cokem, which accounted for approximately 30% and 14% of our net revenue, respectively.

Competition

The interactive entertainment software industry is highly competitive. It is characterized by the continuous introduction of new titles and the development of new technologies. Our competitors vary in size from very small companies with limited resources to very large corporations with greater financial, marketing and product development resources than us.

The principal factors of competition in our industry are:

• the ability to select and develop popular titles;

• the ability to identify and obtain rights to commercially marketable intellectual properties; and

• the ability to adapt products for use with new technologies.

Successful competition in our industry is also based on price, access to retail shelf space, product quality, product enhancements, brand recognition, marketing support and access to distribution channels.

We compete with Microsoft, Nintendo and Sony, which publish software for their respective systems. We also compete with numerous companies licensed by the platform manufacturers to develop or publish software products for use with their respective systems. These competitors include Activision Blizzard, Inc., Atari, Inc., Capcom Interactive, Inc., Electronic Arts, Inc., Konami, Corp., Majesco Entertainment Company, Namco Networks America, Inc., SCi Entertainment Group PLC, Sega Corporation, Take-Two Interactive Software, Inc., THQ, Inc., Ubisoft Entertainment and Vivendi Universal Games, among others. We will face additional competition from the entry of new companies into the video game market, including large diversified entertainment companies as well as other independent publishing companies.

Many of our competitors have significantly greater financial, marketing and product development resources than we do. As a result, current and future competitors may be able to:

• respond more quickly to new or emerging technologies or changes in customer preferences;

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• undertake more extensive marketing campaigns;

• adopt more aggressive pricing policies;

• devote greater resources to secure rights to valuable licenses and relationships with leading software developers;

• gain access to wider distribution channels; and

• have better access to prime shelf space.

There is also intense competition for shelf space among video game developers and publishers, all of whom have greater brand name recognition, significantly more titles and greater leverage with retailers and distributors than we do. In addition, regardless of our competitors’ financial resources or size, our success depends on our ability to successfully execute our competitive strategies.

We believe that large diversified entertainment, cable and telecommunications companies, in addition to large software companies, are increasing their focus on the interactive entertainment software market, which will likely result in consolidation and greater competition.

We also compete with providers of alternative forms of entertainment, such as providers of non-interactive entertainment, including movies, television and music, and sporting goods providers. If the relative popularity of video games were to decline, our revenues, results of operations and financial condition likely would be harmed.

These competitive factors may result in price reductions, reduced gross margins and loss of market share, and may have a material adverse effect on our business.

Intellectual Property

Platform Licenses:

Hardware platform manufacturers require that publishers and developers obtain licenses from them to develop and publish titles for their platforms. We currently have licenses from Sony to develop and publish products for PlayStation, PlayStation 2, Playstation 3, PSP Go and PSP, and from Nintendo to develop products for the GBA, GameCube, DS, Wii, Dsi, Steam, PSN, Wii Ware, DSi Ware and Micro.  We are also licensed by Apple to produce applications on iPhone.  These licenses are non-exclusive and must be periodically renewed.  These companies generally have approval over games for their platforms, on a title-by-title basis, at their discretion. 

Licenses from Third Parties:

While we develop and publish original titles, many of our titles are based on rights, licenses, and properties, including copyrights and trademarks, owned by third parties.  In addition, original titles many times include third party licensed materials such as software and music.  License agreements with third parties have variable terms and are terminable on a variety of events.  Licensors often have fairly strict approval rights.  We are often required to make minimum guaranteed royalty payments over the term of such licenses, including advance payments against these guarantees.     

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Trademarks, Trade Names and Copyrights:

Zoo Games and its subsidiaries have used and applied to register certain trademarks to distinguish our products from those of our competitors in the United States and in foreign countries. Zoo Games and its subsidiaries are also licensed to use certain trademarks, copyrights and technologies.  We believe that these trademarks, copyrights and technologies are important to our business. The loss of some of our intellectual property rights might have a negative impact on our financial results and operations.

Seasonality

The interactive entertainment business is highly seasonal, with sales typically higher during the peak holiday selling season during the fourth quarter of the calendar year. Traditionally, the majority of our sales for this key selling period ship in our fiscal fourth quarter, which ends on December 31. Significant working capital is required to finance the manufacturing of inventory of products that ship during this quarter.

Manufacturing

Sony, Nintendo and Microsoft control the manufacturing of our products that are compatible with their respective video game consoles and ship the products to us for distribution. Video games for Microsoft, Nintendo and Sony game consoles consist of proprietary format CD-ROMs or DVD-ROMs and are typically delivered to us within the relatively short lead time of approximately two to three weeks. Sony PSP products adhere to a similar production time frame, but use a proprietary media format called a Universal Media Disc, or UMD.

With respect to DS products, which use a cartridge format, Nintendo typically delivers these products to us within 30 to 40 days after receipt of a purchase order.

Initial production quantities of individual titles are based upon estimated retail orders and consumer demand. At the time a product is approved for manufacturing, we must generally provide the platform manufacturer with a purchase order for that product, and either cash in advance or an irrevocable letter of credit for the entire purchase price. To date, we have not experienced any material difficulties or delays in the manufacture and assembly of our products. However, manufacturers’ difficulties, which are beyond our control, could impair our ability to bring products to the marketplace in a timely manner.

Employees

As of March 15, 2010, we had twenty-nine (29) full-time employees and one (1) part-time employee; of our employees, six (6) are in product development, nineteen (19) are in selling, general and administrative functions, and four (4) full-time employees and one (1) part-time employee are located at a third-party warehouse. None of our employees are represented by a labor union or are parties to a collective bargaining agreement, and we believe our relationship with our employees is good.

Item 1A. Risk Factors .

You should carefully consider each of the risks described below and other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes and those of our predecessor companies. The following risks and the risks described elsewhere in this Annual Report on Form 10-K, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” could materially affect our business, prospects, financial condition, operating results or cash flow. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also adversely affect our business. If any of these risks materialize, the trading price of our common stock could decline.

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Risks Related to Our Business

We have experienced operating losses since our inception, and may incur future losses.  

We have incurred start-up costs, restructuring costs, impairment of goodwill and other intangible assets, and losses from discontinued operations during the past two and a half years. Through December 31, 2009, we have cumulative losses of approximately $45.1 million. If we do become profitable, we may not be able to sustain our profitability. Continued losses or an inability to sustain profitability may have an adverse effect on our future operating prospects.

Our business activities may require additional financing that might not be obtainable on acceptable terms, if at all, which could have a material adverse effect on our financial condition, liquidity and our ability to operate going forward.

Although there can be no assurance, our management believes that based on our current plan there are sufficient capital resources from operations, including our factoring and purchase order financing arrangements, to finance our immediate operational requirements. We may need to raise additional capital or incur debt to strengthen our cash position, facilitate expansion, pursue strategic investments or to take advantage of business opportunities as they arise.  

Failure to obtain financing or obtaining financing on unfavorable terms could result in a decrease in our stock price and could have a material adverse effect on our financial condition, and could require us to significantly reduce operations.

If our products fail to gain market acceptance, we may not have sufficient revenues to pay our expenses and to develop a continuous stream of new games.  

Our success depends on generating revenues from existing and new products. The market for video game products is subject to continually changing consumer preferences and the frequent introduction of new products. As a result, video game products typically have short market lives spanning only three to twelve months. Our products may not achieve and sustain market acceptance sufficient to generate revenues to cover our costs and allow us to become profitable. If our products fail to gain market acceptance, we may not have sufficient revenues to develop a continuous stream of new games, which we believe is essential to covering costs and achieving future profitability.

Product development schedules are long and frequently unpredictable, and we may experience delays in introducing products, which may adversely affect our revenues.  

The development cycle for certain of our products can exceed one year. In addition, the creative process inherent in video game development makes the length of the development cycle difficult to predict, especially in connection with products for a new hardware platform involving new technologies. As a result, we may experience delays in product introductions. If an unanticipated delay affects the release of a video game we may not achieve anticipated revenues for that game, for example, if the game is delayed until after an important selling season or after market interest in the subject matter of the game has begun to decline. A delay in introducing a video game could also require us to spend more development resources to complete the game, which would increase costs and lower margins, and could affect the development schedule for future products.

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The global economic downturn could result in a reduced demand for our products and increased volatility in our stock price.

Current uncertainty in global economic conditions pose a risk to the overall economy as consumers and retailers may defer or choose not to make purchases in response to tighter credit and negative financial news, which could negatively affect demand for our products. Additionally, due to the weak economic conditions and tightened credit environment, some of our retailers and distributors may not have the same purchasing power, leading to lower purchases of our games for placement into distribution channels. Consequently, demand for our products could be materially different from expectations, which could negatively affect our profitability and cause our stock price to decline.

Our market is subject to rapid technological change, and if we do not adapt to, and appropriately allocate our resources among, emerging technologies, our revenues will be negatively affected.  

Technology changes rapidly in the interactive entertainment industry. We must continually anticipate and adapt our products to emerging technologies. When we choose to incorporate a new technology into a product or to develop a product for a new platform, operating system or media format, we will likely be required to make a substantial investment one to two years prior to the introduction of the product. If we invest in the development of video games incorporating a new technology or for a new platform that does not achieve significant commercial success, our revenues from those products likely will be lower than we anticipated and may not cover our development costs. If, on the other hand, we elect not to pursue the development of products incorporating a new technology or for new platforms that achieve significant commercial success, our potential revenues would also be adversely affected, and it may take significant time and resources to shift product development resources to that technology or platform. Any such failure to adapt to, and appropriately allocate resources among, emerging technologies would harm our competitive position, reduce our market share and significantly increase the time we take to bring popular products to market.

Customer accommodations could materially and adversely affect our business, results of operations, financial condition, and liquidity.  

When demand for our product offerings falls below expectations, we may negotiate accommodations to retailers or distributors in order to maintain our relationships with our customers and access to our sales channels. These accommodations include negotiation of price discounts and credits against future orders commonly referred to as price protection. At the time of product shipment, we establish reserves for price protection and other similar allowances. These reserves are established according to our estimates of the potential for markdown allowances based upon our historical rates, expected sales, retailer inventories of products and other factors. We cannot predict with certainty whether existing reserves will be sufficient to offset any accommodations we will provide, nor can we predict the amount or nature of accommodations that we will provide in the future. If actual accommodations exceed our reserves, our earnings would be reduced, possibly materially. Any such reduction may have an adverse effect on our business, financial condition or results of operations. The granting of price protection and other allowances reduces our ability to collect receivables and impacts our availability for advances from our factoring arrangement. The continued granting of substantial price protection and other allowances may require additional funding sources to fund operations, but there can be no assurance that such funds will be available to us on acceptable terms, if at all.

Significant competition in our industry could adversely affect our business.

The interactive entertainment software industry is highly competitive. It is characterized by the continuous introduction of new titles and the development of new technologies. Our competitors vary in size from very small companies with limited resources to very large corporations with greater financial, marketing and product development resources than us.

Many of our competitors have significantly greater financial, marketing and product development resources than we do. As a result, current and future competitors may be able to:

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· respond more quickly to new or emerging technologies or changes in customer preferences;

· undertake more extensive marketing campaigns;

· adopt more aggressive pricing policies;

· devote greater resources to secure rights to valuable licenses and relationships with leading software developers;

· gain access to wider distribution channels; and

· have better access to prime shelf space.

If we are unable to compete successfully, we could lose sales, market share, opportunities to license marketable intellectual property and access to next-generation platform technology. We also could experience difficulty hiring and retaining qualified software developers and other employees. Any of these consequences would significantly harm our business, results of operations and financial condition.

If game platform manufacturers refuse to license their platforms to us or do not manufacture our games on a timely basis or at all, our revenues would be adversely affected.  

We intend to sell our products for use on proprietary game platforms manufactured by other companies, including Microsoft, Nintendo and Sony. These companies can significantly affect our business because:

· we may only publish their games for play on their game platforms if we receive a platform license from them, which is renewable at their discretion;

· we must obtain their prior review and approval to publish games on their platforms;

· if the popularity of a game platform declines or, if the manufacturer stops manufacturing a platform, does not meet the demand for a platform or delays the introduction of a platform in a region important to us, the games that we have published and that we are developing for that platform would likely produce lower sales than we anticipate;

· these manufacturers control the manufacture of, or approval to manufacture, and manufacturing costs of our game discs and cartridges;

· these manufacturers have the exclusive right to (1) protect the intellectual property rights to their respective hardware platforms and technology and (2) discourage others from producing unauthorized software for their platforms that compete with our games; and

· the manufacturing times, particularly in the fourth quarter, can be quite long. We may be unable to manufacture our products in a timely manner, if at all, to meet holiday or other demands.

We currently have licenses from Sony to develop products for PlayStation, PlayStation 2 and PSP, and from Nintendo to develop products for the GBA, the DS and Wii. These licenses are non-exclusive, and as a result, many of our competitors also have licenses to develop and distribute video game software for these systems. These licenses must be periodically renewed, and if they are not, or if any of our licenses are terminated or adversely modified, we may not be able to publish games for such platforms or we may be required to do so on less attractive terms. In addition, the interactive entertainment software products that we intend to develop for platforms offered by Nintendo or Sony generally are manufactured exclusively by that platform manufacturer or its approved replicator. These manufacturers generally have approval and other rights that will provide them with substantial influence over our costs and the release schedule of such products. Each of these manufacturers is also a publisher of games for its own hardware platform. A manufacturer may give priority to its own products or those of our competitors, especially if their products compete with our products. Any unanticipated delays in the release of our products or increase in our development, manufacturing, marketing or distribution costs as a result of actions by these manufacturers would significantly harm our business, results of operations and financial condition.

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Failure to renew our existing brand and content licenses on favorable terms or at all and to obtain additional licenses would impair our ability to introduce new products and services or to continue to offer our products and services based on third-party content.

Some of our revenues are derived from our products and services based on or incorporating brands or other intellectual property licensed from third parties. Any of our licensors could decide not to renew our existing license or not to license additional intellectual property and instead license to our competitors or develop and publish its own products or other applications, competing with us in the marketplace. Several of these licensors already provide intellectual property for other platforms, and may have significant experience and development resources available to them should they decide to compete with us rather than license to us. In the past, competitors have successfully outbid us for licenses that we previously held.

We have both exclusive and non-exclusive license arrangements and both licenses that are global and licenses that are limited to specific geographies. Our licenses generally have terms that range from two to five years. We may be unable to renew these licenses or to renew them on terms favorable to us, and we may be unable to secure alternatives in a timely manner. Failure to maintain or renew our existing licenses or to obtain additional licenses would impair our ability to introduce new products and services or to continue to offer our current products or services, which would materially harm our business, operating results and financial condition. Some of our existing licenses impose, and licenses that we obtain in the future might impose, development, distribution and marketing obligations on us. If we breach our obligations, our licensors might have the right to terminate the license which would harm our business, operating results and financial condition.

Even if we are successful in gaining new licenses or extending existing licenses, we may fail to anticipate the entertainment preferences of our end users when making choices about which brands or other content to license. If the entertainment preferences of end users shift to content or brands owned or developed by companies with which we do not have relationships, we may be unable to establish and maintain successful relationships with these developers and owners, which would materially harm our business, operating results and financial condition. In addition, some rights are licensed from licensors that have or may develop financial difficulties, and may enter into bankruptcy protection under U.S. federal law or the laws of other countries. If any of our licensors files for bankruptcy, our licenses might be impaired or voided, which could materially harm our business, operating results and financial condition.

Rating systems for interactive entertainment software, potential legislation and vendor or consumer opposition could inhibit sales of our products.  

Trade organizations within the video game industry require digital entertainment software publishers to provide consumers with information relating to graphic violence, profanity or sexually explicit material contained in software titles, and impose penalties for noncompliance. Certain countries have also established similar rating systems as prerequisites for sales of digital entertainment software in their countries. In some instances, we may be required to modify our products to comply with the requirements of these rating systems, which could delay the release of those products in these countries. We believe that we comply with such rating systems and properly display the ratings and content descriptions received for our titles. Several proposals have been made for legislation to regulate the digital entertainment software, broadcasting and recording industries, including a proposal to adopt a common rating system for digital entertainment software, television and music containing violence or sexually explicit material, and the Federal Trade Commission has issued reports with respect to the marketing of such material to minors. Consumer advocacy groups have also opposed sales of digital entertainment software containing graphic violence or sexually explicit material by pressing for legislation in these areas, including legislation prohibiting the sale of certain ‘‘M’’ rated video games to minors, and by engaging in public demonstrations and media campaigns. Retailers may decline to sell digital entertainment software containing graphic violence or sexually explicit material, which may limit the potential market for our ‘‘M’’ rated products, and adversely affect our operating results. If any groups, whether governmental entities, hardware manufacturers or advocacy groups, were to target our ‘‘M’’ rated titles, we might be required to significantly change or discontinue a particular title, which could adversely affect our business.

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We could also experience delays in obtaining ratings which would adversely impact our ability to manufacture products.

We are dependent on third parties to manufacture our products, and any delay or interruption in production would negatively affect both our ability to make timely product introductions and our results of operations.  

All of our products are manufactured by third parties who set the manufacturing prices for those products. Therefore, we depend on these manufacturers, including platform manufacturers, to fill our orders on a timely basis and to manufacture our products at an acceptable cost. If we experience manufacturing delays or interruptions, it would harm our business and results of operations.

We may be unable to develop and publish new products if we are unable to secure or maintain relationships with third party video game software developers.

We utilize the services of independent software developers to develop our video games. Consequently, our success in the video game market depends on our continued ability to obtain or renew product development agreements with quality independent video game software developers. However, we cannot assure you that we will be able to obtain or renew these product development agreements on favorable terms, or at all, nor can we assure you that we will be able to obtain the rights to sequels of successful products which were originally developed for us by independent video game software developers.

Many of our competitors have greater financial resources and access to capital than we do, which puts us at a competitive disadvantage when bidding to attract independent video game software developers. We may be unable to secure or maintain relationships with quality independent video game software developers if our competitors can offer them better shelf access, better marketing support, more development funding, higher royalty rates, more creative control or other advantages. Usually, our agreements with independent software developers are easily terminable if either party declares bankruptcy, becomes insolvent, ceases operations or materially breaches its agreement.

We have less control over a game developed by a third party because we cannot control the developer’s personnel, schedule or resources. In addition, any of our third-party developers could experience a business failure, be acquired by one of our competitors or experience some other disruption. Any of these factors could cause a game not to meet our quality standards or expectations, or not to be completed on time or at all. If this happens with a game under development, we could lose anticipated revenues from the game or our entire investment in the game.

Our failure to manage our growth and expansion effectively could adversely affect our business.

Our ability to successfully offer our products and implement our business plan in a rapidly evolving market requires an effective planning and management process. We expect to increase the scope of our operations domestically and internationally. This growth will continue to place a significant strain on management systems and resources. If we are unable to effectively manage our growth or scale our development, our business could be adversely affected.

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The acquisition of other companies, businesses or technologies could result in operating difficulties, dilution or other harmful consequences.

We have made acquisitions and, although we have no present intention to do so, we may pursue further acquisitions, any of which could be material to our business, operating results and financial condition. Certain of our acquired companies were subsequently disposed during the past two and a half years.  These acquisitions resulted in operating losses and losses from dispositions.  Future acquisitions could divert management’s time and focus from operating our business. In addition, integrating an acquired company, business or technology is risky and may result in unforeseen operating difficulties and expenditures. We may also raise additional capital for the acquisition of, or investment in, companies, technologies, products or assets that complement our business. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, including our common stock, or the incurrence of debt, contingent liabilities, amortization expenses or acquired in-process research and development expenses, any of which could harm our financial condition and operating results. Future acquisitions may also require us to obtain additional financing, which may not be available on favorable terms or at all.

Acquisitions involve a number of risks and present financial, managerial and operational challenges, including:

· diversion of management's attention from running existing business;

· increased expenses, including travel, legal, administrative and compensation expenses resulting from newly hired employees;

· increased costs to integrate personnel, customer base and business practices of the acquired company;

· adverse effects on reported operating results due to possible write-down of goodwill associated with acquisitions;

· potential disputes with sellers of acquired businesses, technologies, services or products; and

· dilution to stockholders if we issue securities in any acquisition.

Any acquired business, technology, product or service could significantly under-perform relative to our expectations, and we may not achieve the benefits we expect from acquisitions. In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our earnings based on this impairment assessment process, which could harm our operating results. For all these reasons, our pursuit of an acquisition and investment strategy or any individual acquisition or investment, could have a material adverse effect on our business, financial condition and results of operations.

Our success depends on our ability to attract and retain our key employees. We may experience increased costs to continue to attract and retain senior management and highly qualified software developers.  

Our success depends to a significant extent upon the performance of senior management and on our ability to attract, motivate and retain highly qualified software developers. We believe that as a result of consolidation in our industry, there are now fewer highly skilled independent developers available to us. Competition for these developers is intense, and we may not be successful in attracting and retaining them on terms acceptable to us or at all. An increase in the costs necessary to attract and retain skilled developers, and any delays resulting from the inability to attract necessary developers or departures, may adversely affect our revenues, margins and results of operations.  

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The loss of the services of any of our executive officers or other key employees could harm our business. All of our executive officers and key employees are under short term employment agreements which means, that their future employment with the company is uncertain. All of our executive officers and key employees are bound by a contractual non-competition agreement; however, it is uncertain whether such agreements are enforceable and, if so, to what extent, which could make us vulnerable to recruitment efforts by our competitors.

Our future success also depends on our ability to identify, attract and retain highly skilled technical, managerial, finance, marketing and creative personnel. We face intense competition for qualified individuals from numerous technology, marketing and mobile entertainment companies. We may be unable to attract and retain suitably qualified individuals who are capable of meeting our growing creative, operational and managerial requirements, or may be required to pay increased compensation in order to do so.  Volatility or lack of performance in our stock price may also affect our ability to attract and retain our key employees. If we are unable to attract and retain the qualified personnel we need to succeed, our business, operating results and financial condition would be harmed.

The loss of any of our key customers could adversely affect our sales.

Our sales to Cokem, Jack of All Games (via Atari) and Gamestop accounted for approximately 29%, 21% and 11%, respectively, of our gross revenues for the year ended December 31, 2009. Our sales to Jack of All Games and Cokem accounted for approximately 30% and 14%, respectively, of our gross revenues for the year ended December 31, 2008.  Although we seek to broaden our customer base, we anticipate that a small number of customers will continue to account for a large concentration of our sales given the consolidation of the retail industry. We do not have written agreements in place with several of our major customers. Consequently, our relationship with these retailers could change at any time. Our business, results of operations and financial condition could be adversely affected if:

• we lose any of our significant customers;

• any of these customers purchase fewer of our offerings;

• any of these customers encounter financial difficulties, resulting in the inability to pay vendors, store closures or liquidation;

• less favorable foreign intellectual property laws making it more difficult to protect our properties from appropriation by competitors;

• we incur difficulties with distributors;

• we incur difficulties collecting our accounts receivable;

• we continue to rely on limited business relationships.

Our failure to manage or address any of these could adversely affect our business.

If our products contain errors, our reputation, results of operations and financial condition may be adversely affected.  

As video games incorporate new technologies, adapt to new hardware platforms and become more complex, the risk of undetected errors in products when first introduced increases. If, despite our testing procedures, errors are found in new products after shipments have been made, we could experience a loss of revenues, delay in timely market acceptance of its products and damage to our reputation, any of which may negatively affect our business, results of operations and financial condition.

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If we are unsuccessful in protecting our intellectual property, our revenues may be adversely affected.  

The intellectual property embodied in our video games is susceptible to infringement, particularly through unauthorized copying of the games, or piracy. The increasing availability of high bandwidth Internet service has made, and will likely continue to make, piracy of video games more common. Infringement of our intellectual property may adversely affect our revenues through lost sales or licensing fees, particularly where consumers obtain pirated video game copies rather than copies sold by us, or damage to our reputation where consumers are wrongly led by infringers to believe that low-quality infringing material originated from us. Preventing and curbing infringement through enforcement of the our intellectual property rights may be difficult, costly and time consuming, and thereby ultimately not cost-effective, especially where the infringement takes place in foreign countries where the laws are less favorable to rights holders or not sufficiently developed to afford the level of protection we desire.

If we infringe on the intellectual property of others, our costs may rise and our results of operations may be adversely affected.  

Although we take precautions to avoid infringing the intellectual property of others, it is possible that we or our third-party developers have done so or may do so in the future. The number and complexity of elements in our products that result from the advances in the capabilities of video game platforms increases the probability that infringement may occur. Claims of infringement, regardless of merit, could be time consuming, costly and difficult to defend. Moreover, as a result of disputes over intellectual property, we may be required to discontinue the distribution of one or more of its products, or obtain a license for the use of or redesign those products, any of which could result in substantial costs and material delays and materially adversely affect our results of operations.

Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement, damages caused by malicious software and other losses.  

In the ordinary course of our business, most of our agreements with carriers and other distributors include indemnification provisions. In these provisions, we agree to indemnify them for losses suffered or incurred in connection with our products and services, including as a result of intellectual property infringement and damages caused by viruses, worms and other malicious software. The term of these indemnity provisions is generally perpetual after execution of the corresponding license agreement, and the maximum potential amount of future payments we could be required to make under these indemnification provisions is generally unlimited. Large future indemnity payments could harm our business, operating results and financial condition.

We may be unable to develop and introduce in a timely way new products or services, which could harm our brand.  

The planned timing and introduction of new products and services are subject to risks and uncertainties. Unexpected technical, operational, deployment, distribution or other problems could delay or prevent the introduction of new products and services, which could result in a loss of, or delay in, revenues or damage to our reputation and brand. Our attractiveness to branded content licensors might also be reduced. In addition, new products and services may not achieve sufficient market acceptance to offset the costs of development, particularly when the introduction of a product or service is substantially later than a planned “day-and-date” launch, which could materially harm our business, operating results and financial condition.

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Our business is subject to risks generally associated with the entertainment industry, and we may fail to properly assess consumer tastes and preferences, causing product sales to fall short of expectations.  

Our business is subject to all of the risks generally associated with the entertainment industry and, accordingly, our future operating results will depend on numerous factors beyond our control, including the popularity, price and timing of new hardware platforms being released; economic, political and military conditions that adversely affect discretionary consumer spending; changes in consumer demographics; the availability and popularity of other forms of entertainment; and critical reviews and public tastes and preferences, which may change rapidly and cannot be predicted. A decline in the popularity of certain game genres or particular platforms could cause sales of our titles to decline dramatically. The period of time necessary to develop new game titles, obtain approvals of platform licensors and produce finished products is unpredictable. During this period, consumer appeal for a particular title may decrease, causing product sales to fall short of expectations.

We have developed and may expand international operations, which may subject us to economic, political, regulatory and other risks.  

We continue to seek the most cost-effective method to distribute our products internationally.  There are many risks involved with international operations, including:

· difficulty in maintaining or finding a suitable distribution partner;

· social, economic and political instability;

· compliance with multiple and conflicting foreign and domestic laws and regulations;

· changes in foreign and domestic legal and regulatory requirements or policies resulting in burdensome government controls, tariffs, restrictions, embargoes or export license requirements;

· currency fluctuations;

· difficulties in staffing and managing  international operations;

· less favorable foreign intellectual property laws making it more difficult to protect our properties from appropriation by competitors;

· potentially adverse tax treatment;

· higher costs associated with doing business internationally;

· challenges caused by distance, language and cultural differences;

· difficulties with distributors;

· protectionist laws and business practices that favor local businesses in some countries;

· foreign exchange controls that might prevent us from repatriating income earned in countries outside the United States;

· price controls;

· the servicing of regions by many different carriers;

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· imposition of public sector controls;

· restrictions on the export or import of technology;

· greater fluctuations in sales to end users and through carriers in developing countries, including longer payment cycles and greater difficulties collecting our accounts receivable; and

· relying on limited business relationships.

Our failure to manage or address any of these could adversely affect our business. In addition, developing user interfaces that are compatible with other languages or cultures can be expensive. As a result, our ongoing international expansion efforts may be more costly than we expect. Further, expansion into developing countries subjects us to the effects of regional instability, civil unrest and hostilities, and could adversely affect us by disrupting communications and making travel more difficult. These risks could harm our international expansion efforts, which, in turn, could materially and adversely affect our business, operating results and financial condition.

Our business is ‘‘hit’’ driven. If we do not deliver ‘‘hit’’ titles, or if consumers prefer competing products, our sales could suffer.  

While many new products are regularly introduced, only a relatively small number of ‘‘hit’’ titles account for a significant portion of net revenue. Competitors may develop titles that imitate or compete with our ‘‘hit’’ titles, and take sales away from us or reduce our ability to command premium prices for those titles. Hit products published by our competitors may take a larger share of consumer spending than we anticipate which could cause our product sales to fall below our expectations. If our competitors develop more successful products or offer competitive products at lower price, or if we do not continue to develop consistently high-quality and well received products, our revenue, margins, and profitability will decline.

Our business is subject to seasonal fluctuations.

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

Risks Relating to Our Common Stock

The liquidity of our common stock will be affected by its limited trading market.

Bid and ask prices for shares of our common stock are quoted on the OTC Bulletin Board under the symbol “ZOOE.OB.” There is currently no broadly followed, established trading market for our common stock. While we are hopeful that we will command the interest of a greater number of investors, a broadly followed, established trading market for our shares of common stock may never develop or be maintained. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders. The absence of an active trading market reduces the liquidity of our common stock. As a result of the lack of trading activity, the quoted price for our common stock on the OTC Bulletin Board is not necessarily a reliable indicator of its fair market value. Further, if we cease to be quoted, holders of our common stock would find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock, and the market value of our common stock would likely decline.

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The market price of our common stock is highly volatile and subject to wide fluctuations, and you may be unable to resell your shares at or above the current price.

The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including announcements of new products or services by our competitors. In addition, the market price of our common stock could be subject to wide fluctuations in response to a variety of factors, including:

· quarterly variations in our revenues and operating expenses;

· developments in the financial markets, and the worldwide or regional economies;

· Announcements of innovations or new products or services by us or our competitors;

· fluctuations in merchant credit card interest rates;

· significant sales of our common stock or other securities in the open market; and

· changes in accounting principles.

In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company’s securities. If a stockholder were to file any such class action suit against us, we would incur substantial legal fees and our management’s attention and resources would be diverted from operating our business to respond to the litigation, which could harm our business.

The sale of securities by us in any equity or debt financing could result in dilution to our existing stockholders and have a material adverse effect on our earnings.

Any sale of common stock by us in a future private placement offering could result in dilution to the existing stockholders as a direct result of our issuance of additional shares of our capital stock. In addition, our business strategy may include expansion through internal growth by acquiring complementary businesses, acquiring or licensing additional brands, or establishing strategic relationships with targeted customers and suppliers. In order to do so, or to finance the cost of our other activities, we may issue additional equity securities that could dilute our stockholders’ stock ownership. We may also assume additional debt and incur impairment losses related to goodwill and other tangible assets, and this could negatively impact our earnings and results of operations.

If securities or industry analysts do not publish research or reports about our business, or if they downgrade their recommendations regarding our common stock, our stock price and trading volume could decline.

The trading market for our common stock, if and when it develops, will be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us downgrade our common stock, our common stock price would likely decline. If analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our common stock price or trading volume to decline.

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“Penny stock” rules may restrict the market for our common stock.  

Our common stock is subject to rules promulgated by the Securities and Exchange Commission relating to “penny stocks,” which apply to companies whose shares are not traded on a national stock exchange, trade at less than $5.00 per share, or who do not meet certain other financial requirements specified by the Securities and Exchange Commission. These rules require brokers who sell “penny stocks” to persons other than established customers and “accredited investors” to complete certain documentation, make suitability inquiries of investors, and provide investors with certain information concerning the risks of trading in such penny stocks. These rules may discourage or restrict the ability of brokers to sell our common stock and may affect the secondary market for our common stock. These rules could also hamper our ability to raise funds in the primary market for our common stock.

If we continue to fail to maintain an effective system of internal controls, we might not be able to report our financial results accurately or prevent fraud; in that case, our stockholders could lose confidence in our financial reporting, which could negatively impact the price of our stock.  

Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. In addition, Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires us to evaluate and report on our internal control over financial reporting for all our current operations and have our independent registered public accounting firm attest to our evaluation beginning with our Annual Report on Form 10-K for the year ending December 31, 2010. Our management has determined that we have a material weakness in our internal control over financial reporting related to not having a sufficient number of personnel with the appropriate level of experience and technical expertise to appropriately resolve non-routine and complex accounting matters or to evaluate the impact of new and existing accounting pronouncements on our consolidated financial statements while completing the financial statements close process. Until this deficiency in our internal control over financial reporting is remediated, there is a reasonable possibility that a material misstatement to our annual or interim consolidated financial statements could occur and not be prevented or detected by our internal controls in a timely manner. We are committed to appropriately addressing this matter and we have engaged additional qualified personnel to assist in these areas. We will continue to reassess our accounting and finance staffing levels to ensure that we have the appropriate accounting resources to handle the existing workload. We are in the process of preparing and implementing an internal plan of action for compliance with Section 404 and strengthening and testing our system of internal controls to provide the basis for our report. The process of implementing our internal controls and complying with Section 404 will be expensive and time - consuming, and will require significant attention of management. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we conclude, and our independent registered public accounting firm concurs, that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent registered public accounting firm discover a material weakness or a significant deficiency in our internal control, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price. In addition, a delay in compliance with Section 404 could subject us to a variety of administrative sanctions, including ineligibility for short form resale registration, action by the Securities and Exchange Commission, and the inability of registered broker-dealers to make a market in our common stock, which could further reduce our stock price and harm our business.

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We do not anticipate paying dividends.  

We have never paid cash or other dividends on our common stock. Payment of dividends on our common stock is within the discretion of our Board of Directors and will depend upon our earnings, our capital requirements and financial condition, and other factors deemed relevant by our Board of Directors.

Our officers, directors and principal stockholders can exert significant influence over us and may make decisions that may not be in the best interests of all stockholders.

Our officers, directors and principal stockholders (greater than 5% stockholders) collectively beneficially own approximately 78% of our outstanding common stock. As a result, this group will be able to affect the outcome of, or exert significant influence over, all matters requiring stockholder approval, including the election and removal of directors and any change in control. In particular, this concentration of ownership of our common stock is likely to have the effect of delaying or preventing a change of control of us or otherwise discouraging or preventing a potential acquirer from attempting to obtain control of us. This, in turn, could have a negative effect on the market price of our common stock. It could also prevent our stockholders from realizing a premium over the market prices for their shares of common stock. Moreover, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders, and, accordingly, this group could cause us to enter into transactions or agreements that we would not otherwise consider.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified members for our Board of Directors.  

As a public company, we are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. The requirements of these rules and regulations increase our legal, accounting and financial compliance costs, may make some activities more difficult, time-consuming and costly and may also place undue strain on our personnel, systems and resources.

In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we will need to expend significant resources and provide significant management oversight. We have a substantial effort ahead of us to implement appropriate processes, document our system of internal control over relevant processes, assess their design, remediate any deficiencies identified and test their operation. As a result, management’s attention may be diverted from other business concerns, which could harm our business, operating results and financial condition. These efforts will also involve substantial accounting-related costs.

Our financial results could vary significantly from quarter to quarter and are difficult to predict.  

Our revenues and operating results could vary significantly from quarter to quarter because of a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. In addition, we may not be able to predict our future revenues or results of operations. We base our current and future expense levels on our internal operating plans and sales forecasts, and our operating costs are to a large extent fixed. As a result, we may not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues, and even a small shortfall in revenues could disproportionately and adversely affect financial results for that quarter. Individual products and services represent meaningful portions of our revenues and net loss in any quarter. We may incur significant or unanticipated expenses when licenses are renewed.

In addition to other risk factors discussed in this section, factors that may contribute to the variability of our quarterly results include:

· the number of new products and services released by us and our competitors;

· the amount we reserve against returns and allowances;

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· the timing of release of new products and services by us and our competitors, particularly those that may represent a significant portion of revenues in a period;

· the popularity of new products and services, and products and services released in prior periods;

· the expiration of existing content licenses;

· the timing of charges related to impairments of goodwill, intangible assets, royalties and minimum guarantees;

· changes in pricing policies by us or our competitors;

· changes in the mix of original and licensed content, which have varying gross margins; the seasonality of our industry;

· fluctuations in the size and rate of growth of overall consumer demand for video game products, services and related content;

· strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;

· our success in entering new geographic markets;

· foreign exchange fluctuations;

· accounting rules governing recognition of revenue;

· the timing of compensation expense associated with equity compensation grants; and

· decisions by us to incur additional expenses, such as increases in marketing or research and development.

As a result of these and other factors, our operating results may not meet the expectations of investors or public market analysts who choose to follow our company. Failure to meet market expectations would likely result in decreases in the trading price of our common stock.

Item 1B. Unresolved Staff Comments .

Not applicable as we are a smaller reporting company.

Item 2.  Properties.

Our principal offices are located at 3805 Edwards Road, Suite 400 Cincinnati, OH 45209, where we lease approximately 7,705 square feet for a monthly rent of $9,567.04 from March 1, 2010 through February 28, 2012, and a monthly rent of $10,273.33 from March 1, 2012 through February 28, 2014, pursuant to a lease agreement that expires on February 28, 2014.

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We believe that our existing facilities are suitable and adequate for the business conducted therein, appropriately used and have sufficient capacity for our intended purpose.

Item 3. Legal Proceedings .

On February 19, 2009, Susan J. Kain Jurgensen, Steven W. Newton, Mercy R. Gonzalez, Bruce C. Kain, Wesley M. Kain, Raymond Pierce and Cristie E. Walsh filed a complaint against Zoo Publishing, Zoo Games and Zoo in the Supreme Court of the State of New York, New York County, index number 09 / 102381 alleging claims for breach of certain loan agreements and employment agreements, intentional interference and fraudulent transfer. The complaint sought compensatory damages, punitive damages and preliminary and permanent injunctive relief, among other remedies. On June 18, 2009, we reached a settlement whereby we agreed to pay to the plaintiffs an aggregate of $560,000 (the “Settlement Amount”) in full satisfaction of the disputed claims, without any admission of any liability of wrongdoing as follows: (a) $300,000 on June 26, 2009; (b) $60,000 on or before the earlier of (i) the date that is 90 days from June 18, 2009 or (ii) the date the Company obtains new and available financing, including any amounts currently held in escrow that will be released from escrow after June 18, 2009, in any form and from any source, in an amount totaling at least $2,000,000; (c) $100,000 on or before December 18, 2009; and (d) $100,000 on or before June 18, 2010. To date, $460,000 of the Settlement Amount has been paid to the plaintiffs. The Zoo Publishing Notes and all other notes, employment, agreements, loan agreements, options, warrants and other agreements relating to the plaintiffs (except with respect to that certain Employment Agreement between Zoo Publishing and Cristie E. Walsh) were terminated and all outstanding obligations of the Company related to these agreements were cancelled. In addition, the plaintiffs returned to us an aggregate of 5,563,950 shares of our common stock owned by them prior to such date.

We are also involved in various other legal proceedings and claims incident to the normal conduct of our business. Although it is impossible to predict the outcome of any legal proceeding and there can be no assurances, we believe that our legal proceedings and claims, individually and in the aggregate, are not likely to have a material adverse effect on our financial condition, results of operations or cash flows.

Item 4. (Removed and Reserved) .

PART II

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

Our common stock is listed for trading on the OTC Bulletin Board under the symbol “ZOOE.OB.”  Prior to January 30, 2009, our common stock was listed for trading on the OTC Bulletin Board under the symbol “DFTW.OB.”  The market for our common stock has often been sporadic, volatile and limited.

The following table sets forth, for the periods indicated, the high and low bid quotations for our common stock as reported by the OTC Bulletin Board. The prices reflect inter-dealer quotations, without retail markup, markdown or commissions, and may not represent actual transactions.

	High		Low
First Quarter 2008	$	1.35	$	1.00
Second Quarter 2008	$	1.45	$	1.10
Third Quarter 2008	$	2.50	$	1.45
Fourth Quarter 2008	$	1.70	$	0.25
First Quarter 2009	$	0.85	$	0.30
Second Quarter 2009	$	1.10	$	0.85
Third Quarter 2009	$	1.10	$	0.75
Fourth Quarter 2009	$	0.75	$	0.75

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Holders of common stock.

On March 22, 2010, we had approximately 90 registered common stockholders of record of the 2,778,409,829 outstanding shares of common stock. There were also an undetermined number of holders who hold their stock in nominee or "street" name.

Dividends and dividend policy.

Since our inception, we have not declared or paid any cash dividends to stockholders. The declaration of any future cash dividend will be at the discretion of our Board of Directors and will depend upon our earnings, if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations. 

Securities authorized for issuance under equity compensation plans.

The following table sets forth information concerning our equity compensation plans as of December 31, 2009.

Equity Compensation Plan Information  

Plan Category	Number of  securities  to be issued  upon  exercise of  outstanding  options,  warrants  and rights  (a)			Weighted-  average  exercise  price of  outstanding  options,  warrants  and rights  (b)		Number of  securities  remaining  available for  future  issuance  under equity  compensation  plans  (excluding  securities  reflected in  column (a))  (c)
Equity compensation plans approved by Zoo security holders		-	*	$	-		25,000
Equity compensation plans approved by Zoo Games security holders		2,589,810		$	1.29		-
Equity compensation plans not approved by security holders		-					-
Total		2,589,810		$	1.29		25,000

* This number does not include an aggregate of 900,000 restricted shares of our common stock that we issued on June 23, 2008, and an aggregate of 75,000 restricted shares of our common stock that we issued on June 27, 2008, at a purchase price of $0.001 per share to certain employees, directors and consultants, pursuant to our 2007 Employee, Director and Consultant Stock Plan, as amended (the "2007 Plan").

Unregistered sales of securities.

None.

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Issuer purchases of equity securities.

None.

Item 6. Selected Financial Data.

Not applicable as we are a smaller reporting company.

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

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

We are a developer, publisher and distributor of video game software for use on major platforms including Nintendo’s Wii, DS, GBA, Sony’s PSP, PlayStation 2 and iPhone.  We are also a distributor of video game software for use on Microsoft’s Xbox 360.   In addition, we intend to publish packaged entertainment software titles for use on a variety of other gaming platforms including Sony’s PlayStation 3. We will also seek to create and sell downloadable games for Microsoft’s Xbox Live Arcade, Sony’s PlayStation 3 Network, Nintendo’s Virtual Console, and for use on personal computers (PCs).

Our current video game titles are targeted at various demographics but primarily at the lower-priced “value” market. In some instances, these titles are based on licenses of well-known properties and, in other cases based on original properties. We collaborate and enter into agreements with content providers and video game development studios for the creation of our video games.

We also operate a site called 2beegames.com which can be found at www.2beegames.com.  We hold contests for independent developers whereby they can enter their games to win monetary prizes and potential publishing arrangements with us.  This site allows us to attract fresh intellectual property, lower production costs, decrease time to market, and improve margins.

Zoo Entertainment, Inc. was originally incorporated in the State of Nevada on February 13, 2003 under the name Driftwood Ventures, Inc.  On December 20, 2007, through a merger, the Company reincorporated in the State of Delaware as a public shell company with no operations.

On July 7, 2008, the Company entered into an Agreement and Plan of Merger, as subsequently amended on September 12, 2008 (the “Merger Agreement”) with DFTW Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company (“Merger Sub”), Zoo Games and a stockholder representative, pursuant to which Merger Sub would merge with and into Zoo Games, with Zoo Games as the surviving corporation through an exchange of common stock of Zoo Games for common stock of the Company (the “Merger”).

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

Upon the closing of the Merger, as the sole remedy for the Zoo Games stockholders’ indemnity obligations, on behalf of the Zoo Games stockholders pursuant to the Merger Agreement, the Company deposited 2,609,861 shares of the Company’s common stock (the “Escrow Shares”), otherwise payable to such stockholders, into escrow to be held by the escrow agent until December 31, 2009 in accordance with the terms and conditions of an escrow agreement. No claims were made against the stockholders pursuant to the Merger Agreement, and the Escrow Shares were released from escrow.

Effective as of the closing of the Merger, Zoo Games became our wholly-owned subsidiary.  As a result thereof, the historical and current business operations of Zoo Games now comprise our principal business operations.

Zoo Games

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

Zoo Games commenced operations in March 2007 as Green Screen Interactive Software, LLC, a Delaware limited liability company, and in May 2008, converted to a Delaware corporation. On August 14, 2008, it changed its name to Zoo Games, Inc. Since its initial organization and financing, Zoo Games embarked on a strategy of partnering with and/or acquiring companies with compelling intellectual property, distribution capabilities, and/or management with demonstrated records of success.

In June 2007, Zoo Games acquired the assets of Supervillain Studios, Inc. which were held by the wholly-owned subsidiary of Zoo Games, Supervillain Studios, LLC.  The acquisition provided Zoo Games with access to proprietary high end casual gaming content, established video game designers, technical experts and producers capable of providing Zoo Games with high quality, original casual games. On July 22, 2008, Zoo Games released Order Up!, its first offering from Supervillain.   In our effort to refocus our cash on our core business, the Company sold the assets of Supervillain Studios LLC back to its original owners on September 16, 2008.

In December 2007, Zoo Games acquired the capital stock of Zoo Publishing.  The acquisition of Zoo Publishing provided Zoo Games with a profitable core business, North American distribution, and further enhanced its experienced management team. Zoo Publishing distributes software titles throughout North America and generated over $30 million in annual revenue in 2007. Zoo Publishing expects to exploit its development expertise, in combination with its sales, marketing and licensing expertise, to target the rapidly expanding market for casual games, particularly on Nintendo’s platforms, where Zoo Publishing has experienced considerable success. By nurturing and growing this business unit, Zoo Games believes it will be able to rapidly build a much larger distribution network, enabling it to place a significant number of software titles with major retailers.

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In April 2008, Zoo Games acquired the capital stock of Zoo Digital, a business operated in the United Kingdom. This acquisition provided Zoo Games with a profitable core business in the United Kingdom, European distribution, and further enhanced its experienced management team. Zoo Digital distributes software titles throughout Europe and generated over $6.8 million in annual revenue in 2007.  In our effort to refocus our cash on our core business operations, the Company sold Zoo Digital back to its original owners on November 28, 2008.

In June 2009, we formed a new company in the United Kingdom that is a wholly-owned subsidiary of Zoo Games called Zoo Entertainment Europe Ltd. (“Zoo Europe”), to focus on the sales and distribution of our products in Europe. Zoo Europe incurred initial start-up costs and minimal revenues beginning in the quarter ended September 30, 2009.  The activity of Zoo Europe was immaterial through the period ended December 31, 2009, and we record all operating activities as one segment.  In our effort to refocus our cash on our core business operations, we decided to discontinue operations of Zoo Europe effective December 2009.

The financial statements of Zoo Entertainment and Zoo Games include operations of each division from the date that they were acquired. Currently, the Company has determined that it operates in one segment in the United States.  The results for Supervillain, Repliqa and Zoo Digital are included in discontinued operations for the periods presented.

Results of Operations

For the year ended December 31, 2009 as compared to the year ended December 31, 2008

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

	(Amounts in Thousands Except Per Share Data)
	2009					2008
Revenue	$	48,709		100	%	$	36,313		100	%
Cost of goods sold		39,815		82	%		30,883		85	%
Gross profit		8,894		18	%		5,430		15	%
Operating expenses:
General and administrative		6,788		14	%		10,484		29	%
Selling and marketing		2,484		5	%		4,548		13	%
Research and development		390		1	%		5,857		16	%
Impairment of goodwill		14,704		30	%		-		-	%
Depreciation and amortization		1,875		4	%		1,760		5	%
Total operating expenses		26,241		54	%		22,649		62	%
Loss from operations		(17,347	)	( 36	)%		(17,219	)	(47	)%
Interest expense, net		(2,975	)	( 6	)%		(3,638	)	(10	)%
Gain on extinguishment of debt		5,315		11	%		-		-	%
Gain on legal settlement		4,328		9	%		-		-	%
Other income – insurance recovery		860		2	%		1,200		3	%
Loss from continuing operations before income tax benefit		(9,819	)	( 20	)%		(19,657	)	(54	)%
Income tax (expense) benefit		(3,143	)	(6	) %		4,696		13	%
Loss from continuing operations		(12,962	)	( 27	)%		(14,961	)	(41	)%
Loss from discontinued operations net of tax benefit		(235	)	-	%		(6,734	)	(19	)%
Net loss	$	(13,197	)	( 27	)%	$	(21,695	)	(60	)%
Loss per common share from continuing operations	$	(0.39	)			$	(0.59	)

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Net Revenues

Net revenues for the year ended December 31, 2009 were approximately $48.7 million, an increase of approximately 34% over the revenues for the year ended December 31, 2008 of approximately $36.3 million, primarily all consisting of casual game sales in North America.

Because of a fire in our third party warehouse in October 2008, we entered into a distribution agreement with Atari that has remained in effect for certain customers through 2009.  With that agreement, we sell product to Atari at a discount and they distribute product to certain of our customers.  The sales in 2009 are recorded net of the $3.7 million fee to Atari and the sales in 2008 are recorded net of the $1.4 million fee to Atari; without the Atari fee, the sales increase from 2008 to 2009 would be 39%.

The breakdown of gross sales by platform is:

	2009			2008
Nintendo Wii		64	%		45	%
Nintendo DS		31	%		50	%
SONY PS2		3	%		2	%
Microsoft XBox		2	%		0	%
Nintendo GBA		0	%		2	%
SONY PSP		0	%		1	%

The best sellers during the 2009 period were (i) Deal or No Deal, (ii) M&M Kart Racing, and (iii) M&M Beach Party, all on the Nintendo Wii platform. The various Wii games bundled with our gun blaster accounted for approximately 10% of our sales during 2009.  The biggest sellers during the 2008 period were (i) M&M Kart Racing on the Nintendo Wii platform, (ii) the compilation of Battle Ship, Connect 4, Sorry & Trouble on the Nintendo DS platform, and (iii) Deal or No Deal on the Nintendo DS platform.  The 2009 period consisted of approximately 5.2 million units sold at an average price of $9.65 as compared to approximately 4.1 million units sold for an average price of $10.00.

Gross Profit

Gross profit for 2009 was approximately $8.9 million, or 18% of net revenue, while the gross profit for 2008 was approximately $5.4 million, or 15% of net revenue. The costs included in the cost of goods sold consist of manufacturing and packaging costs, royalties due to licensors relating to the current period’s revenues and the amortization of product development costs relating to the current period’s revenues. The Atari sales agreement was in place during the entire 2009 period and for three months during 2008.  Atari’s fees that are recorded as a reduction in revenue during 2009 were approximately $3.7 million as compared to $1.4 million for the three months that the agreement was in effect in 2008.  Without the fees to Atari, the gross profit would have been 24% of net revenue in 2009 and 18% of net revenue in 2008.  As part of our business plan to focus on higher margin games and more cost effective product licenses, we opted to discontinue certain lower-margin products in the 2009 period through the accelerated sale of such products at lower than normal prices.   The 2008 period also included a close-out initiative for a license that terminated during that period resulting in similar overall margins for the 2008 period.  The 2008 period included an unusually large amount of amortization of product development costs for a game developed internally that did not earn out its development cost at the expected rate, resulting in an additional 2% charge to the cost of goods sold and therefore a 2% decrease in the gross margin for 2008.

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General and Administrative Expenses

General and administrative expenses for 2009 were approximately $6.8 million as compared to $10.5 million for 2008.  A reduction in the corporate headcount in the New York office from 2008 to 2009 resulted in approximately $2.0 million of the decrease from reduced salaries, rent and related expenses.  Additional costs incurred in the 2008 period resulted from the Company’s reverse merger and costs relating to going public, which were approximately $964,000 in accounting and legal fees and approximately $582,000 in other consulting costs.  These costs did not recur in 2009. Equity compensation included in general and administrative expenses are approximately $592,000 in 2009 and approximately $1.6 million in 2008.  During 2009 the Company incurred approximately $856,000 in cost for its European sales office that both began and terminated during 2009.  These costs are included in the 2009 general and administrative expenses.

Selling and Marketing Expenses

Selling and marketing expenses for 2009 and 2008 were approximately $2.5 million and $4.5 million, respectively. These expenses all relate to the sales of casual games in North America and consist primarily of the salaries, commissions and related costs for Zoo Publishing. The expenses in the 2009 period reflect a reduction in salaries and related costs of $949,000 from the 2008 period due to the transition of that operation from New Jersey to Ohio in 2009 and resulting reduction in headcount and base salaries.  The balance of the variance resulted primarily from approximately $1.0 million in advertising and marketing expenses incurred in 2008 for various products that did not recur in 2009.

Research and Development Expenses

Research and development expenses were $390,000 in 2009 as compared to approximately $5.9 million in 2008.  These expenses are a direct result of our decision to discontinue the development of certain games during these periods. The 2008 costs of consisted of approximately $5.1million relating to various video game products that were discontinued during the year and approximately $720,000 for a video game that was still in development that we deemed unrecoverable in 2008. The Company has modified its business model to focus on casual products which carry significantly lower development risks and costs.

Impairment of Goodwill

The Company incurred a triggering event as of September 30, 2009 based on the equity infusion of approximately $4.0 million for 50% ownership in the Company and the conversion of the existing convertible debt during the fourth quarter of 2009.  As such, the Company performed an impairment analysis, resulting in the full impairment of goodwill of $14.7 million.

Depreciation and Amortization Expenses

Depreciation and amortization costs for 2009 were approximately $1.9 million as compared to approximately $1.8 million in 2008.  The amortization of intangibles acquired from the Zoo Publishing acquisition that is included in these amounts is approximately $1.6 million for both 2009 and 2008. The 2009 period includes $130,000 resulting from the amortization of content intangibles obtained from the New World IP license in May 2009.  The balance relates to depreciation of fixed assets during the period.

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Interest Expense

Interest expense for 2009 was approximately $3.0 million as compared to approximately $3.6 million for 2008. The 2009 period includes approximately $1.6 million of non-cash interest expense relating to the amortization on the Zoo Entertainment notes, $496,000 of interest relating to the Zoo Entertainment notes and approximately $358,000 of interest on the various promissory notes due to the sellers of Zoo Publishing of which $293,000 is non-cash interest imputed at the then market rate. In addition, the 2009 period includes $58,000 of interest on the Solutions 2 Go loan and $133,000 of non-cash interest relating to the warrants issued for the Solutions 2 Go exclusive distribution rights.  Interest paid by Zoo Publishing in 2009 for the receivable factoring facility and other financing arrangements were $354,000.  The 2008 period includes $1.3 million of non-cash interest expense relating to the amortization on the Zoo Entertainment notes, $610,000 of non-cash interest expense relating to the accelerated amortization of the debt discount resulting from the early extinguishment of debt and approximately $1.2 million of interest on the various promissory notes due to the sellers of Zoo Publishing of which $1.0 million is non-cash interest imputed at the then market rate. Also included in 2008 is $536,000 of interest expense on other notes including the Zoo Entertainment notes.

Gain on Extinguishment of Debt

The 2009 period includes approximately $5.3 million of gain on extinguishment of debt resulting from the November 2009 conversion of approximately $11.9 million of existing debt, including related accrued interest, into 1,189,439 shares of Series B Preferred stock that subsequently converted into 1,188,439,000 shares of common stock in March 2010. The total fair value of the Series B Preferred stock was determined to be approximately $3.0 million, based on a $0.0025 value per common share, the same value per share on the sale of Series A Preferred stock with identical rights and features.  Of the $8.9 million gain on extinguishment of debt, approximately $3.6 million is recorded as additional paid-in-capital because that debt holder was also a shareholder with greater than 10% of the outstanding common stock at the time of the debt conversion and deemed to be a related party.  The remaining $5.3 million balance was recorded as a gain on extinguishment of the debt.

Gain on Legal Settlement

During the 2009 period, we settled a lawsuit brought by the former sellers of Zoo Publishing, resulting in a net gain on settlement of approximately $4.3 million. The settlement eliminated the Company’s obligations for certain outstanding notes, employee loans and other obligations for an aggregate amount of approximately $3.9 million. The settlement returned approximately 5.6 million shares to treasury valued at approximately $1.1 million. The Company’s remaining cash obligations and litigation expense amounted to approximately $710,000, resulting in a net gain on settlement of approximately $4.3 million.

Other Income – Insurance Recovery

During the 2009 period, our third party warehouse received $860,000 from their insurance company relating to losses incurred by us from a fire in October 2008.  Those proceeds were applied against other amounts due from Zoo to the third party warehouse and are reported as Other Income in 2009.  In 2008, we received $1.2 million from our insurance company relating to business losses incurred from the same fire at a third party warehouse that housed our inventory in October 2008.

Income Tax (Expense) Benefit

We recorded an income tax expense of approximately $3.1 million for the year ended December 31, 2009.  There were various book to tax differences that resulted in the Company having taxable income for 2009; the income tax expense, in part, is based on permanent differences that are non-deductible for tax purposes, predominantly related to the impairment of goodwill. The net deferred tax component of the tax expense is approximately $2.9 million.  During the year ended December 31, 2008, we recorded a tax benefit of approximately $6.1 million, approximately $4.7 million from continuing operations and approximately $1.4 million attributed to discontinued operations.

Loss from Discontinued Operations

During 2009, we wrote-off $235,000 relating to the balance due from the sale of Zoo Digital in 2008 because it was determined to be uncollectible during this period.   During 2008, we incurred an aggregate of approximately $6.7 million in losses, net of an approximately $1.4 million tax benefit, from four operating divisions which were subsequently discontinued, so the net losses relating to those operations are recorded separately as a loss from discontinued operations. The loss relating to Zoo Digital was approximately $4.6 million, the loss relating to Supervillain was approximately $3.2 million, the loss relating to Repliqa was $219,000 and the loss relating to the on-line initiative was $146,000.  

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Loss per Common Share from Continuing Operations

The loss per common share from continuing operations for the year ended December 31, 2009 was $0.39, based on a weighted average shares outstanding for the period of 33.5 million, versus a loss per share from continuing operations of $0.59, based on a weighted average shares outstanding of 25.4 million for the year ended December 31, 2008.

Liquidity and Capital Resources

We incurred a loss from continuing operations of approximately $13.0 million, including an impairment charge related to goodwill of $14.7 million, for the year ended December 31, 2009 and a net loss of approximately $15.0 million from continuing operations for the year ended December 31, 2008. Our principal sources of cash during the 2009 period were proceeds from the $5 million equity raise in the fourth quarter of 2009, cash generated from the use of our purchase order and receivable financing arrangements, and cash generated from operations throughout the year.

Net cash used in continuing operations for 2009 was approximately $5.5 million, while net cash used in continuing operations for 2008 was $12.1 million. The specifics of the Atari sales agreement, which was in effect during the 2009 period for some of our customers, where Atari prepays the Company for the cost of goods for most of our sales and pays the balance due within 15 days of shipping the product, resulted in significant improvements for our cash provided from operations in the 2009 period, as compared to the 2008 period.  The nature of the customer advances from Atari also reduces our receivables, as compared to standard trade sales where we wouldn’t collect the receivable until up to 60 days after shipment of our goods.  As of the end of December 2008, Atari was distributing for all our customers, while at the end of December 2009, Atari was distributing for only certain customers.  The net increase in receivables for the year ended December 31, 2009 was approximately $2.2 million, while the net increase in receivables for the year ended December 31, 2008 was approximately $500,000.  The inventory decreased by approximately $1.0 million from December 31, 2008 to December 31, 2009 as we made an effort to minimize our cash outlay for product by building product to order and increasing our inventory turns.  Also in the 2008 period, the Company was spending more cash developing higher-cost video games that had a longer development cycle which put a strain on our working capital for that period; while in 2009 we focused mostly on developing lower-cost video games and our cash constraints also limited our spending on development of new video games in 2009.

Net cash used in investing activities for the year ended December 31, 2009 was $338,000, while net cash provided by investing activities for the year ended December 31, 2008 was approximately $2.1 million.  The cash used in the 2009 period consisted of $312,000 invested for intellectual property and $26,000 for the purchase of fixed assets.  During the 2008 period, the Company benefited from the receipt of approximately $1.7 million of cash from the reverse merger and used $67,000 cash for the purchase of fixed assets.

Net cash provided by financing activities for the year ended December 31, 2009 was approximately $7.6 million, while net cash provided by financing activities for the year ended December 31, 2008 was approximately $12.9 million.  The 2009 period includes approximately $90,000, net, repaid to the purchase order financing facility and approximately $900,000, net, received from the receivable factoring facility, as well as $7,000 from the exercise of warrants.  In addition, we received a $2.0 million customer advance from Solutions 2 Go, Inc. in the 2009 period for exclusive Canadian distribution rights which is being treated as a loan due to the fixed maturity date and interest bearing features of the advance.  During 2008 we received approximately $6.1 million from the sale of equity securities, received approximately $8.9 million from the issuance of convertible notes and repaid a net amount of approximately $2.0 million for the purchase order financing and factor arrangements.

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The $5.0 million sale of our Series A Convertible Preferred Stock and common stock purchase warrants that closed on November 20, 2009 and December 16, 2009, and the conversion of approximately $11.9 million underlying our convertible notes into equity, put us into a positive net working capital position of approximately $5.6 million as of  December 31, 2009, leaving us better positioned to meet our cash needs.

On May 16, 2008, Mandalay Media, Inc. (“Mandalay”) provided a bridge loan to us of $2.0 million (the “Mandalay Note”) in connection with the potential acquisition by Mandalay of Zoo Games. The Mandalay Note bore interest at a rate of 10% per annum. The letter of intent between Mandalay and Zoo Games was terminated, and the Mandalay Note was paid in full on July 7, 2008.

On July 7, 2008, Zoo provided a bridge loan of up to $7.0 million to Zoo Games (the “Company Loan”). The Company Loan bore interest at a rate of 10% per annum (increasing upon default). Under the terms of the Company Loan, Zoo Games could borrow on a weekly basis, repay without penalty or premium and continue to borrow amounts until September 30, 2008, provided that any advance made by Zoo to Zoo Games is contingent upon a mutually approved budget for the use of such advance by Zoo Games, which approval will not be unreasonably withheld by Zoo. The Company Loan and all accrued interest were automatically extinguished upon the closing of the Merger. We used $2.03 million of the amounts borrowed to repay all amounts outstanding under the Mandalay Note on July 7, 2008. The additional advances were used for working capital purposes.

Zoo Entertainment Notes

On July 7, 2008, as amended,, we entered into a note purchase agreement under which the purchasers agreed to provide loans to us in the aggregate principal amount of $9.0 million, in consideration for the issuance and delivery of senior secured convertible promissory notes. As partial inducement to purchase the notes, we issued to the purchasers warrants to purchase 8,181,818 shares of our common stock. The notes had an interest rate of five percent (5%) for the one year term of the note commencing from issuance, unless extended. All of the warrants have a five year term and an exercise price of $0.01 per share.  In connection with the note purchase agreement, the Company satisfied a management fee obligation by issuing additional senior secured convertible promissory notes in the principal amount of $750,000 and warrants to purchase 681,818 shares of common stock of the Company. All of the warrants have a five year term and an exercise price of $0.01 per share.

On September 26, 2008,  we entered into a note purchase agreement, as amended, with four investors, pursuant to which the purchasers agreed to provide a loan to us in the aggregate principal amount of $1.4 million, in consideration for the issuance and delivery of senior secured convertible promissory notes. As partial inducement to purchase the notes, we issued to the purchasers warrants to purchase 1,272,726 shares of our common stock. The notes had an interest rate of five percent (5%) for the time period beginning on September 26, 2008 and ending on September 26, 2009, unless extended.    The warrants have a five year term and an exercise price of $0.01 per share.

On November 20, 2009, the requisite holders (the “Holders”) of the Company’s senior secured convertible notes issued in the aggregate principal amount of $11.15 million, described aboveagreed that if the Company raises a minimum of $4.0 million of new capital, they will convert their debt into shares of Series B Convertible Preferred Stock (“Series B Preferred Stock”) that will ultimately convert into shares of common stock representing approximately 36.5% of the equity of the Company. As a result of the consummation of our sale of Series A Preferred Stock resulting in gross proceeds to the Company of approximately $4.2 million, on November 20, 2009, approximately $11.9 million of principal plus accrued and unpaid interest underlying the notes converted into an aggregate of 1,188,439 shares of Series B Preferred Stock. On January 13, 2010, our Board of Directors and stockholders holding approximately 66.7% ofour outstanding voting capital stock approved an amendment to our Certificate of Incorporation to increase the number of authorized shares of common stock from 250,000,000 shares to 3,500,000,000 shares (the “Charter Amendment”). The consents we received constituted the only stockholder approval required for the Charter Amendment under the Delaware General Corporation Law (the “DGCL”) and our existing Certificate of Incorporation and Bylaws. Pursuant to Rule 14c-2 of the Securities Exchange Act of 1934, asamended, stockholder approval of this amendment will become effective on or after such date that is approximately 20 calendar days following the date we first mailed the definitive Information Statement Pursuant to Section 14(c) (the “Information Statement”) to our stockholders.  The Information Statement was first sent to our stockholders on February 16, 2010.  On March 10, 2010, the Company filed the Charter Amendment with the Secretary of State of the State of Delaware.  The Charter Amendment increased the Company’s authorized shares of common stock, par value $0.001 per share, from 250,000,000 shares to 3,500,000,000 shares. Upon the filing of the Charter Amendment on March 10, 2010, the Series B Preferred Stock automatically converted to 1,188,439,000 shares of common stock. 

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Zoo Publishing Notes

In connection with Zoo Games’ acquisition of Zoo Publishing, there was an outstanding 3.9% promissory note for the benefit of the former shareholders of Zoo Publishing in the aggregate principal amount of $2,957,500. Of that amount, $1,137,500 of the principal plus accrued and unpaid interest was scheduled to be paid on or before September 18, 2009 and the remaining $1,820,000 plus accrued and unpaid interest was scheduled to be paid on or before December 18, 2010. Also in connection with the acquisition of Zoo Publishing, Zoo Games was required to pay an individual an aggregate of $608,400. Of that amount, $292,500 was due on December 18, 2010 and $315,900 was scheduled to be paid on July 31, 2011, in cash or our common stock based on the fair market value of our common stock as of July 31, 2011, at the election of Zoo Games. In connection with the Settlement Agreement dated June 18, 2009, all the Zoo Publishing Notes and the note to the individual were cancelled and no cash payments were required to be made for either the principal amounts of the notes or the interest accrued. The net amount of the obligations relieved for the Zoo Publishing Notes was approximately $3.0 million and is included in the Gain on Settlement on the Statement of Operations.

As part of the acquisition of Zoo Publishing, Zoo Games was required to pay $1,200,000 to an employee of Zoo Publishing. Of that amount, as of September 30, 2009, Zoo Games paid $487,000; $93,000 is past due and $620,000 will be paid on July 31, 2011, in cash or our common stock based on the fair market value of our common stock as of July 31, 2011, at the election of Zoo Games.

Zoo Publishing has additional debt outstanding which debt existed prior to Zoo Games’ acquisition of that subsidiary. As of December 31, 2009, Zoo Publishing owes approximately $300,000 as a result of the repurchase of certain stock from a former stockholder. The terms of this note are repayment in monthly increments of $10,000.

Zoo Publishing also takes advances from our factor, Working Capital Solutions, Inc., which utilizes existing accounts receivable in order to provide working capital to fund all aspects of our continuing business operations. Under the terms of our factoring and security agreement, our receivables are sold to the factor, with recourse. The factor, in its sole discretion, determines whether or not it will accept each receivable based upon the credit risk factor of each individual receivable or account. Once a receivable is accepted by the factor, the factor provides funding, subject to the terms and conditions of the factoring and security agreement. The amount remitted to us by the factor equals the invoice amount of the receivable adjusted for any discounts or allowances provided to the account, less 25% which is deposited into a reserve account established pursuant to the agreement, less allowances and fees. In the event of default, valid payment dispute, breach of warranty, insolvency or bankruptcy on the part of the receivable account, the factor can require the receivable to be repurchased by us in accordance with the agreement. The amounts to be paid by us to the factor for any accepted receivable include a factoring fee of 0.6% for each ten (10) day period the account is open. We began to use the factor again in September 2009 and as of December 31, 2009, we had factored approximately $1.4 million of invoices and received $900,000 advance against these receivables.  This agreement expires in September 2010 and we have agreed in principle to increase borrowing levels effective April 1, 2010.

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In addition to the receivable financing agreement with Working Capital Solutions, Inc., Zoo Publishing also utilizes purchase order financing with Wells Fargo Bank, National Association (“Wells Fargo”), to fund the manufacturing of video game products. Under the terms of our agreement, we assign purchase orders received to Wells Fargo, which may accept or decline the assignment of specific purchase orders. The purchase order financing allows us to order manufactured video game product from the manufacturer. Upon receipt of a purchase order, Wells Fargo advances the funds to the video game product manufacturer. This advance permits us to order the video game product to satisfy the purchase orders and projected purchase orders submitted by our accounts. The interest rate is prime plus 4.0% on outstanding advances.

On April 6, 2009, we entered into an amended and restated purchase order financing arrangement with Wells Fargo pursuant to an amended and restated master purchase order assignment agreement (the “Assignment Agreement”). The Assignment Agreement amended and restated in its entirety the master purchase order assignment agreement between Wells Fargo (formerly known as Transcap Trade Finance, LLC) and Zoo Publishing, dated as of August 20, 2001, as amended.

Pursuant to the Assignment Agreement, the Company will assign purchase orders received from customers to Wells Fargo, and request that Wells Fargo purchase the required materials to fulfill such purchase orders. Wells Fargo, which may accept or decline the assignment of specific purchase orders, will retain us to manufacture, process and ship ordered goods, and will pay us for our services upon Wells Fargo’s receipt of payment from the customers for such ordered goods. Upon payment in full of the purchase order invoice by the applicable customer to Wells Fargo, Wells Fargo will re-assign the applicable purchase order to us. We will pay to Wells Fargo a fee upon their funding of each purchase order and we commit to pay a total fee for twelve months in the aggregate amount of $337,500. If the fees earned during the twelve month period do not exceed $337,500, we are required to pay the difference between the $337,500 and the amounts already paid on the earlier of the twelve month anniversary of the date of the Assignment Agreement, or the date of termination of the Assignment Agreement. Wells Fargo is not obligated to provide purchase order financing under the Assignment Agreement if the aggregate outstanding funding exceeds $5,000,000. The Assignment Agreement is for an initial term of twelve months, and shall continue thereafter for successive twelve month renewal terms unless either party terminates the Assignment Agreement by written notice to the other no later than 30 days prior to the end of the initial term or any renewal term. If the term of the Assignment Agreement is renewed for one or more twelve month terms, for each such twelve month term, we will pay to Wells Fargo a commitment fee in the sum of $337,500, to be offset against actual fees paid by us upon their payment of each purchase order, to be paid on the earlier of the twelve month anniversary of such renewal date or the date of termination of the Assignment Agreement. The initial and renewal commitment fees are subject to waiver if certain product volume requirements are met.  We extended the purchase order financing facility through April 2011 and have agreed in principle to increase the borrowing capacity at lower fees and interest rates effective April 6, 2010.

In connection with the Assignment Agreement, on April 6, 2009 we also entered into an amended and restated security agreement and financing statement (the “Security Agreement”) with Wells Fargo. The Security Agreement amends and restates in its entirety that certain security agreement and financing statement, by and between Transcap Trade Finance, LLC and Zoo Publishing, dated as of August 20, 2001. Pursuant to the Security Agreement, we granted to Wells Fargo a first priority security interest in certain of our assets as set forth in the Security Agreement, as well as a subordinate security interest in certain other of our assets (the “Common Collateral”), which security interest is subordinate to the security interests in the Common Collateral held by certain of our senior lenders, as set forth in the Security Agreement.

Also in connection with the Assignment Agreement, on April 6, 2009, Mark Seremet, President and Chief Executive Officer of Zoo Games and a director of Zoo Entertainment, and David Rosenbaum, the President of Zoo Publishing, entered into a Guaranty with Wells Fargo, pursuant to which Messrs. Seremet and Rosenbaum agreed to guaranty the full and prompt payment and performance of the obligations under the Assignment Agreement and the Security Agreement.

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On May 12, 2009, the Company entered into a letter agreement with each of Mark Seremet and David Rosenbaum (the “Fee Letters”), pursuant to which, in consideration for Messrs. Seremet and Rosenbaum entering into the Guaranty with Wells Fargo for the full and prompt payment and performance by the Company and its subsidiaries of the obligations in connection with a purchase order financing (the “Loan”), the Company agreed to compensate Mr. Seremet in the amount of $10,000 per month, and Mr. Rosenbaum in the amount of $7,000 per month, for so long as the executive remains employed while the Guaranty and Loan remain in full force and effect. If the Guaranty is not released by the end of the month following termination of employment of either Messrs. Seremet or Rosenbaum, the monthly fee shall be doubled for each month thereafter until the Guaranty is removed.

 In connection with the financing consummated on November 20, 2009, Messrs. Seremet and Rosenbaum agreed to amend their respective Fee Letters, pursuant to which: in the case of Mr. Seremet, the Company will pay to Mr. Seremet a fee of $10,000 per month for so long as the Guaranty remains in full force and effect, but only for a period ending on November 20, 2010; and, in the case of Mr. Rosenbaum, the Company will pay to Mr. Rosenbaum a fee of $7,000 per month for so long as the Guaranty remains in full force and effect, but only for a period ending on November 20, 2010.  In addition, the amended Fee Letters provide that, in consideration of each of their continued personal guarantees, we will issue to each of Messrs. Seremet and Rosenbaum, an option to purchase shares of common stock or restricted shares of common stock, equal to approximately a 6.25% ownership interest on a fully diluted basis, respectively.  Subject to the effectiveness (the “Effective Date”) of an amendment to the Company’s Certificate of Incorporation authorizing an increase in the number of authorized shares of the Company’s common stock, par value $0.001 per share, from 250,000,000 shares to 3,500,000,000 shares (the “Charter Amendment”), on February 11, 2010, the Company issued options to purchase 202,581,600 shares of common stock to each of Mark Seremet and David Rosenbaum pursuant to the Fee Letters. The options have an exercise price of $0.0025 per share and vest as follows:  commencing as of the Effective Date, 72% vest immediately, 14% on May 12, 2010 and 14% vest on May 12, 2011. On January 13, 2010, our Board of Directors and stockholders holding approximately 66.7% of our outstanding voting capital stock approved the Charter Amendment. The consents we received constituted the only stockholder approval required for the Charter Amendment under the Delaware General Corporation Law (the “DGCL”) and our existing Certificate of Incorporation and Bylaws. Pursuant to Rule 14c-2 of the Securities Exchange Act of 1934, as amended, stockholder approval of this amendment will become effective on or after such date that is approximately 20 calendar days following the date we first mailed the definitive Information Statement Pursuant to Section 14(c) (the “Information Statement”) to our stockholders.  The Information Statement was first sent to our stockholders on February 16, 2010. On March 10, 2010, the Company filed the Charter Amendment with the Secretary of State of the State of Delaware.

As a result of a fire in October 2008 that destroyed our inventory and impacted our cash flow from operations, we entered into an agreement with Atari, Inc. (“Atari”). This agreement became effective on October 24, 2008 and provided for Zoo Publishing to sell its products to Atari without recourse and Atari will resell the products to wholesalers and retailers that are acceptable to Atari in North America. This agreement provides for Atari to prepay the Company for the cost of goods and pay the balance due within 15 days of shipping the product. Atari’s fees approximate 10% of our standard selling price. Atari takes a reserve from the initial payment for potential customer sales allowances, returns and price protection that is analyzed and reviewed within a 60 day period to be liquidated no later than July 31, 2010. The agreement initially expired on March 31, 2009, but was amended to extend the term for certain customers until March 31, 2010.

The $5.0 million sale of our Series A Convertible Preferred Stock and common stock purchase warrants that closed on November 20, 2009 and December 16, 2009, and the conversion of approximately $11.9 million underlying our convertible notes into equity helped the Company to achieve an approximately $5.6 million positive working capital position as of December 31, 2009.  We believe the existing cash and cash generated from operations are sufficient to meet our immediate operating requirements, along with our current financial arrangements. We may need to raise additional capital to strengthen our cash position, facilitate expansion, pursue strategic investments or to take advantage of business opportunities as they arise.

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Critical Accounting Policies and Estimates

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

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

Revenue Recognition

We recognize revenue upon the transfer of title and risk of loss to our customers. Accordingly, we recognize revenue for software when (1) there is persuasive evidence that an arrangement with our customer exists, which is generally a customer purchase order, (2) the product is delivered, (3) the selling price is fixed or determinable, (4) collection of the customer receivable is deemed probable and (5) we do not have any continuing obligations. Our payment arrangements with customers typically provide net 30 and 60-day terms. Advances received from customers are reported on the balance sheet as deferred revenue until we meet our performance obligations, at which point we recognize the revenue.

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

Allowances for Returns and Price Concessions

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

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

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

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

Inventory

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

Product Development Costs

We utilized both internal development teams and third party product developers to develop the titles we publish.  With the sale of Supervillain in September 2008, we no longer have any internal development studios or related costs.

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

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

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

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

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

In December 2007, the FASB issued FASB ASC Topic 808-10-15, “Accounting for Collaborative Arrangements” (ASC 808-10-15) which defines collaborative arrangements and requires collaborators to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) the other collaborators based on other applicable authoritative accounting literature, and in the absence of other applicable authoritative literature, on a reasonable, rational and consistent accounting policy is to be elected.  Effective January 1, 2009, the Company adopted the provisions of FASB ASC Topic 808-10-15.  The adoption of the statement did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

Licenses and Royalties

Licenses consist of payments and guarantees made to holders of intellectual property rights for use of their trademarks, copyrights, technology or other intellectual property rights in the development of our products. Agreements with rights holders generally provide for guaranteed minimum royalty payments for use of their intellectual property.  When significant performance remains to be completed by the licensor, we record payments when actually paid.  Certain licenses extend over multi-year periods and encompass multiple game titles. In addition to guaranteed minimum payments, these licenses frequently contain provisions that could require us to pay royalties to the license holder, based on pre-agreed unit sales thresholds.

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

Asset Impairment

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

Goodwill is the excess of purchase price paid over identified intangible and tangible net assets of acquired companies. Intangible assets consist of trademarks, customer relationships, content and product development. Certain intangible assets acquired in a business combination are recognized as assets apart from goodwill. Identified intangibles other than goodwill are generally amortized using the straight-line method over the period of expected benefit ranging from one to ten years, except for intellectual property, which are usage-based intangible assets that are amortized using the shorter of the useful life or expected revenue stream.

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The Company performs a goodwill impairment test at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from estimated future cash flows. We will perform tests of impairment in the fourth quarter of each fiscal year or earlier if indicators of impairment exist. We determine the fair value of each reporting unit using a discounted cash flow analysis and compare such values to the respective reporting unit's carrying amount.

The Company incurred a triggering event as of September 30, 2009 based on the equity infusion of approximately $4.0 million for 50% ownership in the Company and the conversion of the existing convertible debt during the fourth quarter of 2009.  As such, the Company performed an impairment analysis which resulted in an impairment of goodwill of $14.7 million in 2009.  There was no impairment of other intangible assets.

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

Stock-based Compensation

Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including, in the case of stock option awards, estimating expected stock volatility. In addition, judgment is also required in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

Income Taxes

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

We account for uncertain income tax positions by recognizing in the consolidated financial statements only those tax positions we determine to be more likely than not of being sustainable upon examination, based on the technical merits of the positions, under the presumption that the taxing authorities have full knowledge of all relevant facts. The determination of which tax positions are more likely than not sustainable requires us to use significant judgments and estimates, which may or may not be borne out by actual results.

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Recently Issued Accounting Pronouncements

Effective January 1, 2009, the Company adopted ASC Topic 815 which clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock. The adoption of ASC Topic 815 did not have a significant impact on our results of operations or financial position.

In June 2009, the FASB issued ASC Topic 105 which establishes the FASB Accounting Standards Codification as the single source of authoritative GAAP for all non-governmental entities, with the exception of the SEC and its staff. ASC Topic 105 changes the referencing and organization of accounting guidance and is effective for interim and annual periods ending after September 15, 2009. Since it is not intended to change or alter existing GAAP, the Codification did not have any impact on the Company’s financial condition or results of operations.  Going forward, the Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right; these updates will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification. In the description of Accounting Standards Updates that follows, references in “italics” relate to Codification Topics and Subtopics, and their descriptive titles, as appropriate.

Accounting Standards Updates Not Yet Effective

In June 2009, an update was made to “Consolidation – Consolidation of Variable Interest Entities.” Among other things, the update replaces the calculation for determining which entities, if any, have a controlling financial interest in a variable interest entity (VIE) from a quantitative based risks and rewards calculation, to a qualitative approach that focuses on identifying which entities have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. The update also requires ongoing assessments as to whether an entity is the primary beneficiary of a VIE (previously, reconsideration was only required upon the occurrence of specific events), modifies the presentation of consolidated VIE assets and liabilities, and requires additional disclosures about a company’s involvement in VIEs. This update will be effective for the company beginning January 1, 2010. Management has concluded that adoption of this update will have no significant impact on the company’s consolidated financial position and results of operations when it becomes effective in 2010.

Other Accounting Standards Updates not effective until after December 31, 2009, are not expected to have a significant effect on the company’s consolidated financial position or results of operations.

Off-Balance Sheet Arrangements

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

Fluctuations in Operating Results and Seasonality

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

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Legal Matters

On February 19, 2009, Susan J. Kain Jurgensen, Steven W. Newton, Mercy R. Gonzalez, Bruce C. Kain, Wesley M. Kain, Raymond Pierce and Cristie E. Walsh filed a complaint against Zoo Publishing, Zoo Games and Zoo in the Supreme Court of the State of New York, New York County, index number 09 / 102381 alleging claims for breach of certain loan agreements and employment agreements, intentional interference and fraudulent transfer. The complaint sought compensatory damages, punitive damages and preliminary and permanent injunctive relief, among other remedies. On June 18, 2009, we reached a settlement whereby we agreed to pay to the plaintiffs an aggregate of $560,000 (the “Settlement Amount”) in full satisfaction of the disputed claims, without any admission of any liability of wrongdoing as follows: (a) $300,000 on June 26, 2009; (b) $60,000 on or before the earlier of (i) the date that is 90 days from June 18, 2009 or (ii) the date the Company obtains new and available financing, including any amounts currently held in escrow that will be released from escrow after June 18, 2009, in any form and from any source, in an amount totaling at least $2,000,000; (c) $100,000 on or before December 18, 2009; and (d) $100,000 on or before June 18, 2010. To date, $460,000 of the Settlement Amount has been paid to the plaintiffs. The Zoo Publishing Notes and all other notes, employment, agreements, loan agreements, options, warrants and other agreements relating to the plaintiffs (except with respect to that certain Employment Agreement between Zoo Publishing and Cristie E. Walsh) were terminated and all outstanding obligations of the Company related to these agreements were cancelled. In addition, the plaintiffs returned to us an aggregate of 5,563,950 shares of our common stock owned by them prior to such date.

We are also involved in various other legal proceedings and claims incident to the normal conduct of our business. Although it is impossible to predict the outcome of any legal proceeding and there can be no assurances, we believe that our legal proceedings and claims, individually and in the aggregate, are not likely to have a material adverse effect on our financial condition, results of operations or cash flows.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable as we are a smaller reporting company.

Item 8. Financial Statements and Supplementary Data .

The financial statements required by Item 8 are submitted in a separate section of this report, beginning on Page F-1, and are incorporated herein and made a part hereof.

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

As previously disclosed in that Current Report on Form 8-K filed with the Securities and Exchange Commission on November 5, 2008, effective October 30, 2008, we dismissed Raich Ende Malter & Co. LLP (“Raich Ende”) as our independent public accounting firm and appointed Amper, Politziner & Mattia, LLP (“AP&M”) as our independent public accounting firm to provide audit services for us. The decision to change accountants was approved by our board of directors.

From April 18, 2008 to October 30, 2008, the period of time that Raich Ende served as our principal accountant, no audits were performed by Raich Ende and, therefore, no reports were issued that (i) contained an adverse opinion or disclaimers of opinion and (ii) were qualified or modified as to uncertainty, audit scope or accounting principles.

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From April 18, 2008 to October 30, 2008, there were no disagreements between us and Raich Ende on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Raich Ende, would have caused Raich Ende to make reference to the subject matter of the disagreements in connection with its reports on our financial statements during such periods. None of the events described in Item 304(a)(1)(v) of Regulation S-K occurred during the period that Raich Ende served as our principal accountant.

During our fiscal years ended December 31, 2007 and December 31, 2006, and through October 30, 2008, we did not consult with AP&M regarding the application of accounting principles to a specified transaction, or the type of audit opinion that might be rendered on our financial statements and no written or oral report was provided by AP&M that was a factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issues, and the Company did not consult AP&M on or regarding any matters set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.

Item 9A(T). Controls and Procedures .

Disclosure controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this report.

In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

No system of controls can prevent errors and fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur. Controls can also be circumvented by individual acts of some people, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with its policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Based on the evaluation of the effectiveness of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were not effective at a reasonable assurance level.

Our management has determined that we have a material weakness in our internal control over financial reporting related to not having a sufficient number of personnel with the appropriate level of experience and technical expertise to appropriately resolve non-routine and complex accounting matters or to evaluate the impact of new and existing accounting pronouncements on our consolidated financial statements while completing the financial statements close process.

Changes in controls and procedures.

There were no changes in our internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the fourth quarter of our last fiscal that year materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

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Management’s Annual Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, or GAAP. Our internal control over financial reporting includes those policies and procedures that:

• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect transactions involving our assets;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, management used the framework set forth in the report entitled Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Our management has determined that we have a material weakness in our internal control over financial reporting related to not having a sufficient number of personnel with the appropriate level of experience and technical expertise to appropriately resolve non-routine and complex accounting matters or to evaluate the impact of new and existing accounting pronouncements on our consolidated financial statements while completing the financial statements close process.  Based on this evaluation, management determined that our system of internal control over financial reporting was not effective as of December 31, 2009.

Until this deficiency in our internal control over financial reporting is remediated, there is a reasonable possibility that a material misstatement to our annual or interim consolidated financial statements could occur and not be prevented or detected by our internal controls in a timely manner.

Due to resource constraints in 2009, both monetary and time, we were not able to appropriately address this matter in 2009.  We are committed to addressing this in 2010 and we will reassess our accounting and finance staffing levels to determine and seek the appropriate accounting resources to be added to our staffto handle the existing workload.

This report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only a management’s report in this report.

Item 9B. Other Information .

Not applicable.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Set forth below are the names of our directors and executive officers, their ages, their offices in Zoo Entertainment, Inc., if any, their principal occupations or employment for the past five years, the length of their tenure as directors and the names of other public companies in which such persons hold directorships, if any.

Name	Age	Position(s)
Mark Seremet	45	Director, Chief Executive Officer and President
Jay A. Wolf	37	Chairman of the Board and Secretary
Barry I. Regenstein	52	Director
John Bendheim	56	Director
Drew Larner	45	Director
Moritz Seidel	38	Director
David Smith	63	Director
David J. Fremed	49	Chief Financial Officer
David Rosenbaum	57	President of Zoo Publishing
Steven Buchanan	50	Chief Operating Officer of Zoo Publishing

Our board of directors has concluded that at the time of this filing, each of the members of the board of directors should serve as a director based upon his particular experience, qualifications, attributes and skills, in light of our business and structure.  Biographical information for our directors and executive officers are as follows:

Mark Seremet.  Mr. Seremet has been our Chief Executive Officer and President since May 2009, and has served as a director since September 2008. He has been Chief Executive Officer of Zoo Games since January 2009 and has served as President of Zoo Games since April 2007. Prior to his start at Zoo, Mr. Seremet was an activist internet investor with investments in private companies. From 2005-2006 Mr. Seremet also served as CEO of Spreadshirt.com, which he quickly grew to a lead provider of online, customized merchandise. Mr. Seremet is a co-founder and the first CEO of Take-Two Interactive Software, Inc., which he helped take public in 1997, and where he was President and Chief Operating Officer from 1993 to 1998. Additionally, he served as the Chief Operating Officer of Picis from 1998-2000, SA in Barcelona, Spain and orchestrated its registration for an initial public offering on the Nouveau Marche. Mr. Seremet is also the founder and Chief Executive Officer of Paragon Software, which was acquired in 1992 by MicroProse. Mr. Seremet serves on the boards of Serklin, Inc. He was named Young Entrepreneur of the Year by the U.S. Small Business Administration in 1989 for Pennsylvania and the Mid-Atlantic region and received a B.S. in Business Computer Systems Analysis from Saint Vincent College.  Mr. Seremet’s extensive experience in the video game industry, his familiarity with our business and his management and entrepreneurial skills, are an asset to his services as a director.

Jay A. Wolf.  Mr. Wolf has served as a director and our Secretary since October 1, 2007, and as Executive Chairman of our board of directors since February 11, 2010.  He is the founder and principal of Wolf Capital LP an investment advisory firm he formed in October 2009 to focus on small cap public companies. From November 2003 until September 2009, Mr. Wolf was a partner at Trinad Capital LLC, an activist hedge fund focused on micro-cap public companies. During his work at Trinad, Mr. Wolf assisted distressed and early stage public companies through active board participation, the assembly of management teams and business and financial strategies. Prior to his work at Trinad, Mr. Wolf served as executive vice president of Corporate Development for Wolf Group Integrated Communications Ltd. Prior to that, Mr. Wolf worked at Canadian Corporate Funding, Ltd., a Toronto-based merchant bank as an analyst in the firm’s senior debt department and subsequently for Trillium Growth Capital, the firm’s venture capital fund. Mr. Wolf currently also sits on the boards of Xcorporeal, Inc. (XCR), Hythiam Inc. (HYTM) and NorthStar Systems, Inc. Mr. Wolf is also a member of the board of governors at Cedars-Sinai Hospital. He is a former director of Asianada, Inc., ProLink Holdings Corp., Mandalay Media, Inc., Atrinsic, Inc., Shells Seafood Restaurants, Inc., Optio Software, Inc., Xcorporeal Operations, Inc., Zane Acquisition I, Inc., Zane Acquisition II, Inc., Starvox Communications, Inc. and Noble Medical Technologies, Inc.  Mr. Wolf received his B.A from Dalhousie University.

Mr. Wolf was Chief Operating Officer and Chief Financial Officer of Starvox Communications, Inc. from March 2005 to March 2007.  On March 26, 2008, StarVox Communications, Inc. filed a voluntary petition for liquidation under Chapter 7 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of California, San Jose.  Shells Seafood Restaurants, Inc., a company for which Mr. Wolf formerly served as a director, filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division, on September 2, 2008.

Mr. Wolf’s broad range of investment and operations experience, which includes senior and subordinated debt lending, private equity and venture capital investments, mergers and acquisitions advisory work and public equity investments, equip him with the qualifications and skills to serve on our board of directors.

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Barry I. Regenstein.   Mr. Regenstein has served as a director since October 1, 2007. Mr. Regenstein is also President and Chief Financial Officer of Command Security Corporation. Mr. Regenstein has served as Command Security Corporation’s President since January 2006, as its Executive Vice President and Chief Operating Officer from August 2004 until December 2005, and also as its Chief Financial Officer since October 2004. Trinad Capital Master Fund, Ltd. is a significant shareholder of Command Security Corporation and Mr. Regenstein has formerly served as a consultant for Trinad Capital Master Fund, Ltd. from February 2004 until August 2004. Prior to that period, Mr. Regenstein served as a Senior Vice President and Chief Financial Officer of GlobeGround North America LLC (formerly Hudson General Corporation), an airport services company from 2001 until 2003. Mr. Regenstein also served as Vice President and Chief Financial Officer of GlobeGround North America LLC from 1997 to 2001 and was employed in various executive capacities with GlobeGround North America LLC since 1982. Prior to joining Hudson General Corporation, he was with Coopers & Lybrand in Washington, D.C. Mr. Regenstein is a Certified Public Accountant and received a B.S. in Accounting from the University of Maryland and an M.S. in Taxation from Long Island University. Mr. Regenstein is also a member of the board of directors of Command Security Corporation (MOC).   He is a former director of Mandalay Media, Lateral Media, ProLink Holdings, Mediavest, New Motion and US Wireless.  Mr. Regenstein’s over 30 years of business experience, including over 25 years in operations and finance of contract services companies, are valuable to his contributions as a director.

John Bendheim.   Mr. Bendheim has served as a director since June 2008. Mr. Bendheim is President of Bendheim Enterprises, Inc., a real estate investment holding company with operations located exclusively in California and Nevada. Mr. Bendheim has specialized in providing equity funding for real estate transactions. Previously, he was President of Benditel Incorporated (1988-1994), an apparel manufacturer based in Los Angeles, California. Mr. Bendheim has invested in real estate for his personal account since 1976 and has owned apartments, surgery centers, office buildings, condominiums, model homes, industrial buildings, recreational vehicle parks, and convenience centers.  Mr. Bendheim was the past Chairman of the Cedars-Sinai Board of Governors (2000-2002) and is the current chairman of the Los Angeles Sports & Entertainment Commission.  He is a member of the Board of Directors of the Brentwood School, California Republic Bank, Cedars-Sinai Medical Center, Lowenstein Foundation, Beverly Hills Chamber of Commerce, University Of Southern California Alumni Association Board of Governors, Cedars Sinai Medical Genetics Institute- Community Advisory Board, USC Marshall School Board of Leaders, Wallace Annenberg Center For the Performing Arts, Los Angeles Committee on Foreign Relations, and the Evergreen Community School.  Mr. Bendheim received a B.S. degree in 1975 and an MBA in 1976 from the University of Southern California.   Mr. Bendheim’s extensive management skills and his experience in providing equity funding for companies, are useful in his services as a director.

Drew Larner. Mr. Larner has served as a director since September 2008.  He is CEO of Rdio, Inc., a digital music subscription service.  From 2003 to 2009, he was a Managing Director of Europlay Capital Advisors, a Los Angeles-based merchant bank and advisory firm specializing in media and technology companies.  Prior to Europlay, Mr. Larner spent over twelve years as an executive in the motion picture industry, most recently as Executive Vice-President at Spyglass Entertainment Group. In that role, he was involved in all operations of Spyglass with specific oversight of business development, international distribution and business and legal affairs.  Mr. Larner was responsible for managing the company’s output arrangements with the Walt Disney Company, Kirch Media, Canal Plus and Toho Towa (among others) as well as the equity investments of Disney, Svensk Filmindustri (a subsidiary of the Bonnier Group) and Lusomundo Audiovisuais (a subsidiary of Portuguese Telecom) in Spyglass. During Mr. Larner’s tenure at Spyglass, the company released over fifteen feature films including the blockbuster hit The Sixth Sense , as well as successes Seabiscuit , Bruce Almighty and The Recruit . Prior to Spyglass, Mr. Larner spent a total of five years at Morgan Creek Productions during which time he headed up the business and legal affairs department and then moved on to run Morgan Creek International, the company’s international distribution subsidiary.  In this period, Morgan Creek released over twenty feature films including hits Ace Ventura: Pet Detective , its sequel Ace Ventura: When Nature Calls , Robin Hood: Prince of Thieves and Last of the Mohicans.  Additionally, Mr. Larner spent two years as Vice President/Business Affairs at Twentieth Century Fox.  Mr. Larner began his career as an attorney in the Century City office of O’Melveny & Myers. Mr. Larner currently serves on the Board of Directors of Broadspring, an online search and advertising company. Mr. Larner received a B.A. from Wesleyan University, after which he earned a J.D. from Columbia Law School.   Mr. Larner’s background and experience with technology and entertainment are assets to his services as a director.

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Moritz Seidel.  Mr. Seidel has served as a director since January 2009.  Since April 2007, Mr. Seidel has been the managing director of T7M7 Unternehmensaufbau GmbH, a privately held Venture Capital firm focused on early-stage investments in Ecommerce and gaming companies. He has also served as a Managing Director of MyBestBrands GmbH, an B2C Ecommerce service, since November 2008. In 1998 he founded Webfair AG, a company that provides software solutions to automotive manufacturers (OEMs) and became its Chief Executive Officer. Webfair´s software is used today by more than 50% of all automotive OEMs to monitor the status, bonus schemes and improvement processes of their dealer networks in Europe.  In March 2006, Webfair AG was acquired by Urban Science Inc., headquartered in Detroit, Michigan.  Mr. Seidel was responsible for the integration of Webfair AG within the international Urban Science organization and left the company in April 2007. From 1994 to 1997, Mr. Seidel was a consultant with Roland Berger & Partner, the largest management consulting firm of European origin. His focus was consumer goods, retail and internet. He is a member of the Entrepreneurs Organization (YEO and EO). Mr. Seidel graduated at the age of 23 from the University of Regensburg, Germany with a Diploma in Business Studies (Diplom Kaufmann) and went to school in Germany and United States. Mr. Seidel’s experience with internet and gaming companies, coupled with his management skills, are valuable contributions to his services as a director.

David E. Smith.    Mr. Smith has served as a director since December 2009.  Mr. Smith is the President, CEO, Chairman and primary beneficial owner of Coast Asset Management, LLC, a private investment management firm. Since 1971, following his graduation from the MBA program at the University of California at Berkeley, Mr. Smith has worked in various capacities in the securities industry. His past experience includes a stint at Security Pacific Bank (1973-1983), where Mr. Smith was a Vice President responsible for the sales and fixed income arbitrage trading activities of the Investment Department. In March 1983, Mr. Smith joined Oppenheimer and Company as a bond arbitrageur trading that firm's proprietary capital account. In 1986, Mr. Smith was appointed a Senior Vice President at Oppenheimer, a position he held until he left in November 1990. Following his departure from Oppenheimer, Mr. Smith founded the predecessor for what would ultimately become Coast Asset Management, LLC.  Coast Asset Management, LLC is not affiliated with the Issuer.  Mr. Smith’s experience in the securities industry and his entrepreneurial skills are assets to our board of directors.

David J. Fremed.  Mr. Fremed has been our Chief Financial Officer since May 2009, and Chief Financial Officer of Zoo Games since August 2007. He is a broad-based financial executive with extensive experience in financial operations, budgeting and forecasting, and strategic planning. Prior to working at Zoo Games, he was Executive VP and Chief Financial Officer at Grand Toys International Limited (Nasdaq: GRIN ) where he helped grow the company from $10 million to $150 million in just two years. Mr. Fremed also spent four years at Atari, Inc. as Senior VP of Finance and Chief Financial Officer. During that time he was responsible for all financial functions including treasury, SEC reporting, and compliance. Prior to Atari, Mr. Fremed spent ten years at Marvel Enterprises, Inc. (MVL) and its predecessor in various financial capacities, including Chief Financial Officer. Mr. Fremed earned his MBA in Finance from New York University in 1987 and is a Certified Public Accountant.

David Rosenbaum.  Mr. Rosenbaum has been the President of Zoo Publishing since April 2009.  He has served in various capacities at Zoo Publishing since July 2006 including as Senior Vice President of Sales.  Mr. Rosenbaum served as the Sales Manager of Elmex Corporation, a western model company, from 1975 to 1980, and again from 1982 to 1983.  He served as the Sales Manager of General Toy Distribution, a toy distribution company, from 1979 to 1981.  Mr. Rosenbaum was also the Sales Manager of Kramer Brothers Distribution Company, a hobby distributor, from 1981 to 1982, and of Associated Independent Distributors from 1983 to 1989.  In 1989, Mr. Rosenbaum founded Jack of All Games, which he sold in 1998, but remained on as President through March 2006.  Mr. Rosenbaum received a B.A. from the University of Cincinnati in 1974.

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Steven Buchanan.  Mr. Buchanan has been the Chief Operating Officer of Zoo Publishing since February 2010.  Mr. Buchanan has served as a consultant in a range of capacities at Zoo Publishing since March 2009. Mr. Buchanan has held a variety of executive titles at Jack of All Games, a video game distribution company, including Executive Vice President of Sales and Marketing and President from 1999 to 2009.  At various times between 1992 and 1999, he served as District Sales Manager, Eastern Zone Sales Manager and National Sales Director of Sega of America, a video game publisher. Mr. Buchanan also served as a Buyer Merchandiser from 1981 to 1992, specializing in video games, at Meijer, a Michigan based hypermarket.

There are no family relationships among our directors or executive officers.

Section 16(a) Beneficial Ownership Reporting Compliance.

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (“SEC”). These persons are required by regulation to furnish us with copies of all Section 16(a) reports that they file. Based on our review of the copies of these reports received by us, or written representations from the reporting persons that no other reports were required, we believe that, during 2009, all filing requirements applicable to our current officers, directors and greater than ten percent beneficial owners were complied with.

Code of Ethics.

Now that we are no longer a shell company, we intend to establish a code of ethics.

Committees of the Board of Directors.

The Board has determined that each member of the audit committee is “independent,” as that term is defined under Rule 10A-3(b)(1) of the Securities and Exchange Act of 1934, as amended.

Audit Committee. The Audit Committee of our Board of Directors consists of Messrs. Barry Regenstein (Chairman), John Bendheim and Drew Larner. Our Audit Committee held one meeting in 2008, since we became an operating company as a result of the merger with Zoo Games in September 2008.  Our Audit Committee has the authority to retain and terminate the services of our independent accountants, review annual financial statements, consider matters relating to accounting policy and internal controls and review the scope of annual audits.  The Audit Committee acts under a written charter, which more specifically sets forth its responsibilities and duties, as well as requirements for the Committee’s composition and meetings.  The Board has determined that Messrs. Barry Regenstein, John Bendheim and Drew Larner are “financial experts” serving on its Audit Committee, and are independent, as the SEC has defined that term under Item 407 of Regulation S-K.  Please see the biographical information for these individuals contained in the section above.  During 2008, the Audit Committee held one meeting.   During 2009, the Audit Committee held five meetings.

Nominating Committee. We are not a listed company and there is no legal requirement that we have a nominating committee. We do not have a formal policy in regard to nominations, but the board of directors would consider any person as a nominee whose name is submitted in writing at its corporate address at least 120 days before a meeting at which directors are to be elected.

Compensation Committee. We have a Compensation Committee consisting of Messrs. Barry Regenstein, Drew Larner and John Bendheim.The Compensation Committee determines matters pertaining to the compensation and expense reporting of certain of our executive officers, and administers our stock option, incentive compensation, and employee stock purchase plans.  The Compensation Committee acts under a written charter, which more specifically sets forth its responsibilities and duties, as well as requirements for the Committee’s composition and meetings.  During 2008, the Compensation Committee held one meeting.  During 2009, the Compensation Committee held three meetings.

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Independence of Directors.  Our Board currently consists of seven members. They are Jay Wolf, Barry Regenstein, John Bendheim, Drew Larner, Moritz Seidel, Mark Seremet and David Smith. Messrs. Regenstein, Bendheim, Larner, Seidel and Smith are independent directors. We have determined their independence using the definition of independence set forth under the applicable NASDAQ Marketplace rules.

Item 11. Executive Compensation.

SUMMARY COMPENSATION TABLE

The following table shows the compensation paid or accrued during the fiscal years ended December 31, 2009 and 2008 to (1) our Chief Executive Officer and (2) our two most highly compensated executive officers, other than our Chief Executive Officer, who earned more than $100,000 during the fiscal year ended December 31, 2009. The table includes additional executives who would have been among the two most highly compensated executive officers, other than our Chief Executive Officer, except for the fact that they were not serving as executive officers of the Company as of December 31, 2009.

Name and Principal Position	Year	Salary		Bonus		Stock Awards			Option Awards			All Other Compensation			Total
Robert S. Ellin, former	2009		0		0		0			0			0			0
Chief Executive Officer	2008		0		0		275,000	(2)		0			0			275,000
of Zoo Entertainment (1)
Mark E. Seremet,	2009		325,000		0		0			225,000	(4)		105,300	(5)		655,300
Chief Executive Officer of Zoo	2008		260,222		0		25,000	(6)		510,164	(7)		7,200	(8)		802,586
Entertainment (3)
David J. Fremed,	2009		328,500		0		0			0			15,300	(9)		343,800
Chief Financial Officer of Zoo	2008		314,000		0		0			51,017	(12)		15,600	(11)		380,617
Entertainment (10)
David Rosenbaum,	2009		375,000		0		0			0			85,700	(13)		460,700
President of Zoo	2008		375,000		187,500		0			552,112	(14)		25,000	(15)		1,139,612
Publishing

(1)  Mr. Ellin resigned as Chief Executive Officer on May 1, 2009 and resigned as a director on November 18, 2009.

(2) Mr. Ellin received 250,000 restricted shares of our common stock in June 2008 valued at $1.10 per share in accordance with ASC Topic 718.

(3) Mr. Seremet became Chief Executive Officer of Zoo Entertainment on May 1, 2009.  Prior to that he was Chief Executive Officer of Zoo Games.

(4) Mr. Seremet received options to acquire 750,000 shares of our stock at a fair market value of $225,000 in accordance with ASC Topic 718.

(5) Mr. Seremet received $90,000 in 2009 as cash compensation for his personal guaranty of various loan facilities and we paid a net amount for family medical benefits of $15,300.

(6) Mr. Seremet received 16,484 shares of our common stock in lieu of a cash bonus in 2008 valued at $25,000 in accordance with ASC Topic 718.

(7) Mr. Seremet received options to acquire 702,327 shares of our stock valued at $510,164 in accordance with ASC Topic 718.

(8) Includes a $600 monthly car allowance.

(9) Includes a $600 monthly car allowance, a $25,000 relocation payment and family medical benefits totaling $11,284.

(10) Mr. Fremed became Chief Financial Officer of Zoo Entertainment on May 1, 2009.  Prior to that he was Chief Financial Officer of Zoo Games.

(11) Consists of family medical benefits.

(12) Mr. Fremed received options to acquire 70,233 shares of our stock valued at $51,017 in accordance with ASC Topic 718.

(13) Mr. Rosenbaum received $63,000 in 2009 as cash compensation for his personal guaranty of various loan facilities and the Company paid a net amount for family medical benefits of $22,700.

(14) Mr. Rosenbaum received options to acquire 760,031 shares of our stock valued at $552,112 in accordance with ASC Topic 718.

(15) Consists of family medical benefits.

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On January 14, 2009, Zoo Games entered into an employment agreement (the “Seremet Employment Agreement”) with Mark Seremet, a director of the Company and President of Zoo Games, pursuant to which Mr. Seremet also became Chief Executive Officer of Zoo Games. The Seremet Employment Agreement is for a term of three years, at an initial base salary of $325,000 per year and provides for a bonus at the discretion of the Company’s board of directors. The Seremet Employment Agreement is renewable automatically for successive one year periods unless either party gives written notice not to renew at least 60 days prior to the expiration of the initial term or any renewal terms. The Company also granted Mr. Seremet an option to purchase 750,000 shares of the Company’s common stock, at an exercise price of $0.30 per share, pursuant to the Company’s 2007 Employee, Director and Consultant Stock Plan, as amended. Mr. Seremet became Chief Executive Officer and President of Zoo Entertainment on May 1, 2009.

On January 14, 2009, Mr. Seremet’s previous employment agreement was terminated in connection with Zoo Games and Mr. Seremet entering into the Seremet Employment Agreement. Under the previous employment agreement, Mr. Seremet agreed to serve as President of Zoo Games. Mr. Seremet’s previous employment agreement provided for a term ending on April 30, 2011 with an annual base salary of $250,000 and a bonus based on a performance milestones as determined by the compensation committee of Zoo Games. The previous employment agreement was renewable automatically for successive one year periods unless either party gives written notice not to renew at least 60days prior to the expiration of the initial term or any renewal terms. Mr. Seremet was entitled to receive a monthly car allowance of up to $600 per month and was entitled to participate in Zoo Games’s benefit plans in the same manner and at the same levels as Zoo Games makes such opportunities available to all of Zoo Games’s employees. If the previous employment agreement was terminated by Mr. Seremet for Good Reason (as defined in the Original Employment Agreement) or by Zoo Games without Cause (as defined in the previous employment agreement) then Mr. Seremet was entitled to receive (a) 1.5 times the sum of his then current base salary and bonus earned with respect to the employment year preceding the year in which he was terminated (the “Prior Bonus”), payable over eighteen months from the termination date, (b) payment of premiums for Mr. Seremet under Zoo Games’s health plans or materially similar benefits, (c) any earned but unpaid base salary or bonus, (d) any earned but unpaid performance bonus from the prior fiscal year and (e) acceleration of vesting of all outstanding stock options and restricted stock which have not vested as of the date of such termination, if any. If Mr. Seremet’s employment was terminated as the result of his death, his heirs will be entitled to receive (i) any earned but unpaid base salary or bonus, (ii) any earned but unpaid performance bonus from the prior fiscal year and (iii) acceleration of vesting of all outstanding stock options and restricted stock which have not vested as of the date of death, if any. Mr. Seremet was subject to traditional non-competition and employee non-solicitation restrictions while he was employed by Zoo Games and for a period of one year after termination, except that if the agreement was not renewed at the end of a term, the one-year restricted period shall not apply unless Mr. Seremet is paid the sum of his then current base salary and Prior Bonus. The options to purchase 702,327 shares of common stock issued to Mr. Seremet in 2008 are fully-vested and have an exercise price of $1.52 per share.

On January 1, 2008, Zoo Publishing entered into an employment agreement with David Rosenbaum, which was subsequently amended on July 1, 2008 and July 23, 2009, pursuant to which he became Senior Vice President of Sales. The term of the agreement is four years with an annual base salary of $375,000 for the first two years and $400,000 for the remaining years. Mr. Rosenbaum is eligible to receive a bonus as pay be approved by the board of directors. If Mr. Rosenbaum’s employment is terminated by the Company without cause, severance must be paid according to the following: if the termination is within the first twelve months of the employment agreement, Mr. Rosenbaum shall receive twenty-four months of compensation less the amount already paid; if the termination is after twelve months but before thirty-six months, Mr. Rosenbaum shall receive twelve months of severance pay; if the termination is after thirty-six months, Mr. Rosenbaum shall receive the remainder of pay due to him under the employment agreement. The options to purchase 760,031 shares of common stock issued to Mr. Rosenbaum in 2008 are fully-vested and have an exercise price of $1.52 per share. In April 2009, Mr. Rosenbaum was appointed as President of Zoo Publishing.

On May 12, 2009, we entered into a letter agreement with each of Mark Seremet and David Rosenbaum (the “Fee Letters”), pursuant to which, in consideration for Messrs. Seremet and Rosenbaum each entering into a Guaranty with Wells Fargo for the full and prompt payment and performance by the Company and its subsidiaries of the obligations in connection with a purchase order financing (the “Loan”), we agreed to compensate Mr. Seremet in the amount of $10,000 per month, and Mr. Rosenbaum in the amount of $7,000 per month, for so long as such executive remains employed while the Guaranty and Loan remain in full force and effect. If the Guaranty is not released by the end of the month following termination of employment of either Messrs. Seremet or Rosenbaum, as applicable, the monthly fee shall be doubled for each month thereafter until the Guaranty is removed.

 In connection with the financing consummated on November 20, 2009, Messrs. Seremet and Rosenbaum agreed to amend their respective Fee Letters, pursuant to which: in the case of Mr. Seremet, the Company will pay to Mr. Seremet a fee of $10,000 per month for so long as the Guaranty remains in full force and effect, but only for a period ending on November 20, 2010; and, in the case of Mr. Rosenbaum, the Company will pay to Mr. Rosenbaum a fee of $7,000 per month for so long as the Guaranty remains in full force and effect, but only for a period ending on November 20, 2010. In addition, the amended Fee Letters provide that, in consideration of each of their continued personal guarantees, we will issue to each of Messrs. Seremet and Rosenbaum, an option to purchase shares of common stock or restricted shares of common stock, equal to approximately a 6.25% ownership interest on a fully diluted basis, respectively. Subject to the effectiveness (the “Effective Date”) of an amendment to the Company’s Certificate of Incorporation authorizing an increase in the number of authorized shares of the Company’s common stock, par value $0.001 per share, from 250,000,000 shares to 3,500,000,000 shares (the “Charter Amendment”), on February 11, 2010, the Company issued options to purchase 202,581,600 shares of common stock to each of Mark Seremet and David Rosenbaum pursuant to the Fee Letters. The options have an exercise price of $0.0025 per share and vest as follows: commencing as of the Effective Date, 72% vest immediately, 14% on May 12, 2010 and 14% vest on May 12, 2011. On January 13, 2010, our Board of Directors and stockholders holding approximately 66.7% of our outstanding voting capital stock approved the Charter Amendment. On March 10, 2010, the Company filed the Charter Amendment with the Secretary of State of the State of Delaware, and the Company’s authorized shares of common stock increased from 250,000,000 to 3,500,000,000.

On June 4, 2007, as amended on August 8, 2008, David J. Fremed and Zoo Games entered into an employment agreement pursuant to which Mr. Fremed became Chief Financial Officer of Zoo Games. Mr. Fremed’s employment agreement provides for a term that commenced on August 16, 2007 and ends on June 15, 2010, with a starting annual base salary of $250,000. Mr. Fremed’s annual base salary will increase to no less than $265,000 after twelve months and to no less than $285,000 after twenty-four months. Mr. Fremed is entitled to a bonus of at least $50,000 per twelve month period, based on certain milestones and paid quarterly. Mr. Fremed also received equity grants of incentive units when Zoo Games was a limited liability company. Mr. Fremed is entitled to receive reimbursement of up to $500 per month for expenses associated with his automobile. Mr. Fremed is entitled to participate in Zoo Games’s benefit plans in the same manner and the same levels as Zoo Games makes such opportunities available to the senior executives of Zoo Games. Mr. Fremed’s employment is at will and Zoo Games may terminate Mr. Fremed’s employment at any time. If Zoo Games terminates the employment agreement without Cause (as defined in the employment agreement), then Mr. Fremed will continue to receive six months of salary, bonus and benefits. If Zoo Games terminates the employment agreement as a result of Change in Control of Zoo Games (as defined in the employment agreement), or if, in connection with a Change in Control of Zoo Games, Mr. Fremed's duties are diminished below those of the Chief Financial Officer, or are materially diminished below those that he had in the month prior to the Change in Control and Mr. Fremed resigns due to such diminution of duties, then Mr. Fremed will be entitled to receive twelve months of salary, bonus and benefits. Under the employment agreement, Mr. Fremed is subject to traditional non-competition and employee non-solicitation restrictions while he is employed by Zoo Games and for a period of one year thereafter except that the one-year restricted period shall not apply unless Mr. Fremed is paid his then current base salary. The options to purchase 70,233 shares of common stock issued to Mr. Fremed in 2008 are fully-vested and have an exercise price of $1.52 per share.

Effective February 15, 2010, Zoo Games entered into Amendment Number Two to the June 4, 2007 David Fremed Employment Agreement (the “Amended Employment Agreement”) with Mr. Fremed, which amended his original employment agreement. The term of the Amended Employment Agreement is for two years, at an annual base salary of $335,000.  He is also eligible to receive a bonus at the discretion of the board of directors. 

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2009 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

										Stock Awards
														Equity
	Option Awards													Incentive		Equity
					Equity									Plan		Incentive Plan
					Incentive									Awards:		Awards:
					Plan									Number of		Market or
					Awards:					Number		Market		Unearned		Payout Value
	Number of		Number of		Number of					of Shares		Value of		Shares,		of Unearned
	Securities		Securities		Securities					or Units		Shares or		Units or		Shares, Units
	Underlying		Underlying		Underlying					of Stock		Units of		Other		or Other
	Unexercised		Unexercised		Unexercised		Option			That		Stock That		Rights That		Rights That
	Options (#)		Options (#)		Unearned		Exercise		Option	Have Not		Have Not		Have Not		Have Not
Name	Exercisable		Unexercisable		Options		Price($)		Expiration Date	Vested (#)		Vested ($)		Vested (#)		Vested ($)(1)
Robert S. Ellin		0		0		0		-	-		0		0		0		0
Mark Seremet		702,328		0		0		1.52	July 2018		0		0		0		0
		8,062		0		0		2.58	May 2018		0		0		0		0
		0		750,000		0		0.30	January 2019		0		0		0		0
David Rosenbaum		760,031		0		0		1.52	July 2018		0		0		0		0
David Fremed		42,575		0		0		2.58	May 2018		0		0		0		0
		23,411		46,822		0		2.13	September 2018		0		0		0		0

DIRECTOR COMPENSATION

The following table reflects the compensation paid to our current directors during the fiscal year ended December 31, 2009.

	Fees									Nonqualified
	Earned or							Non-Equity		Deferred
	Paid in			Stock		Option		Incentive Plan		Compensation		All Other
	Cash			Awards		Awards		Compensation		Earnings		Compensation		Total
Name	($)			($)		($)		($)		($)		($)		($)
Barry Regenstein		12,500	(1)		-		—		—		—		—		12,500
Drew Larner		7,500	(2)		-		—		—		—		—		7,500
John Bendheim		5,000	(3)		-		—		—		—		—		5,000

(1) $10,000 for chairman of the Audit Committee and $2,500 as a member of the Compensation Committee.

(2) $5,000 for chairman of the Compensation Committee and $2,500 as a member of the Compensation Committee 

(3) $2,500 as a member of the Compensation Committee and $2,500 as a member of the Compensation Committee

In October 2008, the Board considered, and subsequently approved on February 11, 2010, the following compensation scheme for the members of the Audit Committee and the Compensation Committee for the fiscal year 2009.

· Audit Committee:

- Chairman - $20,000 per year, plus non-qualified options to purchase 100,000 shares of the Company’s common stock, vesting over three years and in accordance with the terms set forth in the Company’s standard form of non-qualified stock option agreement.

- Members - $5,000 per year, plus non-qualified options to purchase 25,000 shares of the Company’s common stock, vesting over three years and in accordance with the terms set forth in the Company’s standard form of non-qualified stock option agreement.

· Compensation Committee:

- Chairman- $10,000 per year, plus non-qualified options to purchase 50,000 shares of the Company’s common stock, vesting over three years and in accordance with the terms set forth in the Company’s standard form of non-qualified stock option agreement.

- Members - $5,000 per year, plus non-qualified options to purchase 25,000 shares of the Company’s common stock, vesting over three years and in accordance with the terms set forth in the Company’s standard form of non-qualified stock option agreement.

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Members of the Audit Committee and Compensation Committee received six months of cash compensation during 2009 for their Board service during 2009. On February 11, 2010, the Company issued 2,743,800 shares, 1,829,400 shares and 4,573,200 shares, respectively, of restricted common stock to each of Drew Larner, John Bendheim and Barry Regenstein in consideration for each of them serving as a member of the Company’s Compensation Committee and Audit Committee in lieu of the balance of the cash compensation that was due to them for their 2009 Board Committee service. No stock options were issued to any directors during 2009 in connection with the compensation packages described above.

Termination of Employment and Change-in-Control Arrangements

Mr. Seremet’s employment agreement may be terminated for Cause (as defined in his employment agreement) by Zoo Games upon written notice, without Cause by Zoo Games, for Good Reason by Mr. Seremet, death or disability, or at Mr. Seremet’s election upon 30 days prior written notice. In the event the employment agreement is terminated for Cause, death or disability, or at the election of Mr. Seremet, Zoo Games will have no further obligations other than the payment of earned but unpaid salary and accrued vacation days.  In the event that the employment agreement is terminated without Cause by Zoo Games or for Good Reason by Mr. Seremet,  Zoo Games shall pay to Mr. Seremet any earned but unpaid salary, acrrued vacation days,  and severance in a lump sum aount equivalent to one year of annual base salary in effect on the date of termination. The payment of severance is conditioned upon Mr. Seremet’s release of all claims against Zoo Games.

If Mr. Rosenbaum’s employment is terminated by Zoo Publishing without cause, severance must be paid according to the following: if the termination is within the first twelve months of the employment agreement, Mr. Rosenbaum shall receive twenty-four months of compensation less the amount already paid; if the termination is after twelve months but before thirty-six months, Mr. Rosenbaum shall receive twelve months of severance pay; if the termination is after thirty-six months, Mr. Rosenbaum shall receive the remainder of pay due to him under the employment agreement.

Mr. Fremed’s employment is at will and Zoo Games may terminate Mr. Fremed’s employment at any time. If Zoo Games terminates the employment agreement without Cause (as defined in the employment agreement), then Mr. Fremed will continue to receive six months of salary, bonus and benefits. If Zoo Games terminates the employment agreement as a result of Change in Control of Zoo Games (as defined in the employment agreement), or if, in connection with a Change in Control of Zoo Games, Mr. Fremed's duties are diminished below those of the Chief Financial Officer, or are materially diminished below those that he had in the month prior to the Change in Control and Mr. Fremed resigns due to such diminution of duties, then Mr. Fremed will be entitled to receive twelve months of salary, bonus and benefits.

Other than as described above, we have no plans or arrangements with respect to remuneration received or that may be received by the above-referenced named executive officers to compensate such officers in the event of termination of employment (as a result of resignation, retirement, change of control) or a change of responsibilities following a change of control.

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

The following table sets forth certain information with respect to the beneficial ownership of our common stock as of March 30, 2010 for (i) each of our Chief Executive Officer and our two most highly compensated executive officers, who are referred to as named executive officers, (ii) each of our directors, (iii) all persons, including groups, known to us to own beneficially more than five percent (5%) of any class of our voting stock and (iv) all current executive officers and directors as a group. As of March 30, 2010, the Company had 2,778,409,829 shares of common stock outstanding.

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	Common		Percentage of
Name and Address of Owner (1)	Stock		VotingPower
5% Stockholders;
Robert Ellin (2)		268,565,826	9.7
Patricia Peizer (3)		321,684,000	11.6
Harris Toibb (4)		268,680,309	9.7
Peter Brant (5)		227,723,631	8.2
Directors and named executive officers:
Jay Wolf (6) (11)		206,097,604	7.4
Barry Regenstein (7) (11)		8,446,550	*
John Bendheim (8) (11)		5,265,550	*
Drew Larner (9) (11)		5,929,950	*
Moritz Seidel (10) (11)		121,848,632	4.4
Mark Seremet (12) (11)		167,479,639	5.7
David Fremed (13) (11)		25,697,785	*
David Rosenbaum (14) (11)		186,765,633	6.4
David Smith (15) (11)		631,844,322	22.7
All current directors and executive officers as a group (nine persons) (16)		1,359,375,665	43.6

* Less than one percent

(1) Except as specifically indicated in the footnotes to this table, the persons named in this table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options, warrants or rights held by that person that are currently exercisable or exercisable, convertible or issuable within 60 days of March 15, 2010, are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person.

(2) Consists of 250,000 shares of restricted common stock held by Mr. Ellin, 211,735,553 shares of common stock held by Trinad Capital Master Fund, Ltd. (“TCMF”) and 56,580,273 shares of common stock held by Trinad Management, LLC (“Trinad Management”), which is an affiliate of and provides investment management services to, TCMF. The address of TCMF is 2121 Avenue of the Stars, Suite 2550, Los Angeles, CA 90067. Robert S. Ellin has sole voting and investment power with respect to the shares held of record by TCMF.

(3) Consists of an aggregate of 321,684,000 shares of common stock, of which 196,206,000 shares are held by Socius Capital Group, LLC and 125,478,000 shares are held by Focus Capital Partners, LLC, each of which are entities owned and controlled by Patricia Peizer. Ms. Peizer has sole voting and investment power with respect to the shares. This amount does not include warrants to purchase an aggregate of 610,316,000 shares of common stock held by Socius Capital Group, LLC and Focus Capital Partners that are not exercisable within 60 days as a result of a 9.9% ownership limitation contained in the warrants. The address for Ms. Peizer is 11150 Santa Monica Boulevard, Los Angeles, CA 90025.

(4) Consists of 268,403,768 shares of common stock and immediately exercisable warrants to purchase 276,541 shares of common stock, but does not include warrants to purchase 2,272,727 shares of common stock that are not exercisable within sixty (60) days as a result of a 4.99% ownership limitation contained in the warrants. The address of Harris Toibb is 6355 Topenga Boulevard, Suite 335, Woodland Hills, CA 91367.

(5) Consists of 225,606,000 shares of common stock owned by Ariza, LLC, a Company controlled by Mr. Brant, and 2,048,127 shares of common stock, immediately exercisable warrants to purchase 37,246 shares of common stock and options to purchase 32,258 shares of common stock, held by Mr. Brant. The amount does not include 189,692 shares of common stock and warrants to purchase 47,421 shares of common stock held by The Bear Island Paper Company LLC Thrift Plan-Aggressive Growth Fund, of which Mr. Brant is the economic beneficiary and shares investment and dispositive power with the trustees of the Plan of which Mr. Brant is one trustee. Mr. Brant has the sole power to vote or dispose of the shares held by Ariza, LLC The address for Mr. Brant is c/o Brant Industries, Inc., 80 Fieldpoint Road, Greenwich, CT 06830.

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(6) Consists of 159,641,000 shares of restricted common stock, 40,994,654 shares of common stock andnon-qualified stock options to purchase up to 5,461,950 shares of common stock for a purchase price of $0.0041 per share that will vest and become exercisable within the next 60 days. This does not include non-qualified stock options to purchase up to 16,385,850 shares of common stock for a purchase price of $0.0041per share that are not vested and not exercisable within the next 60days.

(7) Consists of 4,623,200 shares of restricted common stock andnon-qualified stock options to purchase up to 3,823,350 shares of common stock for a purchase price of $0.0041 per share that will vest and be exercisable within the next 60 days. Thisdoes not include non-qualified stock options to purchase up to 11,470,050 shares of common stock for a purchase price of $0.0041per share that are not vested and not exercisable within the next 60 days.

(8) Consists of 2,079,400 shares of restricted common stock and non-qualified stock options to purchase up to 3,186,150 shares of common stock for a purchase price of $0.0041 per share that will vest and be exercisable within the next 60days. This does not include non-qualified stock options to purchase up to 9,558,450 shares of common stock for a purchase price of $0.0041per share that are not vested and not exercisable within the next 60 days.

(9) Consists of 2,743,800 shares of restricted common stock andnon-qualified stock options to purchase up to 3,186,150 shares of common stock for a purchase price of $0.0041 per share that will vest and be exercisable within the next 60 days. Thisdoes not include non-qualified stock options to purchase up to 9,558,450 shares of common stock for a purchase price of $0.0041per share that are not vested and not exercisable within the next 60 days.

(10) Consists of 120,027,932 shares of common stock held by T7M7 Unternehmensaufbau GmbH. Mr. Seidel is the Managing Director of T7M7 Unternehmensaufbau GmbH, and as a result, may be deemed to indirectly beneficially own an aggregate of 120,027,932 shares of common stock. Mr. Seidel disclaims beneficial ownership of these securities. Mr. Seidel has the sole voting and investment power with respect to the shares held by T7M7 Unternehmensaufbau GmbH. Also consist of non-qualified stock options held by Mr. Seidel to purchase up to 1.820.700 shares of common stock for a purchase price of $0.0041 per share that will vest and be exercisable within the next 60 days, but does not include non-qualified stock options to purchase up to 5,462,100 shares of common stock for a purchase price of $0.0041 per share that are not vested and not exercisable within the next 60 days. The address of T7M7 Unternehmensaufbau GmbH is Occam-Strasse 4, Rueckgebauede, 80802, Muenchen, Germany.

(11) The address of each of these persons is c/o Zoo Entertainment, Inc., 3805 Edwards Road, Suite 400, Cincinnati, OH 45209.

(12) Consists: of 20,645,825 shares of common stock, immediately exercisable warrants to purchase 5,893 shares of common stock for a purchase price of $2.13 per share; immediately exercisable warrants to purchase 8,779 shares of common stock for a purchase price of $2.84 per share; non-qualified stock options to purchase up to 702,328 shares of common stock for a purchase price of $1.52 per share and non-qualified stock options to purchase up to 8,062 shares of common stock for a purchase price of $2.58 per share, in each case which is fully vested and immediately exercisable;non-qualified stock options to purchase up to 250,000 shares of common stock for a purchase price of $0.30 per share that will vest and be exercisable within the next 60 days, but does not include non-qualified stock options to purchase up to 500,000 shares of common stock for a purchase price of $0.30 per share that are not vested and not exercisable within the next 60 days; and non-qualified stock options to purchase up to 145,858,752 shares of common stock for a purchase price of $0.0025 per share that will vest and become exercisable within the next 60days, but does not include non-qualified stock options to purchase up to 56,722,848 shares of common stock for a purchase price of $0.0025 per share that are not vested and not exercisable within the next 60 days.

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(13) Consists of: 142,839 shares of common stock; non-qualified stock options to purchase up to 42,575 shares of common stock for a purchase price of $2.58 per share which are fully vested and immediately exercisable; non-qualified stock options to purchase up to 23,411 shares of common stock for a purchase price of $2.13 per share that are vested and exercisable, but does not include non-qualified stock options to purchase up to 46,822 shares of common stock for a purchase price of $2.13 per share that are not vested and not exercisable within the next 60days; and non-qualified stock options to purchase up to 25,488,960 shares of common stock for a purchase price of $0.0041 per share that will vest and become exercisable within the next 60 days, but does not include non-qualified stock options to purchase up to 10,923,840 shares of common stock for a purchase price of $0.0041per share that are not vested and not exercisable within the next 60 days.

(14) Consists of: 40,117,478 shares of common stock; immediately exercisable warrants to purchase 29,371 shares of common stock for a purchase price of $2.13 per share;non-qualified stock options to purchase up to 760,031 shares for a purchase price of $1.52 per share which are fully vested and immediately exercisable; and non-qualified stock options to purchase up to 145,858,752 shares of common stock for a purchase price of $0.0025 per share that will vest and be exercisable within the next 60 days, but does not include non-qualified stock options to purchase up to 56,722,848 shares of common stock for a purchase price of $0.0025 per share that are not vested and not exercisable within the next 60 days.

(15) Consists of: 621,083,000 shares of common stock owned directly by Mr. Smith; 6,481,965 shares of common stock owned by Coast Sigma Fund, LLC and 2,458,657 shares of common stock owned by Coast medina, LLC, both companies of which are controlled by Mr. Smith; non-qualified stock options to purchase up to 1,820,700 shares of common stock for a purchase price of $0.0041 per share that will vest and become exercisable within the next 60 days, but does not include non-qualified stock options to purchase up to 5,462,100 shares of common stock for a purchase price of $0.0041per share that are not vested and not exercisable within the next 60 days. Mr. Smith became a director of the Company on December 14, 2009. The address for Mr. Smith is 2450 Colorado Ave., Suite 100 East Tower, Santa Monica, CA 90404.

(16) Includes warrants to purchase 44,043 shares of common stock and options to purchase 338,291,871 shares of common stock.

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

The following is a description of transactions that were entered into with our executive officers, directors or 5% stockholders during the past two fiscal years. We believe that all of the transactions described below were made on terms no less favorable to us than could have been obtained from an unaffiliated third party. All future related transactions will be approved by our audit committee or the full board of directors.

On July 7, 2008, we entered into a Note Purchase Agreement with TCMF and the investors set forth on the schedule thereto, as subsequently amended on July 15, 2008, July 31, 2008 and August 15, 2008 (the “Note Purchase Agreement”), pursuant to which the investors agreed to provide a loan to the Company in the aggregate principal amount of $9,000,000, in consideration for the issuance and delivery of senior secured convertible promissory notes (the “Notes”). As partial inducement to purchase the Notes, we issued to the investors warrants to purchase common stock of the Company (the “Warrants,” and together with the issuance of the Notes, the “Financing”). The offering period of the Financing closed on August 15, 2008. Pursuant to the Note Purchase Agreement on July 7, 2008, we issued to TCMF, a principal stockholder of the Company of which Robert Ellin, our former Chief Executive Officer and a former director is the managing director, and of which Jay Wolf, our Secretary and a director was a managing director until December 2009, a Note in the aggregate principal amount of $2,500,000. The Note bore an interest rate of five percent (5%) for the time period beginning on July 7, 2008 and ending on July 7, 2009, unless extended. Upon the occurrence of an investor sale, as defined in the Note, the entire outstanding principal amount of the Note and any accrued interest thereon will be automatically converted into shares of common stock of the Company. In connection with the Note Purchase Agreement, we issued to TCMF a Warrant to purchase 2,272,727 shares of common stock of the Company. The Warrant has a five year term and an exercise price of $0.01 per share. On July 30, 2008, TCMF exercised its Warrant to purchase 2,272,727 shares of common stock of the Company. On November 20, 2009, the Notes issued to TCMF converted into shares of Series B Convertible Preferred Stock. On January 13, 2010, our Board of Directors and stockholders holding approximately 66.7% of our outstanding voting capital stock approved the Charter Amendment. The consents we received constituted the only stockholder approval required for the Charter Amendment under the Delaware General Corporation Law (the “DGCL”) and our existing Certificate of Incorporation and Bylaws. Pursuant to Rule 14c-2 of the Securities Exchange Act of 1934, as amended, stockholder approval of this amendment will become effective on or after such date that is approximately 20 calendar days following the date we first mailed the definitive Information Statement Pursuant to Section 14(c) (the “Information Statement”) to our stockholders. The Information Statement was first sent to our stockholders on February 16, 2010. On March 10, 2010, the Company filed the Charter Amendment with the Secretary of State of the State of Delaware.

Upon the filing of the Charter Amendment on March 10, 2010, the Series B Preferred Stock automatically converted to shares of common stock.

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In connection with an amendment to the Management Agreement, as described below, we issued to Trinad Management, LLC, an affiliate of TCMF, of which ( “Trinad”) a Note in the principal amount of $750,000 and a Warrant to purchase 681,818 shares of the Company’s common stock, on the same terms and conditions as the Notes and Warrants issued in the financing. On November 20, 2009, the Note issued to Trinad converted into shares of Series B Convertible Preferred Stock. Upon the filing of the Charter Amendment on March 10, 2010, the Series B Preferred Stock automatically converted to shares of common stock.

Pursuant to a Security Agreement, dated as of July 7, 2008, as amended, we granted a security interest in all of its assets to each of the investors, including TCMF, to secure our obligations under the Notes. Additionally, on July 7, 2008, Trinad executed a joinder to the Security Agreement. The security interests were terminated upon the conversion of the Notes into shares of Series B Convertible Preferred Stock.

On July 31, 2008, TCMF executed a counterpart signature page to the Note Purchase Agreement, pursuant to which we issued to TCMF a Note in the principal amount of $1,500,000. As partial inducement to purchase the Note, TCMF received a Warrant to purchase 1,363,636 shares of common stock of the Company. The Note and Warrant issued to TCMF were issued on the same terms and conditions as the Notes and Warrants that were issued in the initial closing of the Financing. On August 1, 2008, TCMF exercised its Warrant to purchase 1,363,636 shares of common stock of the Company. On November 20, 2009, the Note issued to TCMF converted into shares of Series B Convertible Preferred Stock. Upon the filing of the Charter Amendment on March 10, 2010, the Series B Preferred Stock automatically converted to shares of common stock.

On September 26, 2008, we entered into a note purchase agreement with TCMF and the investors set forth on the schedule thereto, pursuant to which the investors agreed to provide a loan to the Company in the aggregate principal amount of up to $5,000,000 (the “Second Financing). Pursuant to the note purchase agreement, we issued to TCMF a Note in the principal amount of $500,000. As partial inducement to purchase the Note, TCMF received a Warrant to purchase 454,545 shares of common stock of the Company. The Note and Warrant issued to TCMF in the Second Financing were issued on the same terms and conditions as the Notes and Warrants that were issued in the initial closing of the Financing. On September 26, 2008, TCMF exercised its Warrant to purchase 454,545 shares of common stock of the Company. As of April 30, 2009, $515,000 of principal plus accrued interest was outstanding on the Note issued to TCMF, and no payments of principal or interest have been made. Pursuant to a Security Agreement, dated as of September 26, 2008, we granted a security interest in all of its assets to the investors, including TCMF, to secure our obligations under the Notes issued in the Second Financing. On November 20, 2009, the Note issued to TCMF converted into shares of Series B Convertible Preferred Stock. The security interests were terminated upon the conversion of the Note into shares of Series B Convertible Preferred Stock. Upon the filing of the Charter Amendment on March 10, 2010, the Series B Preferred Stock automatically converted to shares of common stock.

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On October 24, 2007, we executed a loan agreement, as subsequently amended on November 21, 2007 and April 18, 2008 (the "Loan Agreement") with TCMF, whereby TCMF agreed to loan to the Company a principal amount of up to $500,000 (the “Loan”) and to increase the entire outstanding principal amount of the Loan and any accrued interest thereon, which was to be due and payable by the Company upon, and not prior to, a Next Financing (as defined in the Loan Agreement), to an amount of not less than $750,000. On July 7, 2008, pursuant to a further amendment to the Loan Agreement and in consideration of TCFM’s participation in the Financing and receipt of the Notes and Warrants issued thereunder, the Loan Agreement automatically terminated upon the initial closing of the Financing, and the loan thereunder, in the principal amount of $360,000, plus any accrued interest, was cancelled and extinguished with no obligation or liability of the Company.

On October 24, 2007, we entered into a Management Agreement (the “Management Agreement”) with Trinad, an affiliate of TCMF. Pursuant to the terms of the Management Agreement, Trinad agreed to provide certain management services, including, without limitation, the sourcing, structuring and negotiation of a potential business combination transaction involving the Company. We agreed to pay Trinad a management fee of $90,000 per quarter, plus reimbursement of all expenses reasonably incurred by Trinad in connection with the provision of management services. The fees incurred for the year ended December 31, 2007 were waived by Trinad. The Management Agreement was terminable by either party upon written notice, subject to a termination fee of $1,000,000 upon termination by the Company. On July 7, 2008, the Company and Trinad amended the Management Agreement to provide that it automatically terminated upon the initial closing of the Financing, in which such case the termination fee was reduced to $750,000. The Management Agreement, as amended, also provided that the Company may satisfy the payment of such termination fee by delivery to Trinad of Notes in the aggregate amount of $750,000 and a Warrant to purchase 618,818 shares of common stock of the Company, such Notes and Warrants to be on the same terms of the Notes and Warrants sold and issued by the Company to the purchasers in the Financing. The Management Agreement automatically terminated upon the initial closing of the Financing on July 7, 2008. In accordance with the terms of Amendment No. 1 to the Management Agreement, the termination fee was reduced from $1,000,000 to $750,000, which we satisfied by delivery to Trinad of a Note in the principal amount of $750,000 and 681,818 Warrants to purchase common stock of the Company. On November 20, 2009, the Note issued to Trinad converted into shares of Series B Convertible Preferred Stock. Upon the filing of the Charter Amendment on March 10, 2010, the Series B Preferred Stock automatically converted to shares of common stock.

On May 12, 2009, we entered into a letter agreement with each of Mark Seremet and David Rosenbaum (the “Fee Letters”), pursuant to which, in consideration for Messrs. Seremet and Rosenbaum each entering into a Guaranty with Wells Fargo for the full and prompt payment and performance by the Company and its subsidiaries of the obligations in connection with a purchase order financing (the “Loan”), we agreed to compensate Mr. Seremet in the amount of $10,000 per month, and Mr. Rosenbaum in the amount of $7,000 per month, for so long as the executive remains employed while the Guaranty and Loan remain in full force and effect. If the Guaranty is not released by the end of the month following termination of employment of either Messrs. Seremet or Rosenbaum, the monthly fee shall be doubled for each month thereafter until the Guaranty is removed.

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In connection with the financing consummated on November 20, 2009, Messrs. Seremet and Rosenbaum agreed to amend their respective Fee Letters, pursuant to which: in the case of Mr. Seremet, the Company will pay to Mr. Seremet a fee of $10,000 per month for so long as the Guaranty remains in full force and effect, but only for a period ending on November 20, 2010; and, in the case of Mr. Rosenbaum, the Company will pay to Mr. Rosenbaum a fee of $7,000 per month for so long as the Guaranty remains in full force and effect, but only for a period ending on November 20, 2010. In addition, the amended Fee Letters provide that, in consideration of each of their continued personal guarantees, we will issue to each of Messrs. Seremet and Rosenbaum, an option to purchase shares of common stock or restricted shares of common stock, equal to approximately a 6.25% ownership interest on a fully diluted basis, respectively. Subject to the effectiveness (the “Effective Date”) of an amendment to the Company’s Certificate of Incorporation authorizing an increase in the number of authorized shares of the Company’s common stock, par value $0.001 per share, from 250,000,000 shares to 3,500,000,000 shares (the “Charter Amendment”), on February 11, 2010, the Company issued options to purchase 202,581,600 shares of common stock to each of Mark Seremet and David Rosenbaum pursuant to the Fee Letters. The options have an exercise price of $0.0025 per share and vest as follows: commencing as of the Effective Date, 72% vest immediately, 14% on May 12, 2010 and 14% vest on May 12, 2011. On January 13, 2010, our Board of Directors and stockholders holding approximately 66.7% of our outstanding voting capital stock approved the Charter Amendment. The consents we received constituted the only stockholder approval required for the Charter Amendment under the Delaware General Corporation Law (the “DGCL”) and our existing Certificate of Incorporation and Bylaws. Pursuant to Rule 14c-2 of the Securities Exchange Act of 1934, as amended, stockholder approval of this amendment will become effective on or after such date that is approximately 20 calendar days following the date we first mailed the definitive Information Statement Pursuant to Section 14(c) (the “Information Statement”) to our stockholders. The Information Statement was first sent to our stockholders on February 16, 2010. On March 10, 2010, the Company filed the Charter Amendment with the Secretary of State of the State of Delaware.

On November 20, 2009, we entered into a Securities Purchase Agreement with certain investors identified therein, including Mark Seremet, our Chief Executive Officer and President, David Rosenbaum, President of Zoo Publishing, Moritz Seidel, one of our directors, and David E. Smith, who became a director on December 14, 2009, pursuant to which we agreed to sell to certain investors in a private offering an aggregate of up to 2,000,000 shares of our Series A Convertible Preferred Stock, par value $0.001 per share (“Series A Preferred Shares”) at a price per share equal to $2.50, for gross proceeds to us of up to $5,000,000 (the “November Financing”). On November 20, 2009, we sold 20,000 Series A Preferred Shares to Mr. Seremet for gross proceeds of $50,000, 40,000 Series A Preferred Shares to Mr. Rosenbaum for gross proceeds of $100,000, 120,000 Series A Preferred Shares to Mr. Seidel for gross proceeds of $300,000 and 400,000 Series A Preferred Shares to Mr. Smith for gross proceeds of $1,000,000. The Series A Preferred Shares sold to Messrs. Seremet, Rosenbaum, Seidel and Smith were issued on the same terms and conditions as the Series A Preferred Shares sold to the other investors in the November Financing.

On December 16, 2009, we entered into a Securities Purchase Agreement, with certain investors identified therein, including David E. Smith, one of our directors, pursuant to which we agreed to sell to certain investors in a private offering the balance of the Series A Preferred Shares that were not sold in the November Financing described above, at a price per share equal to $2.50 and on the same terms and conditions as the Series A Preferred Shares sold in the November Financing. On December 16, 2009, we sold 100,000 Series A Preferred Shares to Mr. Smith for gross proceeds of $250,000. The Series A Preferred Shares sold to Mr. Smith were issued on the same terms and conditions as the Series A Preferred Shares sold to the other investors in the financing.

Zoo Games

Zoo Games engages in various business relationships with its shareholders and officers and their related entities. The significant relationships are as follows:

Lease of Premises

Zoo Games leased its office space in New York, New York from 575 Broadway Associates, LLC a company owned principally by Peter M. Brant, a former member of the board of directors of Zoo Games and one of the Company’s principal stockholders. Zoo Games leased 5,000 square feet at this location for a monthly rent of $23,750 from April 2007 to October 2008. Zoo Games has paid rent in the amount of $183,000 for 2007 and $234,000 during 2008. Zoo Games believes that the rent and lease terms are at market and are no more favorable to the landlord than comparable leases that could be obtained under an independent third party arrangement.

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Transactions

Mark Seremet, President of Zoo Games, received $549,000 in connection with the sale of a portion of his shares in Cyoob, Inc to Zoo Games. The agreement entitled Mr. Seremet to receive an additional $549,000 from Zoo Games for such shares. However, this amount was converted to an aggregate of 257,052 shares of common stock of the Company in April, 2008.

In connection with Zoo Publishing’s factoring facility with Working Capital Solutions, Inc., in August 2008, Mr. Seremet provided Working Capital Solutions with a personal validity guarantee pursuant to which Mr. Seremet made certain representations and warranties on behalf of Zoo Publishing and agreed to be personally liable for a breach of those representations and warranties. The Company granted Mr. Seremet a fully vested non-qualified stock option to purchase up to 702,327 shares of common stock of the Company for an exercise price of $1.52 per share in consideration for Mr. Seremet’s provision of such guaranty.

From October 2007 to December 2007, Zoo Games issued an aggregate of $2,800,000 in 12% convertible notes in its bridge financing (the “Bridge Financing”). The principal outstanding amounts under the notes issued in the Bridge Financing, and the accrued interest, were to be automatically converted into equity at the first closing of an equity financing (the “Equity Financing”) in which Zoo Games raised at least $15,000,000 inclusive of the amounts converted from the Bridge Financing, at a value of 75% of the average price at which the equity securities were sold in the Equity Financing. In connection with the conversion of the convertible notes into equity, participants in the Bridge Financing were given the right to receive warrants in the Equity Financing to purchase Zoo Games’ common units for a purchase price equal to 75% of the exercise price of the warrants issued in the Equity Financing. Mr. Seremet, Zoo Games’ Chief Executive Officer invested $50,000 in the Bridge Financing. Mr. Peter Brant, a former director of Zoo Games and a principal stockholder of the Company and an entity related to Mr. Brant invested an aggregate of $714,583 in the Bridge Financing. Of that amount, convertible notes in the amount of $114,583 were issued to Mr. Brant in exchange for rent payments due to 575 Broadway Associates.

From December 2007 through May 2008, prior to its conversion from a limited liability company to a corporation, Zoo Games issued common shares and warrants to purchase common shares in an equity financing pursuant to which Zoo Games raised an aggregate of $16,400,000, inclusive of the convertible notes which were automatically converted into the securities issued in the equity financing, as described above. Mr. Seremet’s convertible note was converted into 23,570 common shares and warrants to purchase up to 5,893 common shares for an exercise price of $2.13 per share. In addition, Mr. Seremet invested $100,000 in the equity financing in exchange for 35,116 common shares and warrants to purchase up to 8,779 common shares for an exercise price of $2.84 per unit. The convertible notes of Mr. Brant and his related entities were converted into an aggregate of 338,676 common shares and warrants to purchase up to 84,666 shares for an exercise price of $2.13 per share. S.A.C. Venture Investments, LLC a principal stockholder of the Company, invested an aggregate of $1,250,000 in exchange for an aggregate of 438,955 common shares and warrants to purchase an aggregate of 109,739 common shares for an exercise price of $2.84 per share. Mr. Harris Toibb, a principal stockholder of the Company, and entities related to Mr. Toibb invested an aggregate of $3,150,000 in exchange for an aggregate of 1,106,166 common shares and warrants to purchase an aggregate of 276,541 common shares for an exercise price of $2.84 per share. Mr. Toibb also provided various consulting services to the Company in connection with the restructuring of Zoo Games’ indebtedness and certain other strategic matters. In connection with the provision of those services, in July 2008 we issued 702,440 shares of its common stock to Mr. Toibb.

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Item 14. Principal Accounting Fees and Services .

The following table presents fees for professional services related to the audits and reviews of our interim and annual financial statements and other audit related services for the years ended December 31, 2009 and 2008:

The following table presents fees for professional services related to the audits and reviews of our interim and annual financial statements and other audit related services for the years ended December 31, 2009 and 2008:

	2009		2008
Audit fees:(1)	$	168,000	$	199,000
Audit related fees:(2)		0		0
Tax fees:(3)		0		0
All other fees:(4)		0		0
Total	$	168,000	$	199,000

Policy on Pre-Approval of Audit and Permissible Non-audit Services of Independent Auditors

Consistent with SEC policies regarding auditor independence, the Board has responsibility for appointing, setting compensation and overseeing the work of the independent auditor. In recognition of this responsibility, the Board has established a policy to pre-approve all audit and permissible non-audit services provided by the independent auditor.

Prior to engagement of the independent auditor for the next year’s audit, management will submit an aggregate of services expected to be rendered during that year for each of the following four categories of services to the Board for approval.

1. Audit services include audit work performed in the preparation of financial statements, as well as work that generally only the independent auditor can reasonably be expected to provide, including comfort letters, statutory audits, and attest services and consultation regarding financial accounting and/or reporting standards. For 2009, all services were performed by Amper, Politziner & Mattia, LLP. For 2008, $175,000 was for services performed by Amper, Politziner & Mattia, LLP, and $24,000 was for services perfomed by Raich Ende Malter & Co. LLP.

2. Audit-Related services are for assurance and related services that are traditionally performed by the independent auditor, including due diligence related to mergers and acquisitions, employee benefit plan audits, and special procedures required to meet certain regulatory requirements.

3. Tax services include all services performed by the independent auditor’s tax personnel except those services specifically related to the audit of the financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice.

4. Other Fees are those associated with services not captured in the other categories.

Prior to engagement, the Audit Committee of the Board pre-approves these services by category of service. The fees are budgeted and the Audit Committee of the Board requires the independent auditor and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage the independent auditor for additional services not contemplated in the original pre-approval. In those instances, the Audit Committee of the Board requires specific pre-approval before engaging the independent auditor.

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Effective as of October 30, 2008, we dismissed Raich Ende Malter & Co. LLP as our independent public accounting firm and retained Amper, Politziner & Mattia, LLP for all audit and audit-related services during 2008.

PART IV

Item 15. Exhibits, Financial Statement Schedules .

(1) Financial Statements .

The financial statements required by Item 15 are submitted in a separate section of this report, beginning on Page F-1, and are incorporated herein and made a part hereof.

(2) Financial Statement Schedules .

Those financial statement schedules required by Item 15 have been omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or notes thereto.

(3) Exhibits .

The following exhibits are filed with this report, or incorporated by reference as noted:

EXHIBIT INDEX

Exhibit
No.	Description
2.1	Plan and Agreement of Merger, between Zoo Entertainment, Inc. f/k/a Driftwood Ventures, Inc., a Delaware corporation (“Zoo”), and Driftwood Ventures, Inc., a Nevada corporation, dated as of November 19, 2007 (incorporated by reference to that DEF 14C Information Statement filed with the Securities and Exchange Commission on November 30, 2007).
2.2	Agreement and Plan of Merger, by and among Zoo, DFTW Merger Sub, Inc., Zoo Games Interactive Software, Inc. (“Zoo Games”) and the stockholder representative, dated as of July 7, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on July 11, 2008.)
2.3	Amendment to Agreement and Plan of Merger, by and among Zoo, DFTW Merger Sub, Inc., Zoo Games and the stockholder representative, dated as of September 12, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
3.1	Certificate of Incorporation (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on December 21, 2007).
3.2	Certificate of Ownership and Merger, filed with the Secretary of State of the State of Delaware on December 3, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on December 8, 2008).

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3.3	Certificate of Amendment to Certificate of Incorporation, filed on August 26, 2009 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on August 31, 2009).
3.4	Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on November 27, 2009) .
3.5	Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on November 27, 2009).
3.6	Bylaws (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on December 21, 2007).
3.7	Certificate of Amendment to Certificate of Incorporation (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on March 16, 2010).
4.1	Form of Note issued to investors (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on July 11, 2008).
4.2	Form of Note issued to investors (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on October 2, 2008).
4.3	Form of Warrant issued to investors  (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on July 11, 2008).
4.4	Form of Warrant issued to investors (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on October 2, 2008).
4.5	Form of Warrant issued to Focus Capital Partners, LLC and Socius Capital Group, LLC (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on December 21, 2009).
4.6	Warrant issued to Solutions 2 Go, Inc. (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 23, 2009).
10.1	Loan Agreement with Trinad Capital Master Fund, Ltd. (“Trinad”), dated as of October 24, 2007, as amended on November 21, 2007 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on October 25, 2007 and November 21, 2007, respectively).
10.2	Amendment No. 2 to Loan Agreement, by and between Zoo and Trinad, dated as of April 18, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on April 22, 2008).
10.3	Amendment No. 3 to the Loan Agreement, by and between Zoo and Trinad, dated as of July 7, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on July 11, 2008).
10.4*	Management Agreement, between Zoo and Trinad Management, LLC, dated as of October 24, 2007 (incorporated by reference to that  DEF 14C Information Statement and filed with the Securities and Exchange Commission on November 30, 2007).
10.5 *	Amendment No. 1 to the Management Agreement, by and between Zoo and Trinad Management, LLC, dated as of July 7, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on July 11, 2008).

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10.6*	2007 Employee, Director and Consultant Stock Plan (incorporated by reference to that Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 8, 2008).
10.7*	Amendment to 2007 Employee, Director and Consultant Stock Plan (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2009).
10.8	Commercial Lease Agreement, by and between Trinad Management, LLC and Zoo, dated as of May 1, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on May 7, 2008).
10.9	Letter Agreement, dated as of June 1, 2008, by and between Zoo and DDK Consulting (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on June 2, 2008).
10.10	Note Purchase Agreement, by and among Zoo, Trinad, Back Bay LLC (“Back Bay”), Cipher 06 LLC (“Cipher”), Soundpost Capital, LP (“Soundpost LP”), Soundpost Capital Offshore Ltd. (“Soundpost Offshore”) and S.A.C. Venture Investments, LLC (“S.A.C.”), dated as of July 7, 2008 (incorporated by reference to those Current Reports on Form 8-K filed with the Securities and Exchange Commission on July 11, 2008, July 30, 2008, August 1, 2008 and August 15, 2008).
10.11	Amendment No. 1 to the Note Purchase Agreement, dated as of July 15, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on July 15, 2008).
10.12	Amendment No. 2 to the Note Purchase Agreement, dated as of July 31, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on July 31, 2008).
10.11	Security Agreement, by and among Zoo, Trinad, Back Bay, Cipher, Soundpost LP, Soundpost Offshore and S.A.C., dated as of July 7, 2008. (incorporated by reference to those Current Reports on Form 8-K filed with the Securities and Exchange Commission on July 11, 2008, July 30, 2008, August 1, 2008 and August 15, 2008).
10.12	Securities Purchase Agreement, by and between Zoo Games and Zoo, dated as of July 7, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on July 11, 2008).
10.13	Amendment No. 1 to the Securities Purchase Agreement, dated as of July 15, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on July 15, 2008).
10.14	Senior Secured Note, issued by Zoo Games on July 7, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on July 11, 2008).
10.15	Pledge Agreement, by and between Zoo and Zoo Games, dated as of July 7, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on July 11, 2008).
10.16	Security Agreement, by and among Zoo, Zoo Games, Zoo Games Online LLC, Zoo Digital Publishing Limited, Supervillain Studios, LLC and Zoo Games, Inc. (the “Subsidiaries”), dated as of July 7, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on July 11, 2008).
10.17	Guaranty, by and among the Subsidiaries, dated as of July 7, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on July 11, 2008).

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10.18	Note Purchase Agreement, by and among Zoo, Trinad, Back Bay, Sandor Capital Master Fund LP (“Sandor”) and John S. Lemak (“Lemak”), dated as of September 26, 2008  (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on October 2, 2008).
10.19	Security Agreement, by and among Zoo, Trinad, Back Bay, Sandor and Lemak, dated as of September 26, 2008  (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on October 2, 2008).
10.20	1 st Amended and Restated Employment Agreement between Zoo Games and Mark Seremet, dated as of April 16, 2006. (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.21*	Amendment Number One to the 1 st Amended and Restated Employment Agreement between Zoo Games and Mark Seremet, dated as of July 15, 2008. (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.22*	Employment Agreement, by and between Zoo Games and Mark Seremet, dated as of January 14, 2009 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2009).
10.23*	Employment Agreement between Zoo Games and David J. Fremed, dated as of June 4, 2007 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.24*	Amendment Number One to the June 4, 2007 David Fremed Employment Agreement between Zoo Games and David J. Fremed, effective as of August 8, 2008. (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.25*	Employment Agreement between Zoo Games and Evan Gsell, dated as of May 22, 2007 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.26*	Employment Agreement between Zoo Publishing, Inc. and Susan J. Kain-Jurgensen, dated as of December 18, 2007 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.27*	Amendment Number One to the Susan J. Kain-Jurgensen Employment Agreement between Zoo Publishing, Inc. and Susan J. Kain-Jurgensen effective as of July 16, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.18*	2008 Long-Term Incentive Plan of Zoo Games (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.19	Agreement between Barry Hatch and Ian Stewart, and Zoo Games, dated as of April 4, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.30	Amendment to Loan Note Instrument of Zoo Games, dated as of July 31, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).

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10.31	Loan facility of £325,000 (approximately U.S. $650,000) from I.C. Stewart 2001 Trust to Zoo Digital Publishing Limited, dated as of April 1, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.32	Cash Flow Financing Facility of Zoo Digital Publishing with Bank of Scotland, dated as of November 21, 2006 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.33	Amendment to Cash Flow Financing Facility of Zoo Digital Publishing with Bank of Scotland, dated as of January 7, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.34	Overdraft Financing Facility of Zoo Digital Publishing with Bank of Scotland, dated as of July 11, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.35	Lease Agreement between Paul Andrew Williams and Clare Marie Williams t/a Towers Investments of Valley House and Zoo Digital Publishing, Limited, dated as of February 1, 2007 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.36**	First Renewal License Agreement for the Nintendo DS System between Nintendo Co., Ltd. And Zoo Digital Publishing Limited, dated as of May 25, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.37**	Confidential License Agreement for the Wii Console between Nintendo Co., Ltd. and Zoo Digital Publishing Limited, dated as of May 15, 2007 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.38	Guaranty of Mark Seremet, dated as of August 11, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.39	Playstation2 Licensed Publisher Agreement between Sony Computer Entertainment Europe Limited and Zoo Digital Publishing Limited, dated as of August 22, 2002 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.40	Playstation Portable Licensed Publisher Agreement between Sony Computer Entertainment Europe Limited and Zoo Digital Publishing Limited, dated as of August 7, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.41	Amended and Restated Promissory Note of Supervillain Studios, LLC and TSC Games, Inc., dated as of June 14, 2007, in the aggregate principal amount of $2,100,000 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.42	Sublease between Supervillain Studios, LLC and Supervillain Studios, Inc. (now known as TSC Games, Inc.), dated as of June 14, 2007 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.43	Confidential License Agreement for the Wii Console between Nintendo of America Inc. and Zoo Publishing, Inc., dated as of July 14, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).

64

10.44	Confidential License Agreement for Nintendo DS between Nintendo of America Inc. and Zoo Publishing, dated as of October 1, 2005 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.45	Confidential License Agreement for the Nintendo DS System between Nintendo Co., Ltd. and Zoo Publishing, dated as of April 4, 2005 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.46**	PSP Licensed Publisher Agreement between SONY Computer Entertainment America Inc. and Zoo Publishing, dated as of January 20, 2006 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.47**	PS2 Licensed Publisher Agreement between SONY Computer Entertainment America Inc. and Zoo Publishing, dated as of November 20, 2002 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.48	Zoo Games, Inc. Form of Non-Qualified Stock Option Award Agreement (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.49	Business Lease between Lakeside Business Park, LLC and DSI, dated as of September 20, 2007 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.50	Factoring and Security Agreement between Zoo Publishing, Inc. and Working Capital Solutions, Inc., dated as of August 5, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.51	Promissory Note of Zoo Publishing to the estate of Stuart Kaye in the principal amount of $647,830, dated, as of January 1, 2007 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.52	Guaranty of Zoo Publishing obligations to Transcap Trade Finance made by Susan J. Kain-Jurgensen, dated as of December 19, 2007 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.53	Promissory Note of Zoo Publishing for the benefit of Susan J. Kain-Jurgensen in the principal amount of $506,670.99, dated as of April 15, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.54	Form of Non-Competition Agreement entered into by Mark Seremet and Susan J. Kain-Jurgensen, dated as of September 12, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on September 18, 2008).
10.55	Sales Agreement, by and between Zoo Publishing, Inc. and Atari, Inc., dated as of October 24, 2008 (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 19, 2009).
10.56	Agreement for the Sale and Purchase of the entire Issued Share Capital of Zoo Digital Publishing Limited, by and among Zoo Games, Zoo Digital Publishing Limited, Barry Hatch and Ian Clifford Stewart, dated as of December 2, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on December 8, 2008).

65

10.57	Amended and Restated Master Purchase Order Assignment Agreement, by and among Zoo Entertainment, Inc., Zoo Games, Zoo Publishing, Inc. and Wells Fargo Bank National Association, dated as of April 6, 2009 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on April 9, 2009).
10.58	Amended and Restated Security Agreement and Financing Statement, by and among Zoo Entertainment, Inc., Zoo Games, Zoo Publishing, Inc. and Wells Fargo Bank National Association, dated as of April 6, 2009 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on April 9, 2009).
10.59	Guaranty, by and among Wells Fargo Bank, National Association and Mark Seremet and David Rosenbaum as guarantors, dated as of April 6, 2009 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on April 9, 2009).
10.60	Exchange Agreement, by and among Zoo Games, Supervillian Studios, LLC, TSC Games, Inc. and Stephen Ganem, Timothy Campbell and Chris Rausch, dated as of September 16, 2008 (incorporated by reference to that Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2009).
10.61	Amendment Number One to the October 24, 2008 Sales Agreement, by and between Zoo Publishing, Inc. and Atari, Inc., effective as of April 1, 2009 (incorporated by reference to that Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2009).
10.62	Amendment Number Two to the October 24, 2008 Sales Agreement, by and between Zoo Publishing, Inc. and Atari, Inc., dated as of May 1, 2009 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on May 7, 2009).
10.63	Letter Agreement, by and between Zoo Entertainment, Inc. and Mark Seremet, dated as of May 12, 2009 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on May 18, 2009).
10.64	Letter Agreement, by and between Zoo Entertainment, Inc. and David Rosenbaum, dated as of May 12, 2009 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on May 18, 2009).
10.65	License Agreement, by and among Zoo Entertainment, Inc., Zoo Publishing, Inc. and New World IP, LLC, dated as of May 1, 2009 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on May 20, 2009).
10.66	Amendment No. 2 to Senior Secured Convertible Note, dated as of June 26, 2009, by and among Zoo Entertainment, Inc. and the holders of Notes set forth therein (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2009).
10.67	Letter Agreement, dated as of June 26, 2009, by and among Zoo Entertainment, Inc. and the holders of Notes set forth therein (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2009).
10.68**	Amendment Number 3 to the October 24, 2008 Sales Agreement, dated as of June 15, 2009, by and between Zoo Publishing, Inc. and Atari, Inc (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2009).

66

10.69	Amendment No. 2 to License Agreement, dated as of May 20, 2009, by and among Zoo Publishing, Inc., Zoo Entertainment, Inc. and New World IP, LLC (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2009).
10.70*	Employment Agreement, dated as of January 1, 2008, by and between Zoo Publishing, Inc. and David Rosenbaum (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2009).
10.71*	Amendment No. 1 to Employment Agreement, dated as of July 1, 2008, by and between Zoo Publishing, Inc. and David Rosenbaum (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2009).
10.72*	Amendment No. 2 to Employment Agreement, dated as of July 23, 2009, by and between Zoo Publishing, Inc. and David Rosenbaum (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2009).
10.73	Factoring and Security Agreement, dated as of September 9, 2009 and effective as of September 29, 2009,  by and between Zoo Publishing, Inc. and Working Capital Solutions, Inc. (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on October 2, 2009).
10.74	Continuing Unconditional Guaranty, dated as of September 9, 2009 and effective as of September 29, 2009, by and between Working Capital Solutions, Inc. and Zoo Entertainment, Inc. as guarantor (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on October 2, 2009).
10.75	Continuing Unconditional Guaranty, dated as of September 9, 2009 and effective as of September 29, 2009, by and between Working Capital Solutions, Inc. and Zoo Games, Inc. as guarantor (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on October 2, 2009).
10.76	Individual Guaranty, by and between Working Capital Solutions, Inc. and Mark Seremet as guarantor, dated as of September 9, 2009 and effective as of September 29, 2009 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on October 2, 2009).
10.77	Individual Guaranty, by and between Working Capital Solutions, Inc. and David Rosenbaum as guarantor, dated as of September 9, 2009 and effective as of September 29, 2009 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on October 2, 2009).
10.78	Amendment No. 3 to Senior Secured Convertible Note, dated as of August 31, 2009, by and among Zoo Entertainment, Inc. and the holders of Notes set forth therein (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 23, 2009).
10.79	Advance Agreement, by and among Zoo Entertainment, Inc., Solutions 2 Go Inc. and Solutions 2 Go LLC, dated as of August 31, 2009 (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 23, 2009).
10.80	Exclusive Distribution Agreement, by and between Zoo Publishing, Inc. and Solutions 2 Go Inc. and Solutions 2 Go LLC, dated as of August 31, 2009 (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 23, 2009).
10.81	Exclusive Distribution Agreement, by and between Zoo Publishing, Inc. and Solutions 2 Go LLC, dated as of August 31, 2009 (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 23, 2009).

67

10.82	Amendment 1 to Fee Letter Agreement, by and between Zoo Entertainment, Inc. and Mark Seremet, dated as of August 31, 2009 (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 23, 2009).
10.83	Amendment 1 to Fee Letter Agreement, by and between Zoo Entertainment, Inc. and David Rosenbaum, dated as of August 31, 2009 (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 23, 2009).
10.84	Continuing Personal Guaranty of Mark Seremet for the benefit of Solutions 2 Go Inc. and Solutions 2 Go LLC, dated as of August 31, 2009 (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 23, 2009).
10.85	Continuing Personal Guaranty of David Rosenbaum for the benefit of Solutions 2 Go Inc. and Solutions 2 Go LLC, dated as of August 31, 2009 (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 23, 2009).
10.86	Amendment No. 4 to Senior Secured Convertible Note, dated as of October 6, 2009, by and among Zoo Entertainment, Inc. and the holders of Notes set forth therein (incorporated by reference to that Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 23, 2009).
10.87	Amendment No. 2 to Letter Agreement, by and between Zoo Entertainment, Inc. and Mark Seremet, dated as of November 20, 2009 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on November 27, 2009).
10.88	Amendment No. 2 to Letter Agreement, by and between Zoo Entertainment, Inc. and David Rosenbaum, dated as of November 20, 2009 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on November 27, 2009).
10.89	Amendment No. 6 to Senior Secured Convertible Promissory Note, by and among Zoo Entertainment, Inc. and the note holders set forth therein, dated as of November 20, 2009 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on November 27, 2009).
10.90	Amendment No. 5 to Senior Secured Convertible Note, dated as of November 2, 2009, by and among Zoo Entertainment, Inc. and the holders of Notes set forth therein (incorporated by reference to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2009) .
10.91	Securities Purchase Agreement, by and among Zoo Entertainment, Inc. and the investors set forth therein, dated as of November 20, 2009 (incorporated by reference to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2009) .
10.92	Registration Rights Agreement, by and among Zoo Entertainment, Inc., Focus Capital Partners, LLC and Socius Capital Group, LLC, dated as of November 20, 2009 (incorporated by reference to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2009).
10.93	Securities Purchase Agreement, by and among Zoo Entertainment, Inc. and the investors set forth therein, dated as of December 16, 2009 (incorporated by reference to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2009).

68

10.94	Amendment No. 1 to Registration Rights Agreement, by and among Zoo Entertainment, Inc., Focus Capital Partners, LLC and Socius Capital Group, LLC, dated as of December 16, 2009 (incorporated by reference to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2009).
10.95	Employment Agreement, by and between Zoo Publishing, Inc. and Steve Buchanan, dated as of February 15, 2010 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on February 18, 2010).
10.96	Amendment Number Two to the June 4, 2007 David Fremed Employment Agreement, by and between Zoo Games, Inc. and David Fremed, dated as of February 15, 2010 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission on February 18, 2010).
10.97	Form of non-qualified stock option agreement. †
10.98	Form of restricted stock agreement. †
16.1	Letter from Rothstein, Kass & Company, P.C., dated as of April 21, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission April 22, 2008).
16.2	Letter from Raich Ende Malter & Co. LLP, dated as of November 4, 2008 (incorporated by reference to that Current Report on Form 8-K filed with the Securities and Exchange Commission November 5, 2008).
21.1	Subsidiaries of Zoo Entertainment, Inc. (incorporated by reference to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2009).
31.1	Certification of Mark Seremet, Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. †
31.2	Certification of David Fremed, Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. †
32.1	Certification of Mark Seremet, Principal Executive Officer, and David Fremed, Principal Financial Officer, pursuant to U.S.C. Section 1350. †

* Management compensation agreements

**Confidential treatment as to certain portions requested

† Filed herewith

69

SIGNATURES

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

	ZOO ENTERTAINMENT, INC.
Date: March 31, 2010	By:	/s/ David Fremed
		David Fremed, Chief Financial Officer

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

Signatures		Title	Date
By:	/s/ Mark Seremet	Chief Executive Officer
	Mark Seremet	(principal executive	March 31, 2010
		officer) and Director
By:	/s/ David Fremed	Chief Financial Officer	March 31, 2010
	David Fremed	(principal financial
		officer, principal accounting officer)
By:	/s/ Jay A. Wolf	Director	March 31, 2010
	Jay A. Wolf
By:	/s/ David Smith	Director	March 31, 2010
	David Smith
By:	/s/ Barry Regenstein	Director	March 31, 2010
	Barry Regenstein
By:	/s/ John Bendheim	Director	March 31, 2010
	John Bendheim
By:	/s/ Drew Larner	Director	March 31, 2010
	Drew Larner
By:	/s/ Moritz Seidel	Director	March 31, 2010
	Moritz Seidel

70

ZOO ENTERTAINMENT, INC.  AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

CONTENTS	PAGE NO.
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2009 and 2008		F-3
Consolidated Statements of Operations for the Years Ended December 31, 2009 and 2008		F-4
Consolidated Statements of Cash Flow for the Years Ended December 31, 2009 and 2008		F-5
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2009 and 2008		F-6
Notes to Consolidated Financial Statements		F-7 - F-35

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors

Zoo Entertainment, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Zoo Entertainment, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zoo Entertainment, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Amper, Politziner & Mattia, LLP

March 31, 2010

New York, New York

F-2

Zoo Entertainment, Inc. and Subsidiaries

Consolidated Balance Sheets

(in $000's except share and per share amounts)

	December 31, 2009			December 31, 2008
ASSETS
Current Assets
Cash	$	2,664		$	849
Accounts receivable and due from factor, net of allowances for returns and discounts of $835 and $1,160		4,022			1,832
Inventory		2,103			3,120
Prepaid expenses and other current assets		2,409			2,124
Product development costs, net		4,399			5,338
Deferred tax assets		578			688
Total Current Assets		16,175			13,951
Fixed assets, net		141			214
Goodwill		-			14,704
Intangible assets, net		15,733			14,747
Total Assets	$	32,049		$	43,616
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	3,330		$	5,709
Financing arrangements		1,659			849
Customer advances		3,086			1,828
Accrued expenses and other current liabilities		2,333			3,099
Notes payable, net of discount of $0 and $145 - current portion		120			1,803
Convertible notes payable, net of discount of $0 and $1,576, including accrued interest of $0 and $240		-			9,814
Total Current Liabilities		10,528			23,102
Notes payable, net of discount of $0 and $885 - non current portion		180			1,772
Deferred tax liabilities		3,461			688
Other long-term liabilities		2,770			620
Total Liabilities		16,939			26,182
Commitments and Contingencies
Stockholders' Equity
Preferred Stock, par value $0.001, 5,000,000 authorized
Series A, 1,389,684 issued and outstanding		1			-
Series B, 1,188,439 issued and outstanding		1			-
Common Stock, par value $0.001, 250,000,000 shares authorized, 39,425,755 issued and 31,624,429 outstanding December 31, 2009 and 38,243,937 issued and 36,006,561 outstanding December 31, 2008		39			38
Additional Paid-in-capital		64,675			52,692
Accumulated deficit		(45,137	)		(31,940	)
Treasury Stock, at cost, 7,801,326 shares December 31,2009 and 2,237,376 shares December 31, 2008		(4,469	)		(3,356	)
Total Stockholders' Equity		15,110			17,434
Total Liabilities and Stockholders' Equity	$	32,049		$	43,616

See accompanying notes to consolidated financial statements

F-3

Zoo Entertainment, Inc. and Subsidiaries

Consolidated Statements of Operations

For the Years Ended December 31, 2009 and 2008

(in $000's except per share amounts)

	Year Ended December 31,
	2009			2008
Revenue	$	48,709		$	36,313
Cost of goods sold		39,815			30,883
Gross profit		8,894			5,430
Operating expenses:
General and administrative		6,788			10,484
Selling and marketing		2,484			4,548
Research and development		390			5,857
Impairment of goodwill		14,704			-
Depreciation and amortization		1,875			1,760
Total operating expenses		26,241			22,649
Loss from operations		(17,347	)		(17,219	)
Interest expense, net		(2,975	)		(3,638	)
Gain on extinguishment of debt		5,315			-
Gain on legal settlement		4,328			-
Other income - insurance recovery		860			1,200
Loss from continuing operations before income tax (expense) benefit		(9,819	)		(19,657	)
Income tax (expense) benefit		(3,143	)		4,696
Loss from continuing operations		(12,962	)		(14,961	)
Loss from discontinued operations, net of tax benefit of $1,390 for the year ended December 31, 2008		(235	)		(6,734	)
Net loss	$	(13,197	)	$	(21,695	)
Loss per common share - basic and diluted:
Continuing operations	$	(0.39	)	$	(0.59	)
Discontinued operations		-			(0.27	)
Net loss	$	(0.39	)	$	(0.85	)
Weighted average common shares outstanding - basic and diluted		33,495,707			25,394,264

See accompanying notes to consolidated financial statements

F-4

Zoo Entertainment, Inc. and Subsidiaries

Consolidated Statements of Cash Flow

For the Years Ended December 31, 2009 and 2008

(in $000's)

	Year Ended December 31,
	2009			2008
Operating Activities:
Net loss	$	(13,197	)	$	(21,695	)
Loss from discontinued operations		(235	)		(6,734	)
Loss from continuing operations		(12,962	)		(14,961	)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Gain on legal settlement		(4,328	)		-
Gain on extinguishment of debt		(5,315	)		-
Impairment of goodwill		14,704			-
Depreciation and amortization		1,875			1,760
Amortization of deferred debt discount		1,870			3,443
Deferred income taxes		2,883			(4,782	)
Stock based compensation		588			2,759
Other changes in assets and liabilities, net		(4,801	)		(291	)
Net cash used in continuing operations		(5,486	)		(12,072	)
Net cash used in discontinued operations		-			(2,184	)
Net cash used in operating activities		(5,486	)		(14,256	)
Investing activities:
Purchases of fixed assets		(26	)		(67	)
Purchase of intellectual property		(312	)		-
Disposition of assets of discontinued operations, net of cash acquired		-			477
Acquisition of stock of Zoo Publishing, net of cash acquired		-			(2	)
Cash received from acquisition of Driftwood		-			1,669
Net cash (used in) provided by investing activities		(338	)		2,077
Financing activities:
Proceeds from sale of equity securities		7			6,118
Proceeds from sale of Preferred Series A stock, net of $178 costs		4,822			-
Proceeds from Solutions 2 Go note for customer advance		2,000			-
Proceeds from Driftwood issuance of convertible notes - pre-merger		-			7,785
Proceeds from issuance of convertible notes - post-merger		-			1,000
Net borrowings (repayments) in connection with financing facilities		810			(2,044	)
Net cash provided by financing activities		7,639			12,859
Net increase in cash		1,815			680
Cash at beginning of year		849			169
Cash at end of year	$	2,664		$	849

See accompanying notes to consolidated financial statements

F-5

Zoo Entertainment, Inc. and Subsidiaries

Consolidated Statement of Stockholders' Equity

For the Years Ended December 31, 2009 and 2008

(in 000's)

	Preferred Stock
	Series A				Series B				Common Stock				Additional			Accumulated			Treasury Stock
	Shares		Par value		Shares		Par value		Shares		Par Value		Paid-in-Capital			Deficit			Shares		Cost			Total
Balance January 1, 2008		-	$	-		-	$	-		15,685	$	16	$	31,792		$	(10,245	)		-	$	-		$	21,563
Stock issued in connection with private placement offering										2,143		2		6,433											6,435
Costs incurred in connection with private placement offering														(317	)										(317	)
Stock issued in connection with the acquisition of Zoo Digital										1,581		2		4,084											4,086
Exchange of promissory notes for common stock at fair value										5,973		6		6,022											6,028
Beneficial conversion feature of debt issued										-		-		200											200
Shares issued for consulting services										701		-		1,065											1,065
Value of warrants issued for consulting services										-				63											63
Compensation expense related to shares issued to employees										16		-		25											25
Compensation expense related to options issued to employees										-		-		1,605											1,605
Driftwood shares acquired upon the completion of the reverse merger										11,327		11		1,186											1,197
Value of warrants issued in connection with debt financing														527											527
Value of Shares to be returned to Treasury for SVS and Zoo Digital sale																				2,237		(3,356	)		(3,356	)
Shares issued for warrants exercised										818		1		7											8
Net loss																	(21,695	)							(21,695	)
Balance December 31, 2008		-		-		-		-		38,244		38		52,692			(31,940	)		2,237		(3,356	)		17,434
Issuance of Preferred Series A Stock, net of $178 in costs		1,390		1										4,821											4,822
Conversion of Convertible Notes to Preferred Series B Stock						1,188		1						6,568											6,569
Stock-based compensation										-		-		88											88
Value of shares returned to Treasury from settlement of litigation																				5,564		(1,113	)		(1,113	)
Warrants exercised										682		1		6											7
Shares issued to employee in exchange for personal guaranty										500		-		100											100
Value of warrants issued for Solutions 2 Go distribution advance														400											400
Net loss																	(13,197	)							(13,197	)
Balance December 31, 2009		1,390	$	1		1,188	$	1		39,426	$	39	$	64,675		$	(45,137	)		7,801	$	(4,469	)	$	15,110

See accompanying notes to consolidated financial statements

F-6

Zoo Entertainment, Inc. And Subsidiaries

Notes to Condensed Consolidated Financial Statements

NOTE 1.   DESCRIPTION OF ORGANIZATION AND REVERSE MERGER

Zoo Entertainment, Inc., (“Zoo” or the “Company”) was incorporated under the laws of the State of Nevada on February 13, 2003 under the name Driftwood Ventures, Inc. On December 20, 2007, the Company reincorporated in Delaware and increased its authorized capital stock from 75,000,000 shares to 80,000,000 shares, consisting of 75,000,000 shares of common stock, par value $0.001, per share, and 5,000,000 shares of preferred stock, par value $0.001, per share.  In August 2009, the Company increased its authorized shares of common stock to 250,000,000, par value $0.001 per share. On November 20, 2009, as a result of the Company consummating an approximately $4.2 million equity raise, the Company issued Series A Convertible Preferred Stock (“Series A Preferred Stock”) and warrants.  Concurrently, as a result of the aforementioned preferred equity raise, the Company’s noteholders converted approximately $11.8 million of existing debt and related accrued interest into Series B Convertible Preferred Stock (“Series B Preferred Stock”).  On December 16, 2009, as a result of the Company consummating an additional preferred equity raise of $776,000, the Company issued to investors Series A Preferred Stock.  The Series A Preferred Stock and the Series B Preferred Stock will convert into common shares of the Company upon a sufficient increase in authorized common shares of the Company. (See Notes 14 and 21 for further details in connection with the conversion features and details of the actual conversion on March 10, 2010).   The Company was engaged in acquiring and exploring mineral properties until September 30, 2007 when this activity was abandoned. The Company had been inactive until July 7, 2008 when the Company entered into an Agreement and Plan of Merger, as subsequently amended on September 12, 2008 with DFTW Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company (“Merger Sub”), Zoo Games, Inc. (“Zoo Games”) (formerly known as Green Screen Interactive Software, Inc.) and a stockholder representative, pursuant to which Merger Sub would merge with and into Zoo Games, with Zoo Games as the surviving corporation through an exchange of common stock of Zoo Games for common stock of the Company (the “Merger”). On December 3, 2008, Driftwood Ventures, Inc. changed its name to Zoo Entertainment, Inc.

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

Zoo Games was treated as the acquirer for accounting purposes in this reverse merger and the financial statements of the Company for all periods presented represent the historical activity of Zoo Games and include the activity of Zoo beginning on September 12, 2008, the date of the reverse merger. As a result of the reverse merger, the equity transactions through September 12, 2008 have been adjusted to reflect this recapitalization.

F-7

Zoo Games, a Delaware corporation, is a developer, publisher and distributor of interactive entertainment software for use on all major platforms including Nintendo’s Wii and DS, Sony’s PSP and PlayStation 3, Microsoft’s Xbox 360, and personal computers (PCs). Zoo Games sells primarily to major retail chains and video game distributors. Zoo Games began business in March 2007, acquired the assets of Supervillain Studios, Inc. (“SVS”) on June 13, 2007, acquired the stock of Zoo Publishing, Inc. (“Zoo Publishing”) on December 18, 2007 and acquired the stock of Zoo Digital Publishing Limited (“Zoo Digital”) on April 4, 2008. The consolidated financial statements include the results of their operations from their respective acquisition dates. The Company also acquired an interest in Cyoob, Inc., also known as Repliqa (“Repliqa”), on June 28, 2007. During January 2008, Zoo Games’ board of directors made a determination to discontinue its involvement with the operations of Repliqa. During September 2008, Zoo Games sold SVS back to its original owners. In November 2008, Zoo Games sold Zoo Digital back to its original owners. Repliqa, SVS and Zoo Digital have been reflected as discontinued operations for all periods presented. In May 2009, we entered into a license agreement with New World IP (Licensor”) pursuant to which the Licensor granted to Zoo Publishing all of the Licensor’s rights to substantially all the intellectual property of Empire Interactive Europe, Ltd. for a minimum royalty of $2.6 million. In June 2009, we formed a new company called Zoo Entertainment Europe Ltd. (“Zoo Europe”), a 100% subsidiary of Zoo Games, Inc. based in the United Kingdom for the purpose of sales and distribution of our product in Europe.  We terminated the operations of Zoo Europe in December 2009.

Currently, the Company has determined that it operates in one segment in the United States and will focus on developing, publishing and distributing interactive entertainment software under the Zoo brand both in North American and international markets.

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

NOTE 2.   LIQUIDITY

The Company has incurred losses since inception, resulting in an accumulated deficit of approximately $45.1 million as of December 31, 2009.  For the year ended December 31, 2009 the Company generated negative cash flows from continuing operations of approximately $5.5 million, and for the year ended December 31, 2008 the Company generated negative cash flows from continuing operations of approximately $12.1 million.

As a result of the Company consummating an aggregate of $5.0 million of equity raises in the fourth quarter of 2009 and the conversion of approximately $11.9 million in existing debt including related accrued interest into equity during that period (See Note 7), the Company’s net working capital position became positive.  As of December 31, 2009, the working capital was approximately $5.6 million.

In March 2010, the Company extended its purchase order financing facility (See Note 9) and we have agreed in principle to increase the borrowing capacity at lower fees and interest rates through April 2011.  In addition, we have agreed in principal to increase our receivable factoring facility (See Note 9) effective April 1, 2010 to $5.25 million, which allows us to factor up to $7.0 million of receivables at any point in time.

The Company believes the existing cash and cash generated from operations are sufficient to meet our immediate operating requirements, along with our current financial arrangements through March 31, 2011.  We may need to raise additional capital to strengthen our cash position, facilitate expansion, pursue strategic investments or to take advantage of business opportunities as they arise.

NOTE 3.   BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements of the Company include the accounts of Zoo Games and its wholly and majority owned subsidiaries, Supervillain Studios LLC, Zoo Publishing, Zoo Entertainment Europe Ltd., Zoo Digital Publishing Limited and Repliqa during the periods that each subsidiary was directly or indirectly owned by Zoo Games. All intercompany accounts and transactions are eliminated in consolidation.

F-8

Use of Estimates

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

Concentration of Credit Risk

We maintain cash balances at what we believe are several high quality financial institutions. While we attempt to limit credit exposure with any single institution, balances often exceed FDIC insurable amounts.

If the financial condition and operations of our customers deteriorate, our risk of collection could increase substantially. A majority of our trade receivables are derived from sales to major retailers and distributors. In October 2008, we entered into an agreement with Atari, Inc. where sales from October 24, 2008 through March 31, 2009 for all customers that Atari deemed acceptable would be through Atari and Atari would prepay us for the cost of goods and they would bear the credit risk from the ultimate customer. This agreement was subsequently amended to include sales to certain customers through March 31, 2010. As of December 31, 2009, Atari had prepaid us approximately $1.5 million which is included in customer advances in current liabilities in the consolidated balance sheet and the receivable due from Atari was approximately $1.8 million, before allowances, which is included in accounts receivable in the consolidated balance sheet. Our five largest ultimate customers accounted for approximately 76% (customer A-29%, customer B-21%, customer C-11%) and 60% (customer A-14%, customer B-30%) of net revenue for the years ended December 31, 2009 and 2008, respectively. These five largest customers accounted for 57% and 3% of our gross accounts receivable as of December 31, 2009 and 2008, respectively. We believe that the receivable balances from Atari and our ultimate customers do not represent a significant credit risk based on past collection experience. During the year ended December 31, 2009, we sold approximately $4.6 million of receivables to our factor with recourse.  There were approximately $1.4 million of receivables due from our factor included in our gross accounts receivable and due from factor as of December 31, 2009 and $0 as of December 31, 2008. We regularly review our outstanding receivables for potential bad debts and have had no history of significant write-offs due to bad debts.

Inventory

Inventory is stated at the lower of actual cost or market. We periodically evaluate the carrying value of our inventory and make adjustments as necessary. Estimated product returns are included in the inventory balances and also recorded at the lower of actual cost or market.

Product Development Costs

We utilized both internal development teams and third party product developers to develop the titles we publish.  With the sale of SVS in September 2008, we no longer have any internal development studios or related costs.

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

F-9

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

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

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

Prior to establishing technological feasibility, we expense research and development costs as incurred. During the years ended December 31, 2009 and 2008, we wrote-off $390,000 and approximately $5.1 million, respectively, of expense relating to costs incurred for the development of games that were abandoned during those periods. In the 2008 period, we expensed $720,000 for a game still in development that we deemed unrecoverable.  Those costs are included in our statement of operations under research and development expenses.  In addition in 2008, approximately $1.4 million of other costs were incurred by our discontinued internal development studio prior to technological feasibility that could not be capitalized, and these costs are included in the loss from discontinued operations in the consolidated statement of operations.

In December 2007, the FASB issued FASB ASC Topic 808-10-15, “Accounting for Collaborative Arrangements” (ASC 808-10-15) which defines collaborative arrangements and requires collaborators to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) the other collaborators based on other applicable authoritative accounting literature, and in the absence of other applicable authoritative literature, on a reasonable, rational and consistent accounting policy is to be elected.  Effective January 1, 2009, the Company adopted the provisions of ASC 808-10-15.  The adoption of the statement did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

Licenses and Royalties

Licenses consist of payments and guarantees made to holders of intellectual property rights for use of their trademarks, copyrights, technology or other intellectual property rights in the development of our products. Agreements with rights holders generally provide for guaranteed minimum royalty payments for use of their intellectual property. 

F-10

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

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

Fixed Assets

Office equipment and furniture and fixtures are depreciated using the straight-line method over their estimated useful life of five years. Computer equipment and software are generally depreciated and amortized using the straight-line method over three years. Leasehold improvements are amortized over the lesser of the term of the related lease or seven years. The cost of additions and betterments are capitalized, and repairs and maintenance costs are charged to operations, in the periods incurred. When depreciable assets are retired or sold, the cost and related allowances for depreciation are removed from the accounts and the gain or loss is recognized. The carrying amounts of these assets are recorded at historical cost.

Goodwill and Intangible Assets

Goodwill represents the premium paid over the fair value of the net tangible and intangible assets acquired in a business combination.  Intangible assets consist of trademarks, customer relationships, content and product development. Certain intangible assets acquired in a business combination are recognized as assets apart from goodwill. Identified intangibles other than goodwill are generally amortized using the straight-line method over the period of expected benefit ranging from one to ten years, except for intellectual property, which are usage-based intangible assets that are amortized using the shorter of the useful life or expected revenue stream.

The Company is required to perform a goodwill impairment test on at least an annual basis.  The goodwill impairment test is a two-step process, which requires management to make judgments in determining what assumptions to use in the calculation.  Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the business, the useful life over which cash flows will occur and determination of weighted average cost of capital.  Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment.  The Company conducts its annual goodwill impairment test during the fourth quarter of each fiscal year, or more frequently if indicators of impairment exist.  The Company periodically analyzes whether any such indicators of impairment exist.  A significant amount of judgment is involved in determining if an indicator of impairment has occurred.  Such indicators may include a sustained, significant decline in share price and market capitalization, a decline in expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition and/or slower expected growth rates, among others.  The Company compares the fair value of each reporting unit to the carrying value and if the carrying amount of the goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized.  As of September 30, 2009, the Company determined that goodwill was impaired and as such recorded an impairment charge of $14.7 million against the goodwill (see Note 8).  

F-11

Impairment of Long-Lived Assets, Including Definite Life Intangible Assets

We review all long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, including assets to be disposed of by sale, whether previously held and used or newly acquired. We compare the carrying amount of the asset to the estimated undiscounted future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, we record an impairment charge for the difference between the carrying amount of the asset and its fair value. The estimated fair value is generally measured by discounting expected future cash flows at our incremental borrowing rate or fair value, if available.  The Company determined that no impairment for definite lived intangible assets was identified in 2009 or 2008.

Revenue Recognition

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

We recognize Publishing Revenue upon the transfer of title and risk of loss to our customers.  Accordingly, we recognize revenue for software titles when there is (1) persuasive evidence that an arrangement with the customer exists, which is generally a customer purchase order, (2) the product is delivered, (3) the selling price is fixed or determinable and (4) collection of the customer receivable is deemed probable. Our payment arrangements with customers typically provide net 30 and 60-day terms. Advances received from customers are reported on the consolidated balance sheet as customer advances and are included in current liabilities until we meet our performance obligations, at which point we recognize the revenue.

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

Allowances for Returns, Price Concessions and Other Allowances

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

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

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

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

F-12

Consideration Given to Customers and Received from Vendors

We have various marketing arrangements with retailers and distributors of our products that provide for cooperative advertising and market development funds, among others, which are generally based on single exchange transactions. Such amounts are accrued as a reduction to revenue when revenue is recognized, except for cooperative advertising which is included in selling and marketing expense if there is a separate identifiable benefit and the benefit's fair value can be established.

We receive various incentives from our manufacturers, including up-front cash payments as well as rebates based on a cumulative level of purchases. Such amounts are generally accounted for as a reduction in the price of the manufacturer's product and included as a reduction of inventory or cost of goods sold, based on (1) a ratio of current period revenue to the total revenue expected to be recorded over the remaining life of the product or (2) an agreed upon per unit rebate, based on actual units manufactured during the period.

Equity-Based Compensation

We issued options and warrants to purchase shares of common stock of the Company to certain management and employees during 2009 and 2008.  Grants vest over periods ranging from immediate to three years and expire within ten years of issuance.  Stock options that vest in accordance with service conditions amortize over the applicable vesting period using the straight-line method.

The fair value of our equity-based compensation is estimated using the Black-Scholes option-pricing model. This model requires the input of assumptions regarding a number of complex and subjective variables that will usually have a significant impact on the fair value estimate. These variables include, but are not limited to, the volatility of our stock price and estimated exercise behavior.  As a privately-held company until September 12, 2008, we used the stock prices of equity raises to assist us in our calculations for 2008 grants.  There was no activity subsequent to such date for the balance of 2008.  We had limited trading volume in 2009, therefore we used the current market price, bid-ask spreads and a marketability discount to determine the fair value of the stock price.  The following table summarizes the assumptions and variables used by us to compute the weighted average fair value of stock option grants:

	For the Year
	Ended December 31,
	2009			2008
Risk-free interest rate		3.45	%		3.07	%
Expected stock price volatility		60.0	%		70.0	%
Expected term until exercise (years)		5			5
Expected dividend yield	None			None

For the years ended December 31, 2009 and 2008, we estimated the implied volatility for publicly traded options on our common shares as the expected volatility assumption required in the Black-Scholes option-pricing model. The selection of the implied volatility approach was based upon the historical volatility of companies with similar businesses and capitalization and our assessment that implied volatility is more representative of future stock price trends than historical volatility.

Loss Per Share

Basic loss per share ("EPS") is computed by dividing the net loss applicable to common stockholders for the period by the weighted average number of shares of common stock outstanding during the same period. Diluted EPS is computed by dividing the net income applicable to common stockholders for the period by the weighted average number of shares of common stock outstanding and common stock equivalents, which includes warrants and options outstanding during the same period. Since the inclusion of the 13,486,072 warrants and 2,589,810 options outstanding as of December 31, 2009 and the 6,502,159 warrants and 2,336,552 options outstanding as of December 31, 2008 are anti-dilutive because of losses, the dilutive loss per share is the same as the basic loss per share.

F-13

Foreign Currency Translation

The functional currency for our former foreign operations was primarily the applicable local currency, British pounds sterling and Euro. Accounts of foreign operations were translated into U.S. dollars using exchange rates for assets and liabilities at the balance sheet date and average prevailing exchange rates for the period for revenue and expense accounts.  Realized and unrealized transaction gains and losses are included in income in the period in which they occur.  There was no translation adjustment required at December 31, 2009 and 2008.

Income Taxes

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

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

Fair Value Measurement

In accordance with “Fair Value Measurements and Disclosures”, Topic 820 of the FASB ASC, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  Topic 820 of the FASB ASC establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

· Level 1 – Unadjusted quoted market prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

· Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assts or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asst or liability (i.e. interest rates, yield curves, etc.) an inputs that are derived principally from or corroborated by observable market data by correlation or other means

· Level 3 – Unobservable inputs that reflect assumptions about what market participants would use in pricing assets or liabilities based on the best information available.

As of December 31, 2009, the carrying value of cash, accounts receivable, inventory, prepaid expenses, accounts payable, accrued expenses, due to factor, and advances from customers are reasonable estimates of the fair values because of their short-term maturity. Notes payable are recorded net of the discount which is computed as the difference between the market interest rate that the Company would pay for financing at the time the note is issued and the stated interest rate on the note. 

The fair value of the warrants under the Zoo entertainment Notes (See Note 11) was detemined based upon Level 3 inputs.

Recently Issued Accounting Pronouncements

Effective January 1, 2009, the Company adopted ASC Topic 815 which clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock. The adoption of ASC Topic 815 did not have a significant impact on our results of operations or financial position.

F-14

In June 2009, the FASB issued ASC Topic 105 which establishes the FASB Accounting Standards Codification as the single source of authoritative GAAP for all non-governmental entities, with the exception of the SEC and its staff. ASC Topic 105 changes the referencing and organization of accounting guidance and is effective for interim and annual periods ending after September 15, 2009. Since it is not intended to change or alter existing GAAP, the Codification did not have any impact on the Company’s financial condition or results of operations.  Going forward, the Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right; these updates will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification. In the description of Accounting Standards Updates that follows, references in “italics” relate to Codification Topics and Subtopics, and their descriptive titles, as appropriate.

Accounting Standards Updates Not Yet Effective

In June 2009, an update was made to “Consolidation – Consolidation of Variable Interest Entities.” Among other things, the update replaces the calculation for determining which entities, if any, have a controlling financial interest in a variable interest entity (VIE) from a quantitative based risks and rewards calculation, to a qualitative approach that focuses on identifying which entities have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. The update also requires ongoing assessments as to whether an entity is the primary beneficiary of a VIE (previously, reconsideration was only required upon the occurrence of specific events), modifies the presentation of consolidated VIE assets and liabilities, and requires additional disclosures about a company’s involvement in VIEs. This update will be effective for the company beginning January 1, 2010. Management concluded that the adoption of this update will have no material impact on the company’s consolidated financial position and results of operations when it becomes effective in 2010.

Other Accounting Standards Updates not effective until after December 31, 2009, are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.

NOTE 4.   DISCONTINUED OPERATIONS

The loss from discontinued operations for the years ended December 31, 2009 and 2008 is summarized as follows:

	(Amounts in Thousands)
	December31,2009		December31,2008
Supervillain	$	-	$	3,174
Zoo Digital		235		4,585
Repliqa		-		219
Online concept		-		146
Tax benefit		-		(1,390	)
Loss from discontinued operations	$	235	$	6,734

The revenues from the discontinued operations for the years ended December 31, 2009 and 2008 were $0 and approximately $2.5 million, respectively.

NOTE 5.   INVENTORY

Inventory consisted of:

	(Amounts in Thousands)
	December 31, 2009		December 31, 2008
Finished products	$	1,247	$	2,939
Parts and supplies		856		181
Totals	$	2,103	$	3,120

F-15

Estimated product returns included in inventory at December 31, 2009 and 2008 were $261,000 and $337,000, respectively.

NOTE 6.   PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of:

	(Amounts in Thousands)
	December31, 2009		December 31, 2008
Vendor advances for inventory	$	1,545	$	555
Prepaid royalties		474		1,072
Income taxes receivable		-		55
Other prepaid expenses		390		442
Totals	$	2,409	$	2,124

NOTE 7.   PRODUCT DEVELOPMENT COSTS

Details of our capitalized product development costs were as follows:

	(Amounts in thousands)
	December 31,		December 31,
	2009		2008
Product development costs, externally developed, net of amortization	$	4,399	$	5,168
Product development costs, internally developed, net of amortization		-		170
Totals	$	4,399	$	5,338

NOTE 8.   GOODWILL and INTANGIBLE ASSETS, NET

The Company incurred a triggering event as of September 30, 2009 based on the equity infusion of approximately $4.0 million for a 50% ownership in the Company and the conversion of the existing convertible debt during the fourth quarter of 2009.  As such, the Company performed an impairment analysis utilizing an approach employing multiple valuation methodologies, including a market approach (market price multiples of comparable companies) and an income approach (discounted cash flow analysis).  This approach is consistent with the requirement to utilize all appropriate valuation techniques as described in ASC 820-10-35-24 “Fair Value Measurements and Disclosures”.  The values ascertained using these methods were weighted to obtain a total fair value, which was less the carrying value, therefore the Company recorded an impairment charge of $14.7 million to fully impair the goodwill during the third quarter of 2009.

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

	Estimated			(Amounts in Thousands)
	Useful	Gross		December 31, 2009				December 31, 2008
	Lives	Carrying		Accumulated		Net Book		Net Book
	(Years)	Amount		Amortization		Value		Value
Content	10	$	14,965	$	2,620	$	12,345	$	10,931
Trademarks	10		1,510		309		1,201		1,353
Customer relationships	10		2,749		562		2,187		2,463
Totals		$	19,224	$	3,491	$	15,733	$	14,747

F-16

Amortization expense related to intangible assets was approximately $1.8 million and approximately $2.0 million for the years ended December 31, 2009 and 2008, respectively.

In May 2009, we entered into a license agreement with New World IP, LLC (“Licensor”) pursuant to which the Licensor granted to Zoo Publishing all of the Licensor’s rights to substantially all the intellectual property of Empire Interactive Europe, LLC for a minimum royalty of $2.6 million to be paid within two years.  At any time prior to April 1, 2011, Zoo Publishing has the option to purchase all rights in and to suchgames.  At any time after April 1, 2011, Licensor has the right to sell all rights in and to the games to Zoo Publishing. The $2.6 million of costs related to this agreement have been capitalized and are included as Content in Intangible Assets and will be amortized over ten years.  During 2009, we paid $150,000 of these costs and as of December 31, 2009, approximately $2.2 million of the liability is recorded in other long-term liabilities and $300,000 is recorded in accrued expenses in the balance sheet.

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

YearEndingDecember31,	(Amounts in Thousands)
2010	$	1,922
2011		1,922
2012		1,922
2013		1,922
2014		1,922
Thereafter		6,123
Total	$	15,733

NOTE 9.   CREDIT AND FINANCING ARRANGEMENTS, ATARI AGREEMENT AND OTHER CUSTOMER ADVANCES

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

The Company and Zoo Publishing entered into a purchase order financing agreement with Transcap Trade Finance, LLC (“Transcap”) on December 19, 2007. This agreement made the Company a party to a Master Purchase Order Assignment Agreement dated August 20, 2001 pursuant to which Transcap agreed to provide purchase order financing to or for the benefit of Zoo Publishing. Total advances under the factoring arrangement include letters of credit for purchase order financing and is limited to $10.0 million. The amounts outstanding as of December 31, 2009 and 2008 were $759,000 and $849,000, respectively. The interest rate is prime plus 4.0% on outstanding advances. As of December 31, 2009 and 2008, the effective interest rates were 7.25%.  The charges and interest expense on the advances are included in the cost of goods sold in the accompanying condensed consolidated statement of operations and were $326,000 and approximately $1.1 million for 2009 and 2008, respectively. 

On April 6, 2009, we entered into an amended and restated purchase order financing arrangement with Wells Fargo Bank, National Association (“Wells Fargo”) pursuant to an amended and restated master purchase order assignment agreement (the “Assignment Agreement”). The Assignment Agreement amended and restated in its entirety the master purchase order assignment agreement between Transcap and Zoo Publishing, dated as of August 20, 2001, as amended.

F-17

Pursuant to the Assignment Agreement, the Company will assign purchase orders received from customers to Wells Fargo, and request that Wells Fargo purchase the required materials to fulfill such purchase orders. Wells Fargo, which may accept or decline the assignment of specific purchase orders, will retain us to manufacture, process and ship ordered goods, and will pay us for our services upon Wells Fargo’s receipt of payment from the customers for such ordered goods. Upon payment in full of the purchase order invoice by the applicable customer to Wells Fargo, Wells Fargo will re-assign the applicable purchase order to us. We will pay to Wells Fargo a fee upon their funding of each purchase order and we commit to pay a total fee for twelve months in the aggregate amount of $337,500. If the fees earned during the twelve month period do not exceed $337,500, we are required to pay the difference between the $337,500 and the amounts already paid on the earlier of the twelve month anniversary of the date of the Assignment Agreement, or the date of termination of the Assignment Agreement. Wells Fargo is not obligated to provide purchase order financing under the Assignment Agreement if the aggregate outstanding funding exceeds $5,000,000. The Assignment Agreement is for an initial term of twelve months, and shall continue thereafter for successive twelve month renewal terms unless either party terminates the Assignment Agreement by written notice to the other no later than 30 days prior to the end of the initial term or any renewal term. If the term of the Assignment Agreement is renewed for one or more twelve month terms, for each such twelve month term, we will pay to Wells Fargo a commitment fee in the sum of $337,500, to be offset against actual fees paid by us upon their payment of each purchase order, to be paid on the earlier of the twelve month anniversary of such renewal date or the date of termination of the Assignment Agreement. The initial and renewal commitment fees are subject to waiver if certain product volume requirements are met.

In connection with the Assignment Agreement, on April 6, 2009 we also entered into an amended and restated security agreement and financing statement (the “Security Agreement”) with Wells Fargo. The Security Agreement amends and restates in its entirety that certain security agreement and financing statement, by and between Transcap and Zoo Publishing, dated as of August 20, 2001. Pursuant to the Security Agreement, we granted to Wells Fargo a first priority security interest in certain of our assets as set forth in the Security Agreement, as well as a subordinate security interest in certain other of our assets (the “Common Collateral”), which security interest is subordinate to the security interests in the Common Collateral held by certain of our senior lenders, as set forth in the Security Agreement.

Also in connection with the Assignment Agreement, on April 6, 2009, Mark Seremet, President, Chief Executive Officer and a director of Zoo Entertainment and Zoo Games, and David Rosenbaum, the President of Operations of Zoo Publishing, entered into a Guaranty with Wells Fargo, pursuant to which Messrs. Seremet and Rosenbaum agreed to guaranty the full and prompt payment and performance of the obligations under the Assignment Agreement and the Security Agreement.

On May 12, 2009, the Company entered into a letter agreement with each of Mark Seremet and David Rosenbaum (the “Fee Letters”), pursuant to which, in consideration for Messrs. Seremet and Rosenbaum entering into the Guaranty with Wells Fargo for the full and prompt payment and performance by the Company and its subsidiaries of the obligations in connection with a purchase order financing (the “Loan”), the Company agreed to compensate Mr. Seremet in the amount of $10,000 per month, and Mr. Rosenbaum in the amount of $7,000 per month, for so long as the executive remains employed while the Guaranty and Loan remain in full force and effect. If the Guaranty is not released by the end of the month following termination of employment of either Messrs. Seremet or Rosenbaum, the monthly fee shall be doubled for each month thereafter until the Guaranty is removed.

F-18

Additionally, pursuant to the Fee Letters, the Company agreed to grant under the Company’s 2007 Employee, Director and Consultant Stock Plan, as amended to each of Messrs. Seremet and Rosenbaum, on such date that is the earlier of the conversion of at least 25% of all currently existing convertible debt of the Company into equity, or November 8, 2009 (the earlier of such date, the “Grant Date”), an option to purchase that number of shares of the Company’s common stock equal to 6% and 3% respectively, of the then issued and outstanding shares of common stock, based on a fully diluted current basis assuming those options and warrants that have an exercise price below $0.40 per share are exercised on that date but not counting the potential conversion to equity of any outstanding convertible notes that have not yet been converted and, inclusive of any options or other equity securities or securities convertible into equity securities of the Company that each may own on the Grant Date. The options shall be issued at an exercise price equal to the fair market value of the Company’s common stock on the Grant Date and pursuant to the Company’s standard form of nonqualified stock option agreement; provided however that in the event the Guaranty has not been released by Wells Fargo Bank as of the date of the termination of the option due to termination of service, the option termination date shall be extended until the earlier of the date of the release of the Guaranty or the expiration of the ten year term of the option. In addition any options owned by Messrs. Seremet and Rosenbaum as of the Grant Date with an exercise price that is higher than the exercise price of the new options shall be cancelled as of the Grant Date.  As part of the November 2009 financing, Messrs. Seremet and Rosenbaum agreed to amend their respective Fee Letters, pursuant to which: in the case of Mr. Seremet, the Company will pay to Mr. Seremet a fee of $10,000 per month for so long as the Guaranty remains in full force and effect, but only for a period ending on November 20, 2010; and, in the case of Mr. Rosenbaum, the Company will pay to Mr. Rosenbaum a fee of $7,000 per month for so long as the Guaranty remains in full force and effect, but only for a period ending on November 20, 2010.  In addition, the amended Fee Letters provide that, in consideration of each of their continued personal guarantees, the Company’s Board of Directors has approved an increase in the issuance of an option to purchase (restricted stock or other incentives intended to comply with Section 409A of the Internal Revenue Code, equal to) a 6.25% ownership interest, to each of Mr. Seremet and Mr. Rosenbaum respectively.   On February 11, 2010, the Company issued options to purchase shares of common stock of the Company to each of Mr. Seremet and Mr. Rosenbaum in consideration for their continued personal guarantees (see Note 21).  The Company issued the options on February 11, 2010 and performed a Black-Scholes valuation to determine the value of the arrangements on that date to be $542,000.  Of the $542,000, $403,000 is included as stock compensation expense in the year ended December 31, 2009 based on the value ascribed for the period from November 20, 2009 to December 31, 2009, in as much as guarantees were in place and presumed vesting had taken place, and has been included in accrued expenses in the December 31, 2009 consolidated balance sheet.

Zoo Publishing uses a factor to approve credit and to collect the proceeds from a portion of its sales. In August 2008, Zoo Publishing entered into a factoring agreement with Working Capital Solutions, Inc., which utilizes existing accounts receivable in order to provide working capital to fund all aspects of our continuing business operations. A new factoring agreement was entered into on September 29, 2009 with Working Capital Solutions, Inc.  Under the terms of our factoring and security agreement, we sell our receivables to the factor, with recourse. The factor, in its sole discretion, determines whether or not it will accept each receivable based upon the credit risk factor of each individual receivable or account. Once a receivable is accepted by the factor, the factor provides funding subject to the terms and conditions of the factoring and security agreement. The amount remitted to us by the factor equals the invoice amount of the receivable adjusted for any discounts or allowances provided to the account, less 25% which is deposited into a reserve account established pursuant to the agreement, less allowances and fees. In the event of default, valid payment dispute, breach of warranty, insolvency or bankruptcy on the part of the receivable account, the factor can require the receivable to be repurchased by us in accordance with the agreement. The amounts to be paid by us to the factor for any accepted receivable include a factoring fee of 0.6% for each ten (10) day period the account is open. Since the factor acquires the receivables with recourse, we record the gross receivables including amounts due from our customers to the factor and we record a liability to the factor for funds advanced to us from the factor. During the year ended December 31, 2009, we sold approximately $4.6 million of receivables to the factor with recourse.  At December 31, 2009, accounts receivable and due from factor included approximately $1.4 million of amounts due from our customers to the factor and the factor had an advance outstanding to the Company of $900,000. At December 31, 2008, accounts receivable did not include any amounts due from our customers to the factor and the factor did not have any advance outstanding to the Company. In connection with the factoring facility, on September 29, 2009, Mark Seremet, President, Chief Executive Officer and a director of the Company and Zoo Games, and David Rosenbaum, the President of Operations of Zoo Publishing, entered into a Guaranty with Working Capital Solutions, Inc., pursuant to which Messrs. Seremet and Rosenbaum agreed to guaranty the full and prompt payment and performance of the obligations under factoring and security agreement.

F-19

Atari Agreement

As a result of a fire in October 2008 that destroyed our inventory and impacted our cash flow from operations, we entered into an agreement with Atari, Inc. (“Atari”). This agreement became effective on October 24, 2008 and provided for Zoo Publishing to sell its products to Atari without recourse and Atari will resell the products to wholesalers and retailers that are acceptable to Atari in North America. The agreement initially expired on March 31, 2009, but was amended to extend the term for certain customers until March 31, 2010. This agreement provided for Atari to prepay to the Company for the cost of goods and pay the balance due within 15 days of shipping the product. Atari’s fees approximate 10% of our standard selling price and they have been recorded as a reduction in revenue. During the years ended December 31, 2009 and 2008, we recorded approximately $33.6 million and $10.9 million, respectively, of net sales to Atari.  Atari takes a reserve from the initial payment for potential customer sales allowances, returns and price protection that is analyzed and reviewed within a sixty day period to be liquidated no later than July 31, 2010.  As of December 31, 2009 and 2008, Atari had prepaid the Company approximately $1.5 million and approximately $1.8 million, respectively, for goods not yet shipped which is recorded as customer advances in current liabilities. Also, as of December 31, 2009 and 2008, Atari owed the Company approximately $1.8 million and approximately $1.8 million, respectively, before allowances, for goods already shipped which are recorded in accounts receivable.

Other Customer Advance – Solutions 2 Go, Inc.

On August 31, 2009, Zoo Publishing entered into an Exclusive Distribution Agreement with Solutions 2 Go Inc., a Canadian corporation (“S2G Inc.”) and an Exclusive Distribution Agreement with Solutions 2 Go, LLC, a California limited liability company (“S2G LLC,” and together with S2G Inc., “S2G”), pursuant to which Zoo Publishing granted to S2G the exclusive rights to market, sell and distribute certain video games, related software and products, with respect to which Zoo Publishing owns rights, in the territories specified therein.  In connection with these distribution agreements, on August 31, 2009, the Company entered into an Advance Agreement (the “Advance Agreement”) with S2G, pursuant to which S2G made a payment to the Company in the amount of $1,999,999, in advance of S2G’s purchases of certain products pursuant to these distribution agreements. From August 31, 2009 until recoupment of the advance in full, interest on the outstanding amount shall accrue at the rate of ten percent (10%) per annum. Interest expense of $58,000 is recorded for the year ended December 31, 2009.  The amount of any unrecouped advance outstanding shall be repaid in its entirety to S2G no later than September 15, 2010. The advance shall be recouped, in whole or in part, from sales generated by S2G of products purchased by S2G under the distribution agreements. A percentage of the gross margin on the S2G Sales shall be applied to a recoupment of the advance until the earlier of (i) the date on which the amount of the unrecouped advance has been reduced to zero or (ii) September 15, 2010, on which any unrecouped advance shall be repaid. As of December 31, 2009, the balance remaining on the advance is approximately $1.4 million and this is included in customer advances in the current liabilities section of the balance sheet.

Notwithstanding the foregoing, if, at any time prior to the recoupment of the advance in full, the Company receives proceeds in connection with any sale of securities, or otherwise raises additional capital, exceeding an aggregate of five million dollars ($5,000,000), other than under a defined anticipated qualified financing, the entire unrecouped advance under the advance agreement shall at once become due and payable in full as of the funding date of the additional capital transaction without written notice of acceleration to the Company.  Additional capital transaction shall include, but not be limited to the sale or issuance of any security by the Company, or any subsidiary of the Company, of any kind or character whatsoever, where “security” is given its broadest meaning including stock, warrants, options, convertible notes, and similar instruments of all types.

In consideration of S2G entering into the advance agreement, the Company agreed to issue to S2G Inc. a warrant to purchase 7,665,731 shares of the Company’s common stock (or such other number of shares of Common Stock that on the warrant grant date (as defined below), represents 6% of the Company’s modified fully-diluted shares, computed as if all outstanding convertible stock, warrants and stock options that are, directly or indirectly, convertible into Common Stock at a price of $0.75 or less, have been so converted), upon the occurrence of an anticipated qualified financing, which means (i) the consummation of the sale of shares of Common Stock by the Company which results in aggregate gross proceeds to the Company of at least $4,000,000 and (ii) the conversion of the Company’s senior secured convertible notes, in the aggregate original principal amount of $11,150,000, into shares of Common Stock.  The warrant will have a term of five years and an exercise price equal to $0.30.  The warrant to acquire 7,665,731 shares was issued on August 31, 2009.  The warrant was valued at $400,000 using the Black-Scholes model and this cost will be amortized over twelve months through interest expense.  For the period ended December 31, 2009, $132,000 of additional interest expense was recorded in the consolidated statement of operations for this advance.

The advance is guaranteed by Messrs. Seremet, Rosenbaum and another employee.  Messrs. Seremet and Rosenbaum did not receive any additional compensation for this guarantee.  The employee who guaranteed the advance was granted 500,000 shares of common stock.  The value of the shares issued was computed at $100,000 using the bid-ask spread of the Company’s stock price and is recorded in the general and administrative expenses in the year ended December 31, 2009.

F-20

NOTE 10.   ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of:

	(Amounts in Thousands)
	December 31,		December 31,
	2009		2008
Operating expenses	$	773		982
Obligations to compensate current and former employees		561		720
Royalties		430		252
Obligations arising from acquisitions		233		354
Taxes payable		260		-
Due to customers		18		710
Interest		58		81
Totals	$	2,333	$	3,099

NOTE 11.   NOTES PAYABLE

Outstanding notes payable, net of unamortized discounts, are as follows:

	(Amounts in Thousands)
	December 31,		December 31,
	2009		2008
Zoo Entertainment convertible notes, net of discounts attributable to the warrant value of $0 and $1,576	$	-	$	9,574
Interest on convertible notes		-		240
3.9% Zoo Publishing notes, net of discount of $0 and $1,030		-		2,536
2.95% note due June 2012 assumed from Zoo Publishing acquisition		300		370
8.25% Wachovia demand note assumed from Zoo Publishing acquisition		-		45
Note assumed from Zoo Publishing acquisition, 12% interest		-		25
Employee loans, payable on demand		-		331
Zoo Publishing employee loans at 4% interest		-		268
Totals		300		13,389
Current portion		120		11,617
Non-current portion	$	180	$	1,772

The principal and interest amounts for the Zoo Entertainment convertible notes were converted into equity as part of the November 2009 financing.

The face amounts of the notes payable as of December 31, 2009 are due as follows:

	(Amounts in Thousands)
Year Ending December	Amount Due
2010	$	120
2011		120
2012		60
Total	$	300

F-21

Zoo Entertainment Notes

On July 7, 2008, as amended on July 15, 2008 and July 31, 2008, the Company entered into a note purchase agreement under which the purchasers agreed to provide loans to the Company in the aggregate principal amount of $9.0 million, in consideration for the issuance and delivery of senior secured convertible promissory notes. In connection with the issuance of such notes, the Company issued to the note holders warrants to purchase 8,181,818 shares of common stock of the Company. The notes had an interest rate of five percent (5%) for the one year term of the note commencing from issuance, unless extended. In connection with the note purchase agreement, the Company satisfied a management fee obligation by issuing additional senior secured convertible promissory notes in the principal amount of $750,000 and warrants to purchase 681,818 shares of common stock of the Company. All of the warrants have a five year term and an exercise price of $0.01 per share. Pursuant to a security agreement, by and among the Company and the purchasers, dated as of July 7, 2008, as amended on August 12, 2008, the Company granted a security interest in all of its assets to each of the purchasers to secure the Company’s obligations under the notes.

On September 26, 2008, the Company entered into a note purchase agreement pursuant to which the purchasers agreed to provide a loan to the Company in the aggregate principal amount of $1.4 million, in consideration for the issuance and delivery of senior secured convertible promissory notes. In connection with the issuance of such notes, the Company also issued warrants to purchase 1,272,726 shares of common stock of the Company to the note holders. The notes had an interest rate of five percent (5%) for the time period beginning on September 26, 2008 and ending on September 26, 2009, unless extended. On October 6, 2009, the maturity date was extended to November 2, 2009 and on November 2, 2009, the maturity date was subsequently extended to February 2, 2010.  . The warrants have a five year term and an exercise price of $0.01 per share. Pursuant to a security agreement, by and among the Company and the purchasers, dated September 26, 2008, the Company granted a security interest in all of its assets to each of the purchasers to secure the Company’s obligations under the notes.

The total principal amount of all of the notes described above was approximately $11.15 million, $9.8 million of which was incurred prior to the date of the reverse merger. The warrants issued with all the notes were valued at approximately $5.9 million by the Company. We used the income and market valuation approaches to derive the Company’s business enterprise value and then used the Black-Scholes option-pricing model, applying discounts for illiquidity and dilution, to calculate the value of the warrants. The total deferred debt discount of $5.9 million is amortized over the one year life of the notes. Prior to September 12, 2008, 4,545,455 warrants were exercised and the interest expense related to the discount of these warrants was accelerated. As of September 12, 2008, the deferred debt discount of the existing notes was approximately $2.4 million and the net value of the notes recorded as of September 12, 2008 was approximately $7.8 million. On September 26, 2008, we issued $1.0 million of the notes and 909,090 of the warrants which were valued at $527,000 using consistent valuation methodologies as those used for all the previously issued notes. As of November 20, 2009, the net value of the notes was approximately $11.9 million including $734,000 of accrued interest.

On June 26, 2009, the Company entered into Amendment No. 2 to Senior Secured Convertible Note (“Amendment No. 2”), with the requisite holders (the “Holders”) of the Company’s senior secured convertible notes issued in the aggregate principal amount of $11.15 million.  Pursuant to Amendment No. 2, the parties agreed to extend the maturity date of the notes that were originally scheduled to mature during July 2009 to August 31, 2009, or, if the Company receives comments from the SEC with respect to the Information Statement Pursuant to Section 14(c) (the “Information Statement”) that the Company filed on July 7, 2009 in connection with an amendment to the Company’s Certificate of Incorporation authorizing a sufficient number of shares of the Company’s common stock to permit the conversion of the notes (“Certificate of Amendment”), on September 15, 2009. The Company did not receive comments from the SEC with respect to the Information Statement and, as such, the maturity dates of such notes became August 31, 2009. The Company entered into subsequent amendments with the Holders extending the maturity date to November 2, 2009 and then subsequently to February 2, 2010.

F-22

On November 20, 2009, the requisite Senior Secured Convertible Note Holders agreed that if the Company raises a minimum of $4.0 million of new capital, they will convert their debt into convertible preferred shares of the Company that will ultimately convert into common shares that represent 36.5% of the equity of the Company. As a result of the Company consummating an approximately $4.2 million preferred equity raise on November 20, 2009, upon which approximately $11.9 million of existing debt including related accrued interest converted into convertible preferred equity, the Company issued 1,188,439 shares of Series B Preferred stock that automatically convert into 1,188,439,000 shares of common stock to the Senior Convertible Note Holders in exchange for their Notes when there are sufficient common shares authorized. (See Note 21 for further details in connection with the actual conversion on March 10, 2010).  The total fair value of the Series B Preferred stock was determined to be approximately $3.0 million, based on a $0.0025 value per common share, the same value per share on the sale of Series A Preferred stock with identical rights and features (See Note 14).  Of the $8.9 million gain on extinguishment of debt, approximately $3.6 million is recorded as additional paid-in-capital because that debt holder was also a shareholder with greater than 10% of the outstanding common stock at the time of the debt conversion and deemed to be a related party.  The remaining $5.3 million balance was recorded as a gain on extinguishment of the debt.

Zoo Publishing Notes

In connection with the acquisition of Zoo Publishing, the Company issued various promissory notes (“Zoo Publishing Note”) in an aggregate of approximately $6.8 million. Approximately $1.8 million of principal was payable at the earlier of the Company’s completion of another round of financing or by December 2008 with the $5.0 million balance to be paid in two installments pursuant to the “Zoo Publishing Note.” The first installment of $2.5 million of principal together with accrued interest at the rate of 3.9% per annum would be due on the earlier of June 18, 2009 and the date on which the Company consummates a round of equity financing of $40.0 million or more. The balance of the Zoo Publishing Note (including accrued interest) would be payable December 18, 2010. In connection with the aforementioned note, the Company recorded a debt discount of approximately $2.3 million. For the years ended December 31, 2009 and 2008, amortization of deferred debt discount was $294,000 and $988,000 and interest expense was $64,000 and $213,000, respectively.  In July 2008, the $6.8 million of notes were restructured and approximately $3.2 million of this debt was converted to common stock of the Company based on fair value and of the remaining $3.6 million, approximately $1.1 million became due September 18, 2009, $113,000 became due September 18, 2010, $2.0 million became due December 18, 2010 and approximately $316,000 became due July 31, 2011.

In connection with the Settlement Agreement dated June 18, 2009 (See Notes15 and 19), all the Zoo Publishing Notes were cancelled and no cash payments were required to be made for either the principal amounts of the notes or the interest accrued. The net amount of the obligation relieved for the Zoo Publishing Notes was approximately $3.0 million and is included in the gain on legal settlement on the statement of operations.

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

· $200,000 demand note with 12.0% percent interest per annum, callable in six months, minimum guaranteed interest per renewal is $12,000. The note is guaranteed by the Zoo Publishing President. The note was totally paid off by March 31, 2009.

· Zoo Publishing purchased treasury stock from a former employee in December 2006 for the amount of $650,000. The balance on the note as of December 31, 2009 was $300,000; $120,000 is classified as current and $180,000 is classified as long-term. The payments are due monthly and the amount of the payment is $10,000 per month.

F-23

NOTE 12.  COMMITMENTS

Leases

A summary of annual minimum lease commitments as of December 31, 2009 is as follows:

	Operating
	Leases
2010	$	49
2011		10
Total	$	59

Our office facilities are occupied under non-cancelable operating leases that expire in February 2010 and January 2011. Rent expense amounted to $174,000 and $310,000 for the years ending December 31, 2009 and 2008, respectively.   In January 2010, we signed a lease for new office facilities in Cincinnati through February 2014 that provide for commitments of $67,000 in 2010, $115,000 in 2011, $102,000 in 2012, $113,000 in 2013 and $21,000 in 2014.

NOTE 13.   INCOME TAXES

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

For financial reporting purposes, loss before income taxes include the following components (in thousands):

	2009			2008
Pretax (loss):
United States	$	(10,054	)	$	(23,196	)
Foreign (discontinued operations)		-			(4,585	)
	$	(10,054	)	$	(27,781	)

For 2008, the United States pretax loss includes approximately $5.6 million for the period through May 15, 2008 attributable to entities that are taxed as partnerships.

The components of income tax expense (benefit) for the years ended December 31, 2009 and 2008 are as follows (in thousands):

	2009		2008
Current:
Federal	$	135	$	—
State		125		86
Total Current		260		86
Deferred:
Federal		1,897		(3,765	)
State		986		(1,017	)
Foreign		—		(1,390	)
Total Deferred		2,883		(6,172	)
Total	$	3,143	$	(6,086	)

F-24

During 2008, $4,696 of the tax benefit was allocated to continuing operations and $1,390 was allocated to discontinued operations.

We paid $23,000 to various state jurisdictions for income taxes during the year ended December 31, 2009.  No income taxes were paid during the year ended December 31, 2008.

The reconciliations of income tax benefit computed at the U.S. statutory tax rates to income tax expense (benefit) for the years ended December 31, 2009 and 2008 are:

	2009			2008
Tax at U.S. federal income tax rates		(34.0	)%		(34.0	)%
State taxes, net of federal income tax benefit		6.9			(5.8	)

Permanent differences:
Goodwill	49.7		-
Cancellation of indebtedness income	12.2		-
Litigation settlement - Purchase money debt reduction	(7.9	)	-

Adjustment to NOL carryover balance
net of adjustment to valuation allowance	5.6		-
Impact of foreign tax rates and credits	2.5		1.1
Change in valuation allowance	-		7.0
Amount not subject to corporate income taxes	-		6.8
Deferred taxes related to change in tax status	-		0.6
Nondeductible expenses and other	(3.7	)	2.4
	31.3	%	(21.9	)%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 2009 and 2008 are as follows (in thousands):

	2009						2008
	Current			Long Term			Current			Long Term
Deferred tax assets:
Net operating loss carried forward	$	-		$	719		$	-		$	5,887
Capital loss carryforwards					431						515
Allowance for doubtful accounts		315			-			548			-
Bonuses payable		-			-			461			111
Bonus and other accruals		363			-			263			74
Non-qualified options		-			569			-			558
Alternative minimum  tax credit carryforward		135			-			-			-
Gross deferred tax assets		813			1,719			1,272			7,145
Valuation allowance		(138	)		(293	)		(299	)		(1,800	)
Net deferred tax assets		675			1,426			973			5,345
Deferred tax liabilities:
Property and equipment		-			(17	)		-			(19	)
Inventory		(97	)		-			-			-
Discounts on notes		-			-			(285	)		(183	)
Intangibles		-			(4,870	)		-			(5,831	)
Total deferred tax liabilities		(97	)		(4,887	)		(285	)		(6,033	)
Net deferred tax asset (liability)	$	578		$	(3,461	)	$	688		$	(688	)

F-25

As of December 31, 2008, the Company had approximately $1.2 million of available capital loss carryforwards which expire in 2013.  A valuation allowance of approximately $431,000 was recognized to offset the deferred tax assets related to these carryforwards.  The Company currently does not have any capital gains to utilize against this capital loss.  If realized, the tax benefit of this item will be applied to reduce future capital gains of the Company. 

As of December 31, 2009, the Company has US federal net operating loss (“NOL”) carryforwards of approximately $1.6 million.  As a result of statutory limitations, the company will only be able to utilize approximately $160,000 of NOL and capital loss carryforwards per year.  The federal NOL will begin to expire in 2028.  The Company has state NOL carryforwards of approximately $3.0 million which will be available to offset taxable state income during the carryforward period. The state NOL will also begin to expire in 2028.  The tax benefit of this item is reflected in the above table of deferred tax assets and liabilities. 

NOTE 14.  STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION ARRANGEMENTS

The Company has authorized 250,000,000 shares of common stock, par value $0.001, and 5,000,000 shares of preferred stock, par value $0.001 as of December 31, 2009. (See Notes 14 and 21 for further details in connection with the conversion features of the preferred shares and details of the March 2010 increase in authorized shares of common stock).

Common Stock

As of December 31, 2009, there were 39,425,755 shares of common stock issued and 31,624,429 shares of common stock outstanding.

On June 26, 2009, our Board of Directors and stockholders holding approximately 63.6% of our outstanding common stock approved an amendment to our Certificate of Incorporation to increase the number of authorized shares of common stock from 75,000,000 shares to 250,000,000 shares (the “Share Increase”). The consents we have received constitute the only stockholder approval required for the Share Increase under the Delaware General Corporation Law (the “DGCL”) and our existing Certificate of Incorporation and Bylaws. Pursuant to Rule 14c-2 of the Securities Exchange Act of 1934, as amended, stockholder approval of these amendments will become effective on or after such date that is approximately 20 calendar days following the date we first mailed the Information Statement to our stockholders. After such date, the board of directors may implement the Share Increase at any time, at its discretion, by filing a Certificate of Amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware. The Information Statement was first sent to our stockholders on July 31, 2009. The board of directors effectuated the Share Increase on August 26, 2009.

In conjunction with the settlement of the litigation with the sellers of Zoo Publishing on June 18, 2009 (see Notes 15 and 19), the sellers returned 5,563,950 shares of common stock to the Company.  These shares were valued at $0.20 based on the bid-ask spread of the Company’s stock price and recorded as treasury shares.

Preferred Stock

As of December 31, 2009, there were 1,389,684 shares of Series A Preferred Stock and 1,188,439 shares of Series B Preferred Stock issued and outstanding.  Both Series A Preferred Stock and Series B Stock will automatically convert to common shares of the Company at a rate of 1:1,000 when there are a sufficient number of common shares authorized.

F-26

Preferred stock was issued in lieu of common stock in connection with the November 2009 and December 2009 equity raises because the Company did not have a sufficient number of shares of common stock authorized.  On November 20, 2009, the Company determined that it had the requisite number of votes of its holders of common stock and preferred stock in order to effect an increase in its authorized shares of common stock as soon as practicable to allow for all the then outstanding preferred stock to automatically convert to common stock immediately upon the effectiveness of an amendment to the Company's certificate of incorporation authorizing an increase in its authorized shares of common stock. On January 13, 2010, our Board of Directors and stockholders holding approximately 66.7% of our outstanding voting capital stock approved an amendment to our Certificate of Incorporation to increase the number of authorized shares of common stock from 250,000,000 shares to 3,500,000,000 shares (the “Charter Amendment”). The consents we received constituted the only stockholder approval required for the Charter Amendment under the Delaware General Corporation Law (the “DGCL”) and our existing Certificate of Incorporation and Bylaws. Pursuant to Rule 14c-2 of the Securities Exchange Act of 1934, as amended, stockholder approval of this amendment will become effective on or after such date that is approximately 20 calendar days following the date we first mailed the definitive Information Statement Pursuant to Section 14(c) (the “Information Statement”) to our stockholders.  The Information Statement was first sent to our stockholders on February 16, 2010. On March 10, 2010, the Companyfiled the CharterAmendment with the Secretary of State of the State of Delaware.  The Charter Amendment increased the Company’s authorized shares of common stock, par value $0.001 per share, from 250,000,000 shares to 3,500,000,000 shares(See Note 21).

On November 20, 2009, the Company entered into a securities purchase agreement (the “SPA”) with certain investors, consummating an approximately $4.2 million convertible preferred equity raise, pursuant to which the Company  issued Series A Preferred Stock that will convert into common shares of the Company upon an increase in sufficient authorized common shares, representing 50% of the equity of the Company. The Series A Preferred Stock have a rate of one (1) share of Series A Preferred Stock for each $2.50 of value of the investment amount.  The Company issued 1,180,282 shares of Series A Preferred Stock on November 20, 2009.  On December 16, 2009, the Company received an additional $776,000 from certain investors and issued an additional 209,402 shares of Series A Preferred Stock.

On November 20, 2009, the Company entered into Amendment No. 6 to Senior Secured Convertible Note with the requisite holders of the Company’s outstanding senior secured convertible notes issued in the aggregate principal amount of $11,150,000.  The amendment provides that, among other things, the outstanding principal balance and all accrued and unpaid interest of $734,000 under the notes shall convert into shares of the Company’s Series B Preferred Stock upon the consummation of an investor sale that results in aggregate gross proceeds to the Company of at least $4,000,000, at a rate of one (1) share of Series B Preferred Stock for each $10.00 of value of the note.   Moreover, the amendment provides that the notes shall no longer be deemed to be outstanding and all rights with respect to the notes shall immediately cease and terminate upon the conversion, except for the right of each holder to receive the shares to which it is entitled as a result of such conversion.  The Company issued 1,188,439 shares of Series B Preferred Stock on November 20, 2009 as a result of the conversion of the notes.

Options

As of December 31, 2008, the Company’s 2007 Employee, Director and Consultant Stock Plan allowed for an aggregate of 1,000,000 shares of common stock with respect to which stock rights may be granted and a 250,000 maximum number of shares of common stock with respect to which stock rights may be granted to any participant in any fiscal year. As of December 31, 2008, an aggregate of 975,000 shares of restricted common stock of the Company are outstanding under the Company’s 2007 Employee, Director and Consultant Stock Plan, and 25,000 shares of common stock were reserved for future issuance under this plan.

On January 14, 2009, the Company’s Board of Directors approved and adopted an amendment to the 2007 Employee, Director and Consultant Stock Plan, which increased the number of shares of common stock that may be issued under the plan from 1,000,000 shares to 4,000,000 shares, and increased the maximum number of shares of common stock with respect to which stock rights may be granted to any participant in any fiscal year from 250,000 shares to 750,000 shares. All other terms of the plan remain in full force and effect.

F-27

On January 14, 2009, the Company granted Mr. Seremet an option to purchase 750,000 shares of the Company’s common stock at an exercise price of $0.30 per share, pursuant to the Company’s 2007 Plan, as amended. There were no other options issued during the year ended December 31, 2009.

On May 12, 2009, the Company entered into a letter agreement with each of Mark Seremet and David Rosenbaum, pursuant to which, in consideration for Messrs. Seremet and Rosenbaum entering into a Guaranty with Wells Fargo for the full and prompt payment and performance by the Company and its subsidiaries of the obligations in connection with a purchase order financing (the “Loan”) (see Note 9), the Company agreed to compensate Mr. Seremet in the amount of $10,000 per month, and Mr. Rosenbaum in the amount of $7,000 per month, for so long as the executive remains employed while the Guaranty and Loan remain in full force and effect. If the Guaranty is not released by the end of the month following termination of employment of either Messrs. Seremet or Rosenbaum, the monthly fee shall be doubled for each month thereafter until the Guaranty is removed.  As part of the November 2009 financing, Messrs. Seremet and Rosenbaum agreed to amend their respective letter agreements, pursuant to which, in consideration of each of their continued personal guarantees, the Company’s Board of Directors has approved  the issuance of an option to purchase (restricted stock or other incentives intended to comply with Section 409A of the Internal Revenue Code, equal to) a 6.25% ownership interest, to each of Mr. Seremet and Mr. Rosenbaum respectively. Subject to the effectiveness of an amendment to the Company’s Certificate of Incorporation authorizing an increase in the number of authorized shares of the Company’s common stock, on February 11, 2010, the Company issued options to purchase shares of common stock to each of Mr. Seremet and Mr. Rosenbaum in consideration for their continued personal guarantees (see Note 21).

Subject to the effectiveness of an amendment to the Company’s Certificate of Incorporation authorizing an increase in the number of authorized shares of the Company’s common stock, par value $0.001 per share, from 250,000,000 shares to 3,500,000,000, on February 11, 2010, the Company issued shares of common stock and options to acquire common stock to various employees, directors and consultants, outside of the Company’s 2007 Employee, Director and Consultant Stock Plan (see Note 21).

A summary of the status of the Company’s outstanding stock options as of December 31 and changes during the years then ended is presented below:

	2009					2008
				Weighted					Weighted
				Average					Average
	Number Of			Exercise		Number Of			Exercise
	Shares			Price		Shares			Price
Outstanding at beginning of year		2,336,552		$	1.76		243,040		$	2.58
Granted		750,000		$	0.30		2,109,637		$	1.67
Canceled		(496,742	)	$	1.96		(16,125	)	$	2.58
Outstanding at end of year		2,589,810		$	1.29		2,336,552		$	1.76
Options exercisable at year-end		1,699,345		$	1.84		1,915,155		$	1.65

The fair value of options granted during the year was $107,000.

F-28

The following table summarizes information about outstanding stock options at December 31, 2009:

	OptionsOutstanding						OptionsExercisable
			Weighted-
			Average		Weighted-				Weighted-
			Remaining		Average				Average
Range of	Number		Contractual		Exercise		Number		Exercise
Exercise Prices	Outstanding		Life (Years)		Price		Exercisable		Price
$2.58		166,754		3.5	$	2.58		166,754	$	2.58
$2.25		210,698		3.7	$	2.25		70,233	$	2.25
$1.52		1,462,358		3.6	$	1.52		1,462,358	$	1.52
$0.30		750,000		4.1	$	0.30		-	$	0.30
$0.30 to $2.58		2,589,810		3.8	$	1.29		1,699,345	$	1.84

The following table summarizes the activity of non-vested outstanding stock options:

						Weighted-Average
				Weighted-Average		Remaining
	Number			Fair Value at		Contractual Life
	Outstanding			GrantDate		(Years)
Non-Vested shares at December 31, 2008		421,398		$	2.25		4.7
Options Granted		750,000			0.30		4.1
Options Vested		(70,233	)		2.25		3.7
Options forfeited or expired		(210,699	)		2.25		3.7
Non-Vested shares at December 31, 2009		890,466		$	0.79		4.0

As of December 31, 2009, there was approximately $162,000 of unrecognized compensation cost related to non-vested stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of 1.7 - 2.0 years.

The intrinsic value of options outstanding at December 31, 2009 is $0.

Warrants

On August 31, 2009, in consideration of Solutions 2 GO Inc. entering into an advance agreement with the Company, we issued to Solutions 2 GO Inc. a warrant to purchase 7,665,731 shares of the Company’s common stock, par value $0.001 per share. The warrants have a term of five years and an exercise price equal to $0.30.

As part of the equity raise on November 20, 2009 and on December 16, 2009, we issued warrants to purchase 610,316,000 shares of the Company’s common stock.   The warrants have a five year term and an exercise price of $0.01 per share. The warrants contain customary limitations on the amount that can be exercised. Additionally, the warrants provide that they cannot be exercised until the effectiveness of the filing of an amendment to the Company’s Certificate of Incorporation authorizing a sufficient number of shares of Common Stock to permit the exercise of the warrants (see Preferred Stock discussion above). In the event of any subdivision, combination, consolidation, reclassification or other change of Common Stock into a lesser number, a greater number or a different class of stock, the number of shares of Common Stock deliverable upon exercise of the warrants will be proportionally decreased or increased, as applicable, but the exercise price of the warrants will remain at $0.01 per share.

As of December 31, 2009, there were 623,802,072 warrants outstanding with five-year lives expiring in 2012 through 2014, of which 13,486,072 are currently exercisable.

F-29

A summary of the status of the Company’s outstanding warrants as of December 31 and changes during the years then ended is presented below:

	2009					2008
				Weighted					Weighted
				Average					Average
	Number Of			Exercise		Number Of			Exercise
	Warrants			Price		Warrants			Price
Outstanding at beginning of period		6,502,159		$	0.73		1,007,405		$	2.62
Granted		617,981,731		$	0.01		1,994,753		$	1.03
Assumed with  reverse merger		-			-		4,318,182			0.01
Exercised		(681,818	)	$	0.01		(818,181	)		0.01
Outstanding at end of year		623,802,072		$	0.02		6,502,159		$	0.73
Warrants exercisable at year-end		13,486,072		$	0.02		6,502,159		$	0.73

The following table summarizes information about outstanding warrants at December 31, 2009:

	Warrants Outstanding
			Weighted-
			Average		Weighted-
			Remaining		Average
Range of	Number		Contractual		Exercise
Exercise Prices	Outstanding		Life (Years)		Price
$2.84		1,411,186		3.3	$	2.84
$2.13		318,246		3.4	$	2.13
$0.30		7,665,731		4.9	$	0.30
$0.01		614,406,909		4.9	$	0.01
$0.01 to $2.84		623,802,072		4.9	$	0.02

NOTE 15.  GAIN ON LEGAL SETTLEMENT

On June 18, 2009, we settled a lawsuit brought by the former sellers of Zoo Publishing, resulting in a net gain on legal settlement of approximately $4.3 million. (See Note 19)

The settlement eliminated the following Company’s obligations totaling $3,925,000:

· outstanding notes with a face value of $3,565,900, discounted as of June 18, 2009 for $736,000 and interest accrued of $219,000

· employee loans totaling $574,000

· other obligations for an aggregate amount of $302,000

In conjunction with the settlement of the litigation with the sellers of Zoo Publishing, the sellers returned 5,563,950 shares of common stock to the Company. These treasury shares were valued at $0.20 and included as part of the gain on legal settlement for approximately $1.1 million.

F-30

The Company’s remaining cash obligations and litigation expense amounted to approximately $710,000, resulting in a total net gain on settlement of approximately $4.3 million.

NOTE 16.   FIRE LOSS AND INSURANCE RECOVERY

On October 13, 2008, a third party warehouse in San Bernardino, California that we use for packing our product from Zoo Publishing and shipping finished goods to our customers was consumed by fire, destroying our entire inventory stored at that location, with an approximate cost of $3.0 million. We collected on our property insurance policy in the amount of approximately $2.1 million, which was paid directly to our inventory financing company and was recorded as a reduction of cost of goods sold.  We collected $1.2 million from our business income insurance policy and this was recorded as other income on the statement of operations in 2008.  During the 2009 period, our third party warehouse received $860,000 from their insurance company relating to losses incurred by us from the fire in October 2008.  Those proceeds were applied against other amounts due to the third party warehouse by reducing our payables and are reported as other income in the consolidated statement of operations in 2009.

NOTE 17.   INTEREST, NET

	(Amounts in Thousands)
	Year Ended December 31,
	2009		2008
Interest arising from amortization of debt discount	$	2,003	$	3,562
Interest on various notes		618		624
Interest on financing arrangements		354		-
Less interest income		-		(9	)
Net interest – all operations		2,975		4,177
Interest relating to discontinued operations		-		(539	)
Interest expense, net	$	2,975	$	3,638

NOTE 18.   SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information for the years ended December 31, 2009 and 2008 is as follows:

	(Amounts in Thousands)
	2009			2008
Changes in other assets and liabilities:
Accounts receivable and due from factor	$	(2,190	)	$	(516	)
Inventory		1,017			(1,565	)
Prepaid expenses and other current assets		(153	)		645
Product development costs		939			155
Accounts payable		(2,379	)		1,726
Customer advances		(742	)		-
Accrued expenses and other current liabilities		(1,293	)		(736	)
Net changes in other assets and liabilities	$	(4,801	)	$	(291	)
Cash paid during the year for interest	$	-		$	56
Cash paid during the year for taxes	$	23		$	3
Non-cash investing and financing activities:
Conversion of convertible notes to Series B Preferred Stock	$	11,884		$	-
Receipt of 5,563,950 shares for partial settlement of litigation	$	1,113		$	-
Notes and obligations relieved for partial settlement of litigation	$	3,925		$	-
Acquisition of Intangible for long-term obligation	$	2,600		$	-
Issuance of 1,580,237 shares for partial payment of Zoo Digital	$	-		$	4,086
Receipt of 351,171 shares in Treasury in connection with the sale of Supervillain	$	-		$	527
Receipt of 1,866,205 shares in Treasury in connection with the sale of Zoo Digital	$	-		$	2,829
Exchange of debt for equity at original face value	$	-		$	5,950

F-31

NOTE 19.   LITIGATION

On February 19, 2009, Susan Kain Jurgensen, Steven Newton, Mercy Gonzalez, Bruce Kain, Wesley Kain, Raymond Pierce and Cristie Walsh filed a complaint against Zoo Publishing, Zoo Games and Zoo in the Supreme Court of the State of New York, New York County, index number 09 / 102381 alleging claims for breach of certain loan agreements and employment agreements, intentional interference and fraudulent transfer. The complaint sought compensatory damages, punitive damages and preliminary and permanent injunctive relief, among other remedies. On June 18, 2009, we reached a settlement whereby we agreed to pay to the plaintiffs an aggregate of $560,000 (the “Settlement Amount”) in full satisfaction of the disputed claims, without any admission of any liability of wrongdoing as follows: (a) $300,000 on June 26, 2009; (b) $60,000 on or before the earlier of (i) the date that is 90 days from June 18, 2009 or (ii) the date the Company obtains new and available financing, including any amounts currently held in escrow that will be released from escrow after June 18, 2009, in any form and from any source, in an amount totaling at least $2,000,000; (c) $100,000 on or before December 18, 2009; and (d) $100,000 on or before June 18, 2010. To date, $460,000 of the Settlement Amount has been paid to the plaintiffs. The Zoo Publishing Notes and all other notes, employment,  agreements, loan agreements, options, warrants and other agreements  relating to the plaintiffs (except with respect to that certain Employment Agreement between Zoo Publishing and Cristie Walsh) were terminated and all outstanding obligations of the Company related to these agreements were cancelled. In addition, the plaintiffs returned to us an aggregate of 5,563,950 shares of our common stock owned by them prior to such date.

We are also involved in various other legal proceedings and claims incident to the normal conduct of our business. Although it is impossible to predict the outcome of any legal proceeding and there can be no assurances, we believe that our legal proceedings and claims, individually and in the aggregate, are not likely to have a material adverse effect on our financial condition, results of operations or cash flows.

NOTE 20.   RELATED PARTY TRANSACTIONS

We leased office space in New York from 575 Broadway Associates, LLC, a company owned principally by one of our principal investors, from April 2007 to October 2008. We paid rent expense of $0 and $234,000 during the years ended December 31, 2009 and 2008, respectively, to this related party.

Certain Zoo Publishing employees loaned us an aggregate of up to $765,000 in 2008 on a short-term basis. The Company accrued interest at 4% per annum and all amounts were cancelled as part of the Settlement Agreement (see Note 15).

F-32

On April 6, 2009, we entered into an amended and restated purchase order financing arrangement with Wells Fargo Bank, National Association (“Wells Fargo”) pursuant to an amended and restated master purchase order assignment agreement (the “Assignment Agreement”). In connection with the Assignment Agreement, on April 6, 2009 we also entered into an amended and restated security agreement and financing statement (the “Security Agreement”) with Wells Fargo, pursuant to which we granted to Wells Fargo a first priority security interest in certain of our assets as set forth in the Security Agreement, as well as a subordinate security interest in certain other of our assets (the “Common Collateral”), which security interest is subordinate to the security interests in the Common Collateral held by certain of our senior lenders, as set forth in the Security Agreement. Also in connection with the Assignment Agreement, on April 6, 2009, Mark Seremet, President and Chief Executive Officer of Zoo Games and a director of Zoo Entertainment, and David Rosenbaum, the President of Zoo Publishing, entered into a Guaranty with Wells Fargo, pursuant to which Messrs. Seremet and Rosenbaum agreed to guaranty the full and prompt payment and performance of the obligations under the Assignment Agreement and the Security Agreement. On May 12, 2009, we entered into a letter agreement with each of Mark Seremet and David Rosenbaum (the “Fee Letters”), pursuant to which, in consideration for Messrs. Seremet and Rosenbaum entering into the Guaranty with Wells Fargo for the full and prompt payment and performance by the Company and its subsidiaries of the obligations in connection with a purchase order financing (the “Loan”), we agreed to compensate Mr. Seremet in the amount of $10,000 per month, and Mr. Rosenbaum in the amount of $7,000 per month, for so long as the executive remains employed while the Guaranty and Loan remain in full force and effect. If the Guaranty is not released by the end of the month following termination of employment of either Messrs. Seremet or Rosenbaum, the monthly fee shall be doubled for each month thereafter until the Guaranty is removed.

Additionally, pursuant to the Fee Letters, the Company agreed to grant under the Company’s 2007 Employee, Director and Consultant Stock Plan, as amended to each of Messrs. Seremet and Rosenbaum, on such date that is the earlier of the conversion of at least 25% of all currently existing convertible debt of the Company into equity, or November 8, 2009 (the earlier of such date, the “Grant Date”), an option to purchase that number of shares of the Company’s common stock equal to 6% and 3% respectively, of the then issued and outstanding shares of common stock, based on a fully diluted current basis assuming those options and warrants that have an exercise price below $0.40 per share are exercised on that date but not counting the potential conversion to equity of any outstanding convertible notes that have not yet been converted and, inclusive of any options or other equity securities or securities convertible into equity securities of the Company that each may own on the Grant Date. The options shall be issued at an exercise price equal to the fair market value of the Company’s common stock on the Grant Date and pursuant to the Company’s standard form of nonqualified stock option agreement; provided however that in the event the Guaranty has not been released by Wells Fargo Bank as of the date of the termination of the option due to termination of service, the option termination date shall be extended until the earlier of the date of the release of the Guaranty or the expiration of the ten year term of the option. In addition any options owned by Messrs. Seremet and Rosenbaum as of the Grant Date with an exercise price that is higher than the exercise price of the new options shall be cancelled as of the Grant Date.  As part of the November 2009 financing, Messrs. Seremet and Rosenbaum agreed to amend their respective Fee Letters, pursuant to which: in the case of Mr. Seremet, the Company will pay to Mr. Seremet a fee of $10,000 per month for so long as the Guaranty remains in full force and effect, but only for a period ending on November 20, 2010; and, in the case of Mr. Rosenbaum, the Company will pay to Mr. Rosenbaum a fee of $7,000 per month for so long as the Guaranty remains in full force and effect, but only for a period ending on November 20, 2010.  In addition, the amended Fee Letters provides that, in consideration of each of their continued personal guarantees, the Company’s Board of Directors has approved an increase in the issuance of an option to purchase (restricted stock or other incentives intended to comply with Section 409A of the Internal Revenue Code, equal to) a 6.25% ownership interest, to each of Mr. Seremet and Mr. Rosenbaum respectively.    Subject to the effectiveness of an amendment to the Company’s Certificate of Incorporation authorizing an increase in the number of authorized shares of the Company’s common stock, on February 11, 2010, the Company issued options to purchase shares of common stock to each of Mr. Seremet and Mr. Rosenbaum in consideration for their continued personal guarantees (see Note 21).

NOTE 21.   SUBSEQUENT EVENTS

Subject to the effectiveness (the “Effective Date”) of an amendment to the Company’s Certificate of Incorporation authorizing an increase in the number of authorized shares of the Company’s common stock, par value $0.001 per share, from 250,000,000 shares to 3,500,000,000 shares, on February 11, 2010, the Company issued an aggregate of 168,662,400 shares of restricted common stock and options to purchase 351,387,000 shares of common stock at an exercise price of $0.0041 per share to various employees, directors and consultants, outside of the Company’s 2007 Employee, Director and Consultant Stock Plan.  The Company also issued options to purchase 202,581,600 shares of common stock to each of Mark Seremet, a director, Chief Executive Officer and President of the Company, and David Rosenbaum, President of Zoo Publishing, Inc., in consideration for their continued personal guarantees of the payment and performance by the Company of certain obligations in connection with previously entered into financing arrangements, pursuant to Fee Letters entered into between the Company and each of Messrs. Seremet and Rosenbaum, dated as of May 12,2009,  as amended on August 31, 2009 and November 20, 2009. The options have an exercise price of $0.0025 per share and vest as follows:  commencing as of the Effective Date, 72% vest immediately, 14% on May 12, 2010 and 14% vest on May 12, 2011.

F-33

On January 13, 2010, our Board of Directors and stockholders holding approximately 66.7% of our outstanding voting capital stock approved an amendment to our Certificate of Incorporation to increase the number of authorized shares of common stock from 250,000,000 shares to 3,500,000,000 shares (the “Charter Amendment”). The consents we received constituted the only stockholder approval required for the Charter Amendment under the Delaware General Corporation Law (the “DGCL”) and our existing Certificate of Incorporation and Bylaws. Pursuant to Rule 14c-2 of the Securities Exchange Act of 1934, as amended, stockholder approval of this amendment will become effective on or after such date that is approximately 20 calendar days following the date we first mailed the definitive Information Statement Pursuant to Section 14(c) (the “Information Statement”) to our stockholders.  The Information Statement was first sent to our stockholders on February 16, 2010. On March 10, 2010, the Company filed the Charter Amendment with the Secretary of State of the State of Delaware.  The Charter Amendment increased the Company’s authorized shares of common stock, par value $0.001 per share, from 250,000,000 shares to 3,500,000,000 shares.

Upon the filing of the Charter Amendment on March 10, 2010, both Series A Preferred Stock and Series B Preferred Stock automatically converted to common shares of the Company at a rate of 1:1,000.

NOTE 22.   RESTATEMENT OF SEPTEMBER 30, 2009 FINANCIAL STATEMENTS

The Company incurred a triggering event as of September 30, 2009 based on the equity infusion of approximately $4.0 million for 50% ownership in the Company and the conversion of the existing convertible debt during the fourth quarter of 2009.  For the September 30, 2009 financial statements, the Company estimated impairment of goodwill at $14.7 million and impairment of other intangible assets at $7.3 million for a total impairment charge of $22.0 million.  After the Company performed a formal impairment analysis, we concluded that the resulting impairment of goodwill is $14.7 million and there should be no impairment of other intangible assets.  Therefore, the Company has restated its September 30, 2009 financial statements to reflect this reduction in impairment of other intangible assets of approximately $7.3 million.

In addition, the Company erroneously reported the $2.0 million proceeds from a loan for a customer advance in other changes in assets and liabilities, net in the operating activities section of the statement of cash flows for the nine months ended September 30, 2009.  Accordingly, it should be included in the financing activities section of the statement of cash flows and has been restated accordingly.

The effects of our restatement on previously reported unaudited consolidated financial statements as of September 30, 2009 are summarized as follows:

The effects on the Consolidated Balance Sheet as of September 30, 2009 (in thousands):

	(as previously reported)			(restated)
Selected Balance Sheet Data:
Intangible assets, net	$	8,914		$	16,210
Total assets		25,713			33,009
Accumulated deficit		(55,967	)		(48,671	)
Total stockholders’ equity (deficiency)		(7,125	)		171

The following table reflects the impact of the restatements on the Consolidated Statements of Operations (in thousands except per share amounts):

F-34

Three Months Ended September 30, 2009

	(as previously reported)			(restated)
Selected Statement of Operations Data:
Impairment of goodwill and other intangible assets (as restated, goodwill only)	$	22,000		$	14,704
Total operating expenses		24,802			17,506
Loss from operations		(22,881	)		(15,585	)
Loss from continuing operations		(22,391	)		(15,095	)
Net loss		(22,626	)		(15,330	)
Net loss per share – basic and diluted		(0.72	)		(0.49	)

Nine Months Ended September 30, 2009

	(as previously reported)			(restated)
Selected Statement of Operations Data:
Impairment of goodwill and other intangible assets (as restated, goodwill only)	$	22,000		$	14,704
Total operating expenses		30,826			23,530
Loss from operations		(26,577	)		(19,281	)
Loss from continuing operations		(23,792	)		(16,496	)
Net loss		(24,027	)		(16,731	)
Net loss per share – basic and diluted		(0.70	)		(0.49	)

The following table reflects the impact of the restatements on the Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 (in thousands):

	(as previously reported)			(restated)
Selected Cash Flow Data:
Net loss	$	(24,027	)	$	(16,731	)
Loss from continuing operations		(23,792	)		(16,496	)

Impairment of goodwill and other intangible assets (as restated, goodwill only) 22,000 14,704

Other changes in assets and liabilities, net	(412	)	(2,412	)
Net cash used in continuing operations	(2,723	)	(4,723	)
Proceeds from Solutions 2 Go note for customer advance	-		2,000
Net cash provided by financing activities	2,661		4,661

F-35

EX-10.97

Exhibit 10.97

NON-QUALIFIED STOCK OPTION AGREEMENT

ZOO ENTERTAINMENT, INC.

AGREEMENT made as of the [__] day of [__], between Zoo Entertainment, Inc. (the “Company”), a Delaware corporation, and [__] (the “Participant”).

WHEREAS, the Company desires to grant to the Participant an Option to purchase shares of its common stock, $0.001par value per share (the “Shares”), [outside of/pursuant to] the Company’s 2007 Employee, Director and Consultant Stock Plan, as amended (the “Plan”) [(but otherwise subject to and governed by all of the terms and conditions of the Plan, except for Section 4(c) thereof, and this Agreement)];

WHEREAS, the Company and the Participant understand and agree that any terms used and not defined herein have the same meanings as in the Plan; and

WHEREAS, the Company and the Participant each intend that the Option granted herein shall be a Non-Qualified Option.

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto agree as follows:

1. GRANT OF OPTION.

The Company hereby grants to the Participant the right and option to purchase all or any part of an aggregate of [__] Shares, on the terms and conditions and subject to all the limitations set forth herein, under United States securities and tax laws, and in the Plan, which is incorporated herein by reference.  [Notwithstanding the foregoing, the option to purchase the number of Shares set forth herein is conditioned upon, and cannot be exercised prior to, the effectiveness of those certain amendments to the Company’s Certificate of Incorporation authorizing an increase in the number of authorized Shares from 250,000,000 Shares to 3,500,000,000 Shares and effecting a reverse stock split at a ratio of one for 600 Shares (the “Charter Amendments”), and in the event the Charter Amendments are not filed prior to September 1, 2010, the option to purchase the number of Shares set forth herein shall be deemed immediately canceled.  The Participant acknowledges receipt of a copy of the Plan]1.

2. PURCHASE PRICE.

The purchase price of the Shares covered by the Option shall be $[__] per Share, subject to adjustment, as provided in the Plan, in the event of a stock split, reverse stock split or other events affecting the holders of Shares after the date hereof (the “Purchase Price”).  Payment shall be made in accordance with Paragraph 9 of the Plan.

1 Portions of the bracketed language contained in this form of option agreement can be found in the option agreements executed between the Company and certain individuals in connection with the options granted on February 11, 2010.

3. EXERCISABILITY OF OPTION.

Subject to the terms and conditions set forth in this Agreement and the Plan, the Option granted hereby shall become exercisable as follows:

[VESTING SCHEDULE]

The foregoing rights are cumulative and are subject to the other terms and conditions of the Agreement and the Plan.

Notwithstanding the foregoing, in the event of (i) a termination by the Company without Cause (as defined in the Participant’s employment agreement) or (ii) a Change of Control (as defined below), this Option shall become fully vested and immediately exercisable unless this Option has otherwise expired or been terminated pursuant to its terms or the terms of the Plan.

Change of Control means the occurrence of any of the following events:

(i) Ownership.  Any “Person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becomes the “Beneficial Owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company’s then outstanding voting securities (excluding for this purpose the Company or its Affiliates or any employee benefit plan of the Company) pursuant to a transaction or a series of related transactions which the Board of Directors does not approve; or

(ii) Merger/Sale of Assets.  A merger or consolidation of the Company whether or not approved by the Board of Directors, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or the parent of such corporation) at least 50% of the total voting power represented by the voting securities of the Company or such surviving entity or parent of such corporation outstanding immediately after such merger or consolidation, or the stockholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets; or

(iii) Change in Board Composition.  A change in the composition of the Board of Directors, as a result of which fewer than a majority of the directors are Incumbent Directors.  “Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the date of this Agreement, or (B) are elected, or nominated for election, to the Board of Directors with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company).

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4. TERM OF OPTION.

This Option shall terminate ten years from the date of this Agreement, but shall be subject to earlier termination as provided herein or in the Plan.

Subject to this Section 4, if the Participant ceases to be an employee, director or consultant of the Company or of an Affiliate (for any reason other than the death or Disability of the Participant or termination of the Participant for Cause, the Option may be exercised, if it has not previously terminated, within three months after the date the Participant ceases to be an employee, director or consultant of the Company or an Affiliate, or within the originally prescribed term of the Option, whichever is earlier, but may not be exercised thereafter.  In such event, the Option shall be exercisable only to the extent that the Option has become exercisable and is in effect at the date of such cessation of service.

Notwithstanding the foregoing, and subject to this Section 4, in the event of the Participant’s Disability or death within three months after the termination of service, the Participant or the Participant’s Survivors may exercise the Option within one year after the date of the Participant’s termination of service, but in no event after the date of expiration of the term of the Option.

Subject to this Section 4, in the event the Participant’s service is terminated by the Company or an Affiliate for Cause, the Participant’s right to exercise any unexercised portion of this Option shall cease immediately as of the time the Participant is notified his or her service is terminated for Cause, and this Option shall thereupon terminate.  Notwithstanding anything herein to the contrary, if subsequent to the Participant’s termination, but prior to the exercise of the Option, the Board of Directors of the Company determines that, either prior or subsequent to the Participant’s termination, the Participant engaged in conduct which would constitute Cause, then the Participant shall immediately cease to have any right to exercise the Option and this Option shall thereupon terminate.

In the event of the Disability of the Participant, as determined in accordance with the Plan, and subject to this Section 4, the Option shall be exercisable within one year after the Participant’s termination of service or, if earlier, within the term originally prescribed by the Option.  In such event, the Option shall be exercisable:

(a) to the extent that the Option has become exercisable but has not been exercised as of the date of Disability; and

(b) in the event rights to exercise the Option accrue periodically, to the extent of a pro rata portion through the date of Disability of any additional vesting rights that would have accrued on the next vesting date had the Participant not become Disabled.  The proration shall be based upon the number of days accrued in the current vesting period prior to the date of Disability.

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In the event of the death of the Participant while an employee, director or consultant of the Company or of an Affiliate, subject to this Section 4, the Option shall be exercisable by the Participant’s Survivors within one year after the date of death of the Participant or, if earlier, within the originally prescribed term of the Option.  In such event, the Option shall be exercisable:

(x) to the extent that the Option has become exercisable but has not been exercised as of the date of death; and

(y) in the event rights to exercise the Option accrue periodically, to the extent of a pro rata portion through the date of death of any additional vesting rights that would have accrued on the next vesting date had the Participant not died.  The proration shall be based upon the number of days accrued in the current vesting period prior to the Participant’s date of death.

[Notwithstanding the foregoing, to the extent that the Option has become exercisable, such Option shall not terminate for any reason, including in the event of the Participant’s termination of service for any of the reasons set forth in this Section 4, prior to May 12, 2016.]

5. METHOD OF EXERCISING OPTION.

Subject to the terms and conditions of this Agreement, the Option may be exercised by written notice to the Company or its designee, in substantially the form of Exhibit A attached hereto.  Such notice shall state the number of Shares with respect to which the Option is being exercised and shall be signed by the person exercising the Option.  Payment of the purchase price for such Shares shall be made in accordance with Paragraph 9 of the Plan.  The Company shall deliver such Shares as soon as practicable after the notice shall be received, provided, however, that the Company may delay issuance of such Shares until completion of any action or obtaining of any consent, which the Company deems necessary under any applicable law (including, without limitation, state securities or “blue sky” laws).  The Shares as to which the Option shall have been so exercised shall be registered in the Company’s share register in the name of the person so exercising the Option (or, if the Option shall be exercised by the Participant and if the Participant shall so request in the notice exercising the Option, shall be registered in the Company’s share register in the name of the Participant and another person jointly, with right of survivorship) and shall be delivered as provided above to or upon the written order of the person exercising the Option.  In the event the Option shall be exercised, pursuant to Section 4 hereof, by any person other than the Participant, such notice shall be accompanied by appropriate proof of the right of such person to exercise the Option.  All Shares that shall be purchased upon the exercise of the Option as provided herein shall be fully paid and nonassessable.

6. PARTIAL EXERCISE.

Exercise of this Option to the extent above stated may be made in part at any time and from time to time within the above limits, except that no fractional share shall be issued pursuant to this Option.

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7. NON-ASSIGNABILITY.

The Option shall not be transferable by the Participant otherwise than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act or the rules thereunder.  Except as provided above in this paragraph, the Option shall be exercisable, during the Participant’s lifetime, only by the Participant (or, in the event of legal incapacity or incompetency, by the Participant’s guardian or representative) and shall not be assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process.  Any attempted transfer, assignment, pledge, hypothecation or other disposition of the Option or of any rights granted hereunder contrary to the provisions of this Section 7, or the levy of any attachment or similar process upon the Option shall be null and void.

8. NO RIGHTS AS STOCKHOLDER UNTIL EXERCISE.

The Participant shall have no rights as a stockholder with respect to Shares subject to this Agreement until registration of the Shares in the Company’s share register in the name of the Participant.  Except as is expressly provided in the Plan with respect to certain changes in the capitalization of the Company, no adjustment shall be made for dividends or similar rights for which the record date is prior to the date of such registration.

9. ADJUSTMENTS.

The Plan contains provisions covering the treatment of Options in a number of contingencies such as stock splits and mergers.  Provisions in the Plan for adjustment with respect to stock subject to Options and the related provisions with respect to successors to the business of the Company are hereby made applicable hereunder and are incorporated herein by reference.

10. TAXES.

The Participant acknowledges that upon exercise of the Option the Participant will be deemed to have taxable income measured by the difference between the then fair market value of the Shares received upon exercise and the price paid for such Shares pursuant to this Agreement.  The Participant acknowledges that any income or other taxes due from him or her with respect to this Option or the Shares issuable pursuant to this Option shall be the Participant’s responsibility.

The Participant agrees that the Company may withhold from the Participant’s remuneration, if any, the minimum statutory amount of federal, state and local withholding taxes attributable to such amount that is considered compensation includable in such person’s gross income.  At the Company’s discretion, the amount required to be withheld may be withheld in cash from such remuneration, or in kind from the Shares otherwise deliverable to the Participant on exercise of the Option.  The Participant further agrees that, if the Company does not withhold an amount from the Participant’s remuneration sufficient to satisfy the Company’s income tax withholding obligation, the Participant will reimburse the Company on demand, in cash, for the amount under-withheld.

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11. PURCHASE FOR INVESTMENT.

Unless the offering and sale of the Shares to be issued upon the particular exercise of the Option shall have been effectively registered under the Securities Act of 1933, as now in force or hereafter amended (the “1933 Act”), the Company shall be under no obligation to issue the Shares covered by such exercise unless and until the following conditions have been fulfilled:

(a) The person(s) who exercise the Option shall warrant to the Company, at the time of such exercise, that such person(s) are acquiring such Shares for their own respective accounts, for investment, and not with a view to, or for sale in connection with, the distribution of any such Shares, in which event the person(s) acquiring such Shares shall be bound by the provisions of the following legend which shall be endorsed upon the certificate(s) evidencing the Shares issued pursuant to such exercise:

“The shares represented by this certificate have been taken for investment and they may not be sold or otherwise transferred by any person, including a pledgee, unless (1) either (a) a Registration Statement with respect to such shares shall be effective under the Securities Act of 1933, as amended, or (b) the Company shall have received an opinion of counsel satisfactory to it that an exemption from registration under such Act is then available, and (2) there shall have been compliance with all applicable state securities laws;” and

(b) If the Company so requires, the Company shall have received an opinion of its counsel that the Shares may be issued upon such particular exercise in compliance with the 1933 Act without registration thereunder.  Without limiting the generality of the foregoing, the Company may delay issuance of the Shares until completion of any action or obtaining of any consent, which the Company deems necessary under any applicable law (including without limitation state securities or “blue sky” laws).

12. RESTRICTIONS ON TRANSFER OF SHARES.

12.1         The Participant agrees that in the event the Company proposes to offer for sale to the public any of its equity securities and such Participant is requested by the Company and any underwriter engaged by the Company in connection with such offering to sign an agreement restricting the sale or other transfer of Shares, then it will promptly sign such agreement and will not transfer, whether in privately negotiated transactions or to the public in open market transactions or otherwise, any Shares or other securities of the Company held by him or her during such period as is determined by the Company and the underwriters, not to exceed 180 days following the closing of the offering, plus such additional period of time as may be required to comply with Marketplace Rule 2711 of the National Association of Securities Dealers, Inc. or similar rules thereto (such period, the “Lock-Up Period”).  Such agreement shall be in writing and in form and substance reasonably satisfactory to the Company and such underwriter and pursuant to customary and prevailing terms and conditions.  Notwithstanding whether the Participant has signed such an agreement, the Company may impose stop-transfer instructions with respect to the Shares or other securities of the Company subject to the foregoing restrictions until the end of the Lock-Up Period.

6

12.2         The Participant acknowledges and agrees that neither the Company, its shareholders nor its directors and officers, has any duty or obligation to disclose to the Participant any material information regarding the business of the Company or affecting the value of the Shares before, at the time of, or following a termination of the employment of the Participant by the Company, including, without limitation, any information concerning plans for the Company to make a public offering of its securities or to be acquired by or merged with or into another firm or entity.

13. NO OBLIGATION TO MAINTAIN RELATIONSHIP.

The Company is not by the Plan or this Option obligated to continue the Participant as an employee, director or consultant of the Company or an Affiliate.  The Participant acknowledges:  (i) that the Plan is discretionary in nature and may be suspended or terminated by the Company at any time; (ii) that the grant of the Option is a one-time benefit which does not create any contractual or other right to receive future grants of options, or benefits in lieu of options; (iii) that all determinations with respect to any such future grants, including, but not limited to, the times when options shall be granted, the number of shares subject to each option, the option price, and the time or times when each option shall be exercisable, will be at the sole discretion of the Company; (iv) that the Participant’s participation in the Plan is voluntary; (v) that the value of the Option is an extraordinary item of compensation which is outside the scope of the Participant’s employment contract, if any; and (vi) that the Option is not part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments.

14. NOTICES.

Any notices required or permitted by the terms of this Agreement or the Plan shall be given by recognized courier service, facsimile, registered or certified mail, return receipt requested, addressed as follows:

If to the Company:

Zoo Entertainment, Inc.

3805 Edwards Road, Suite 605

Cincinnati, OH 45209

If to the Participant:

[__________]

[__________]

[__________]

or to such other address or addresses of which notice in the same manner has previously been given.  Any such notice shall be deemed to have been given upon the earlier of receipt, one business day following delivery to a recognized courier service or three business days following mailing by registered or certified mail.

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15. GOVERNING LAW.

This Agreement shall be construed and enforced in accordance with the law of the State of Delaware, without giving effect to the conflict of law principles thereof.

16. BENEFIT OF AGREEMENT.

Subject to the provisions of the Plan and the other provisions hereof, this Agreement shall be for the benefit of and shall be binding upon the heirs, executors, administrators, successors and assigns of the parties hereto.

17. ENTIRE AGREEMENT.

This Agreement, together with the Plan, embodies the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior oral or written agreements and understandings relating to the subject matter hereof.  No statement, representation, warranty, covenant or agreement not expressly set forth in this Agreement shall affect or be used to interpret, change or restrict, the express terms and provisions of this Agreement, provided, however, in any event, this Agreement shall be subject to and governed by the Plan.

18. MODIFICATIONS AND AMENDMENTS.

The terms and provisions of this Agreement may be modified or amended as provided in the Plan.

19. WAIVERS AND CONSENTS.

Except as provided in the Plan, the terms and provisions of this Agreement may be waived, or consent for the departure therefrom granted, only by written document executed by the party entitled to the benefits of such terms or provisions.  No such waiver or consent shall be deemed to be or shall constitute a waiver or consent with respect to any other terms or provisions of this Agreement, whether or not similar.  Each such waiver or consent shall be effective only in the specific instance and for the purpose for which it was given, and shall not constitute a continuing waiver or consent.

20.  DATA PRIVACY.

By entering into this Agreement, the Participant:  (i) authorizes the Company and each Affiliate, and any agent of the Company or any Affiliate administering the Plan or providing Plan recordkeeping services, to disclose to the Company or any of its Affiliates such information and data as the Company or any such Affiliate shall request in order to facilitate the grant of options and the administration of the Plan; (ii) waives any data privacy rights he or she may have with respect to such information; and (iii) authorizes the Company and each Affiliate to store and transmit such information in electronic form.

[Remainder of Page Intentionally Left Blank]

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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Participant has hereunto set his or her hand, all as of the day and year first above written.

ZOO ENTERTAINMENT, INC.
By:
	Name
	Title
Participant

9

Exhibit A

NOTICE OF EXERCISE OF NON-QUALIFIED STOCK OPTION

TO:  Zoo Entertainment, Inc.

IMPORTANT NOTICE:  This form of Notice of Exercise may only be used at such time as the Company has filed a Registration Statement with the Securities and Exchange Commission under which the issuance of the Shares for which this exercise is being made is registered and such Registration Statement remains effective.

Ladies and Gentlemen:

I hereby exercise my Non-Qualified Stock Option to purchase _________ shares (the “Shares”) of the common stock, $0.001 par value, of Zoo Entertainment, Inc.(the “Company”), at the exercise price of $[_____] per share, pursuant to and subject to the terms of that certain Non-Qualified Stock Option Agreement between the undersigned and the Company dated [_____].

I understand the nature of the investment I am making and the financial risks thereof.  I am aware that it is my responsibility to have consulted with competent tax and legal advisors about the relevant national, state and local income tax and securities laws affecting the exercise of the Option and the purchase and subsequent sale of the Shares.

I am paying the option exercise price for the Shares as follows:

Please issue the Shares (check one):

o to me; or

o to me and ____________________________, as joint tenants with right of survivorship,

at the following address:

A-1

My mailing address for shareholder communications, if different from the address listed above, is:

Very truly yours,

Participant (signature)

Print Name

Date

Social Security Number

A-2

EX-10.98

Exhibit 10.98

RESTRICTED STOCK AGREEMENT

ZOO ENTERTAINMENT, INC.

AGREEMENT made as of the [__] day of [__] (the “Grant Date”), between Zoo Entertainment, Inc. (the “Company”), a Delaware corporation, and[__] (the “Participant”).

WHEREAS, the Company has adopted the 2007 Employee, Director and Consultant Equity Incentive Plan, as amended (the “Plan”) to promote the interests of the Company by providing an incentive for employees, directors and consultants of the Company or its Affiliates;

WHEREAS, the Company desires to offer to the Participant shares of the Company’s common stock, $0.001 par value per share (“Common Stock”), [outside of/pursuant to] the Plan [(but otherwise subject to and governed by all of the terms and conditions of the Plan, except for Section 4(c) thereof, and this Agreement)] all on the terms and conditions hereinafter set forth;

WHEREAS, Participant wishes to accept said offer; and

WHEREAS, the parties hereto understand and agree that any terms used and not defined herein have the meanings ascribed to such terms in the Plan.

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1.           Terms of Grant.  The Participant hereby accepts the offer of the Company to issue to the Participant, in accordance with the terms of this Agreement, [__] ([__]) Shares of the Company’s Common Stock (such shares, subject to adjustment pursuant to Section 24of the Plan and Subsection 2.1(h) hereof, the “Granted Shares”) at a purchase price of $0.001 per share (the “Purchase Price”), receipt of which is hereby acknowledged by the Company by the Participant’s prior service to the Company and which amount will be reported as income on the Participant’s W-2 for this calendar year, which shares shall be fully-vested subject to Sections 1 and 2 hereof.  [Notwithstanding the foregoing, the issuance of the Granted Shares set forth herein is conditioned upon, and the Granted Shares cannot fully vest prior to, the effectiveness of those certain amendments to the Company’s Certificate of Incorporation authorizing an increase in the number of authorized Shares from 250,000,000 Shares to 3,500,000,000 Shares and effecting a reverse stock split at a ratio of one for 600 Shares (the “Charter Amendments”), and in the event the Charter Amendments are not filed prior to September 1, 2010, the Granted Shares set forth herein shall be deemed immediately canceled.]1

2.1.         Forfeiture Provisions.

(a)          Lapsing Forfeiture Right. In the event that for any reason the Participant is no longer a director of the Company prior to [__] (the “Termination”), the Participant (or the Participant’s Survivor) shall, on the date of Termination, immediately forfeit to the Company (or its designee) all of the Granted Shares which have not yet lapsed in accordance with the schedule set forth below (the “Lapsing Forfeiture Right”).

1 Portions of the bracketed language contained in this form of restricted stock agreement can be found in the restricted stock agreements executed between the Company and certain individuals in connection with the shares of restricted stock granted on February 11, 2010.

The Company’s Lapsing Forfeiture Right is as follows:

(i)           If the Participant’s Termination is prior to [__], all of the Granted Shares shall be forfeited to the Company.

(ii)          If the Participant’s Termination is on or after [__] but prior to [__],[__]% of the Granted Shares shall be forfeited to the Company (rounded up to the next highest whole number of shares).

(iii)         If the Participant’s Termination is on or after [__] but prior to [__],[__]% of the Granted Shares shall be forfeited to the Company (rounded up to the next highest whole number of shares).

(iv)         If the Participant’s Termination is on or after [__]but prior to [__],[__]% of the Granted Shares shall be forfeited to the Company (rounded up to the next highest whole number of shares).

(b)          Effect of Change in Control.  Except as otherwise provided in Subsection 2.1(a) above, the Company’s Lapsing Forfeiture Right shall terminate, and the Participant’s ownership of all Granted Shares then owned by the Participant shall become vested in the event of a Change in Control.  “Change in Control” means that (i) a person, entity or affiliated group has become the beneficial owner or owners of more than 50% of the outstanding equity securities of the Company, or otherwise become entitled to vote more than 50% of the voting power of the Company; (ii) a consolidation or merger (in one transaction or a series of related transactions) of the Company pursuant to which the holders of the Company’s equity securities immediately prior to such transaction or series of related transactions would not be the holders immediately after such transaction or series of related transactions of more than 50% of the voting power of the entity surviving such transaction or series of related transactions; or (iii) the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company.

(c)          Escrow.  The certificates representing all Granted Shares issued to the Participant hereunder which from time to time are subject to the Lapsing Forfeiture Right shall be delivered to the Company and the Company shall hold such Granted Shares in escrow as provided in this Subsection 2.1(c). The Company shall promptly release from escrow and deliver to the Participant a certificate for the whole number of Granted Shares, if any, as to which the Company’s Lapsing Forfeiture Right has lapsed. In the event of forfeiture to the Company of Granted Shares subject to the Lapsing Forfeiture Right, the Company shall release from escrow and cancel a certificate for the number of Granted Shares so forfeited.  Any securities distributed in respect of the Granted Shares held in escrow, including, without limitation, shares issued as a result of stock splits, stock dividends or other recapitalizations, shall also be held in escrow in the same manner as the Granted Shares.

(d)          Prohibition on Transfer.  The Participant recognizes and agrees that all Granted Shares which are subject to the Lapsing Forfeiture Right may not be sold, transferred, assigned, hypothecated, pledged, encumbered or otherwise disposed of, whether voluntarily or by operation of law, other than to the Company (or its designee). The Company shall not be required to transfer any Granted Shares on its books which shall have been sold, assigned or otherwise transferred in violation of this Subsection 2.1(d), or to treat as the owner of such Granted Shares, or to accord the right to vote as such owner or to pay dividends to, any person or organization to which any such Granted Shares shall have been so sold, assigned or otherwise transferred, in violation of this Subsection 2.1(d).

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(e)           Failure to Deliver Granted Shares to be Forfeited.  In the event that the Granted Shares to be forfeited to the Company under this Agreement are not in the Company’s possession pursuant to Subsection 2.1(c) above or otherwise and the Participant or the Participant’s Survivor fails to deliver such Granted Shares to the Company (or its designee), the Company may immediately take such action as is appropriate to transfer record title of such Granted Shares from the Participant to the Company (or its designee) and treat the Participant and such Granted Shares in all respects as if delivery of such Granted Shares had been made as required by this Agreement.  The Participant hereby irrevocably grants the Company a power of attorney which shall be coupled with an interest for the purpose of effectuating the preceding sentence.

(f)           Adjustments.  The Plan contains provisions covering the treatment of Shares in a number of contingencies such as stock splits and mergers.  Provisions in the Plan for adjustment with respect to the Granted Shares and the related provisions with respect to successors to the business of the Company are hereby made applicable hereunder and are incorporated herein by reference.

2.2 General Restrictions on Transfer of Granted Shares.

(a)           The Participant agrees that in the event the Company proposes to offer for sale to the public any of its equity securities and such Participant is requested by the Company and any underwriter engaged by the Company in connection with such offering to sign an agreement restricting the sale or other transfer of Shares, then it will promptly sign such agreement and will not transfer, whether in privately negotiated transactions or to the public in open market transactions or otherwise, any Shares or other securities of the Company held by him or her during such period as is determined by the Company and the underwriters, not to exceed 180 days following the closing of the offering, plus such additional period of time as may be required to comply with Marketplace Rule 2711 of the National Association of Securities Dealers, Inc. or similar rules thereto (such period, the “Lock-Up Period”).  Such agreement shall be in writing and in form and substance reasonably satisfactory to the Company and such underwriter and pursuant to customary and prevailing terms and conditions.  Notwithstanding whether the Participant has signed such an agreement, the Company may impose stop-transfer instructions with respect to the Shares or other securities of the Company subject to the foregoing restrictions until the end of the Lock-Up Period.

(b)           The Participant acknowledges and agrees that neither the Company nor, its shareholders nor its directors and officers, has any duty or obligation to disclose to the Participant any material information regarding the business of the Company or affecting the value of the Shares before, at the time of, or following a Termination, including, without limitation, any information concerning plans for the Company to make a public offering of its securities or to be acquired by or merged with or into another firm or entity.

3.            Purchase for Investment; Securities Law Compliance.  If the offering and sale of the Granted Shares have not been effectively registered under the Securities Act of 1933, as amended (the “1933 Act”), the Participant hereby represents and warrants that he or she is acquiring the Granted Shares for his or her own account, for investment, and not with a view to, or for sale in connection with, the distribution of any such Granted Shares. The Participant specifically acknowledges and agrees that any sales of Granted Shares shall be made in accordance with the requirements of the 1933 Act, in a transaction as to which the Company shall have received an opinion of counsel satisfactory to it confirming such compliance.  The Participant shall be bound by the provisions of the following legend which shall be endorsed upon the certificate(s) evidencing the Shares issued:

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“The shares represented by this certificate have been taken for investment and they may not be sold or otherwise transferred by any person, including a ledge, unless (1) either (a) a Registration Statement with respect to such shares shall be effective under the Securities Act of 1933, as amended, or (b) the Company shall have received an opinion of counsel satisfactory to it that an exemption from registration under such Act is then available, and (2) there shall have been compliance with all applicable state securities laws.”

4.           Rights as a Stockholder.  The Participant shall have all the rights of a stockholder with respect to the Granted Shares, including voting and dividend rights, subject to the transfer and other restrictions set forth herein and in the Plan.

5.           Legend.  In addition to any legend required pursuant to the Plan, all certificates representing the Granted Shares to be issued to the Participant pursuant to this Agreement shall have endorsed thereon a legend substantially as follows:

“The shares represented by this certificate are subject to restrictions set forth in a Restricted Stock Agreement dated as of [__] with this Company, a copy of which Agreement is available for inspection at the offices of the Company or will be made available upon request.”

6.           Incorporation of the Plan.  The Participant specifically understands and agrees that the Granted Shares issued outside of the Plan are being sold to the Participant outside of the Plan, (but are otherwise subject to and governed by all of the terms and conditions of the Plan, except for Section 4© thereof, and this Agreement) a copy of which Plan the Participant acknowledges he or she has read and understands and by which Plan he or she agrees to be bound.  The provisions of the Plan are incorporated herein by reference.

7.           Tax Liability of the Participant and Payment of Taxes. The Participant acknowledges and agrees that any income or other taxes due from the Participant with respect to the Granted Shares issued pursuant to this Agreement, including, without limitation, the Lapsing Forfeiture Right, shall be the Participant’s responsibility.  Without limiting the foregoing, the Participant agrees that, to the extent that the lapsing of restrictions on disposition of any of the Granted Shares or the declaration of dividends on any such shares before the lapse of such restrictions on disposition results in the Participant’s being deemed to be in receipt of earned income under the provisions of the Code, the Company shall be entitled to immediate payment from the Participant of the amount of any tax required to be withheld by the Company.

  Upon execution of this Agreement, the Participant may file an election under Section 83 of the Code in substantially the form attached as Exhibit B.  The Participant acknowledges that if he does not file such an election, as the Granted Shares are released from the Lapsing Forfeiture Right in accordance with Section 2.1, the Participant will have income for tax purposes equal to the fair market value of the Granted Shares at such date, less the price paid for the Granted Shares by the Participant.  The Participant has been given the opportunity to obtain the advice of his or her tax advisors with respect to the tax consequences of the purchase of the Granted Shares and the provisions of this Agreement.

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If the Participant has not filed an election under Section 83 of the Code, the Participant shall be required to deposit with the Company an amount of cash equal to the amount determined by the Company to be required with respect to the statutory minimum of the Participant’s estimated total federal, state and local tax obligations associated with the termination of the Lapsing Forfeiture Right with respect to the Granted Shares. In connection with the foregoing, the Participant agrees that the Company shall authorize a registered broker(s) (the “Broker”) to sell on the date that the Granted Shares shall be released from the Lapsing Forfeiture Right such number of Granted Shares as the Company instructs the Broker to sell to satisfy the Company’s withholding obligations, after deduction of the Broker’s commission, and the Broker shall remit to the Company the cash necessary in order for the Company to satisfy its withholding obligation.  To the extent the proceeds of such sale exceed the Company’s tax withholding obligation the Company agrees to pay such excess cash to the Participant as soon as practicable.  In addition, if such sale is not sufficient to pay the Company ’s tax withholding obligation the Participant agrees to pay to the Company as soon as practicable, including through additional payroll withholding, the amount of any tax withholding obligation that is not satisfied by the sale of shares of Common Stock. The Participant agrees to hold the Company and the Broker harmless from all costs, damages or expenses relating to any such sale.  The Participant acknowledges that the Company and the Broker are under no obligation to arrange for such sale at any particular price.  In connection with such sale of Granted Shares, the Participant shall execute any such documents requested by Broker in order to effectuate the sale of the Granted Shares and payment of the withholding obligation to the Company.  The Participant acknowledges that this paragraph is intended to comply with Section 10b5-1©(1(i)(B) under the Exchange Act.

8.           Equitable Relief.  The Participant specifically acknowledges and agrees that in the event of a breach or threatened breach of the provisions of this Agreement or the Plan, including the attempted transfer of the Granted Shares by the Participant in violation of this Agreement, monetary damages may not be adequate to compensate the Company, and, therefore, in the event of such a breach or threatened breach, in addition to any right to damages, the Company shall be entitled to equitable relief in any court having competent jurisdiction.  Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for any such breach or threatened breach.

9.           No Obligation to Maintain Relationship.  The Company is not by the Plan or this Agreement obligated to continue the Participant as an employee, director or consultant of the Company or an Affiliate.  The Participant acknowledges:  (a) that the Plan is discretionary in nature and may be suspended or terminated by the Company at any time; (b) that the grant of the Shares is a one-time benefit which does not create any contractual or other right to receive future grants of shares, or benefits in lieu of shares; (c) that all determinations with respect to any such future grants, including, but not limited to, the times when shares shall be granted, the number of shares to be granted, the purchase price, and the time or times when each share shall be free from a lapsing repurchase or forfeiture right, will be at the sole discretion of the Company; (d) that the Participant’s participation in the Plan is voluntary; (e) that the value of the Shares is an extraordinary item of compensation which is outside the scope of the Participant’s employment contract, if any; and (f) that the Shares are not part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments.

10.          Notices.  Any notices required or permitted by the terms of this Agreement or the Plan shall be given by recognized courier service, facsimile, registered or certified mail, return receipt requested, addressed as follows:

If to the Company:

Zoo Entertainment, Inc.

3805 Edwards Road, Suite 605,

Cincinnati, Ohio 45209

Attention: Mark Seremet

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If to the Participant:

[__]

or to such other address or addresses of which notice in the same manner has previously been given.  Any such notice shall be deemed to have been given on the earliest of receipt, one business day following delivery by the sender to a recognized courier service, or three business days following mailing by registered or certified mail.

11.           Benefit of Agreement.  Subject to the provisions of the Plan and the other provisions hereof, this Agreement shall be for the benefit of and shall be binding upon the heirs, executors, administrators, successors and assigns of the parties hereto.

12.           Governing Law.  This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware, without giving effect to the conflict of law principles thereof.  For the purpose of litigating any dispute that arises under this Agreement, whether at law or in equity, the parties hereby consent to exclusive jurisdiction in the State of Delaware and agree that such litigation shall be conducted in the state courts of the State of Delaware or the federal courts of the United States for the District of Delaware.

13.           Severability.  If any provision of this Agreement is held to be invalid or unenforceable by a court of competent jurisdiction, then such provision or provisions shall be modified to the extent necessary to make such provision valid and enforceable, and to the extent that this is impossible, then such provision shall be deemed to be excised from this Agreement, and the validity, legality and enforceability of the rest of this Agreement shall not be affected thereby.

14.           Entire Agreement.  This Agreement, together with the Plan, constitutes the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior oral or written agreements and understandings relating to the subject matter hereof.  No statement, representation, warranty, covenant or agreement not expressly set forth in this Agreement shall affect or be used to interpret, change or restrict the express terms and provisions of this Agreement provided, however, in any event, this Agreement shall be subject to and governed by the Plan.

15.           Modifications and Amendments; Waivers and Consents.  The terms and provisions of this Agreement may be modified or amended as provided in the Plan.  Except as provided in the Plan, the terms and provisions of this Agreement may be waived, or consent for the departure therefrom granted, only by written document executed by the party entitled to the benefits of such terms or provisions.  No such waiver or consent shall be deemed to be or shall constitute a waiver or consent with respect to any other terms or provisions of this Agreement, whether or not similar.  Each such waiver or consent shall be effective only in the specific instance and for the purpose for which it was given, and shall not constitute a continuing waiver or consent.

16.           Consent of Spouse/Domestic Partner.  If the Participant has a spouse or domestic partner as of the date of this Agreement, the Participant’s spouse or domestic partner shall execute a Consent of Spouse/Domestic Partner in the form of Exhibit A hereto, effective as of the date hereof.  Such consent shall not be deemed to confer or convey to the spouse or domestic partner any rights in the Granted Shares that do not otherwise exist by operation of law or the agreement of the parties.  If the Participant subsequent to the date hereof, marries, remarries or applies to the Company for domestic partner benefits, the Participant shall, not later than 60 days thereafter, obtain his or her new spouse/domestic partner’s acknowledgement of and consent to the existence and binding effect of all restrictions contained in this Agreement by having such spouse/domestic partner execute and deliver a Consent of Spouse/Domestic Partner in the form of Exhibit A.

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17.           Counterparts.  This Agreement may be executed in one or more counterparts, and by different parties hereto on separate counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

18.           Data Privacy.  By entering into this Agreement, the Participant:  (a) authorizes the Company and each Affiliate, and any agent of the Company or any Affiliate administering the Plan or providing Plan record keeping services, to disclose to the Company or any of its Affiliates such information and data as the Company or any such Affiliate shall request in order to facilitate the grant of Shares and the administration of the Plan; (b) waives any data privacy rights he or she may have with respect to such information; and (c) authorizes the Company and each Affiliate to store and transmit such information in electronic form.

[THE NEXT PAGE IS THE SIGNATURE PAGE]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

ZOO ENTERTAINMENT, INC.

By:

Name:

Title:

Participant:

Print Name:

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EXHIBIT A

CONSENT OF SPOUSE/DOMESTIC PARTNER

I, ____________________________, spouse or domestic partner of _________________________, acknowledge that I have read the RESTRICTED STOCK AGREEMENT dated as of _______________ (the “Agreement”) to which this Consent is attached as Exhibit A and that I know its contents.  Capitalized terms used and not defined herein shall have the meanings assigned to such terms in the Agreement.  I am aware that by its provisions the Granted Shares granted to my spouse/domestic partner pursuant to the Agreement are subject to a Lapsing Forfeiture Right in favor of Zoo Entertainment, Inc. (the “Company”) and that, accordingly, I may be required to forfeit to the Company any or all of the Granted Shares of which I may become possessed as a result of a gift from my spouse/domestic partner or a court decree and/or any property settlement in any domestic litigation.

I hereby agree that my interest, if any, in the Granted Shares subject to the Agreement shall be irrevocably bound by the Agreement and further understand and agree that any community property interest I may have in the Granted Shares shall be similarly bound by the Agreement.

I agree to the Lapsing Forfeiture Right described in the Agreement and I hereby consent to the forfeiture of the Granted Shares to the Company by my spouse/domestic partner or my spouse/domestic partner’s legal representative in accordance with the provisions of the Agreement.  Further, as part of the consideration for the Agreement, I agree that at my death, if I have not disposed of any interest of mine in the Granted Shares by an outright bequest of the Granted Shares to my spouse or domestic partner, then the Company shall have the same rights against my legal representative to exercise its rights to the Granted Shares with respect to any interest of mine in the Granted Shares as it would have had pursuant to the Agreement if I had acquired the Granted Shares pursuant to a court decree in domestic litigation.

I AM AWARE THAT THE LEGAL, FINANCIAL AND RELATED MATTERS CONTAINED IN THE AGREEMENT ARE COMPLEX AND THAT I AM FREE TO SEEK INDEPENDENT PROFESSIONAL GUIDANCE OR COUNSEL WITH RESPECT TO THIS CONSENT.  I HAVE EITHER SOUGHT SUCH GUIDANCE OR COUNSEL OR DETERMINED AFTER REVIEWING THE AGREEMENT CAREFULLY THAT I WILL WAIVE SUCH RIGHT.

Dated as of the _______ day of ________________, 200_.

Print name:

A-1

EXHIBIT B

Election to Include Gross Income in Year

of Transfer Pursuant to Section 83(b)

of the Internal Revenue Code of 1986, as amended

In accordance with Section 83(b) of the Internal Revenue Code of 1986, as amended (the “Code”), the undersigned hereby elects to include in his gross income as compensation for services the excess, if any, of the fair market value of the property (described below) at the time of transfer over the amount paid for such property.

The following sets for the information required in accordance with the Code and the regulations promulgated hereunder:

1. The name, address and social security number of the undersigned are:

Name:

Address:

Social Security No.:

2. The description of the property with respect to which the election is being made is as follows:

____________ (___) shares (the “Shares”) of Common Stock, $0.001 par value per share, of Zoo Entertainment, Inc., a Delaware corporation (the “Company”).

3. This election is made for the calendar year ____, with respect to the transfer of the property to the Taxpayer on _________________.

4.  Description of restrictions:  The property is subject to the following restrictions:

In the event taxpayer is no longer a director of the Company prior to February 11, 2014, the taxpayer shall forfeit the Shares as set forth below:

A. If the Participant’s Termination is prior to [__], all of the Granted Shares shall be forfeited to the Company.

B. If the Participant’s Termination is on or after [__] but prior to [__],[__]% of the Granted Shares shall be forfeited to the Company (rounded up to the next highest whole number of shares).

C. If the Participant’s Termination is on or after [__] but prior to [__],[__]% of the Granted Shares shall be forfeited to the Company (rounded up to the next highest whole number of shares).

D. If the Participant’s Termination is on or after [__] but prior to [__],[__]% of the Granted Shares shall be forfeited to the Company (rounded up to the next highest whole number of shares).

5. The fair market value at time of transfer (determined without regard to any restrictions other than restrictions which by their terms will never lapse) of the property with respect to which this election is being made was not more than $____ per Share.

6. The amount paid by taxpayer for said property was $___ per Share.

7. A copy of this statement has been furnished to the Company.

B-1

Signed this ____ day of ______, 200_.

Print Name:

B-2

EX-31.1

Exhibit 31.1

CERTIFICATIONS UNDER SECTION 302

I, Mark Seremet, certify that:

1.  I have reviewed this annual report on Form 10-K of Mark Seremet;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)  designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.  The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 31, 2010

/s/ Mark Seremet

Mark Seremet

(principal executive officer)

EX-31.2

Exhibit 31.2

CERTIFICATIONS UNDER SECTION 302

I, David Fremed, certify that:

1.  I have reviewed this annual report on Form 10-K of Zoo Entertainment, Inc.;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)  designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.  The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 31, 2010

/s/ David Fremed

David Fremed

(principal financial officer)

EX-32.1

Exhibit 32.1

CERTIFICATIONS UNDER SECTION 906

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Zoo Entertainment, Inc., a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:

The Annual Report for the year ended December 31, 2009 (the “Form 10-K”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 31, 2010	/s/ Mark Seremet
	Mark Seremet
	(principal executive officer)
Dated: March 31, 2010	/s/ David Fremed
	David Fremed
	(principal financial officer)