Edgar Filing: ZONE 4 PLAY INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-KSB

(Mark One)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934.

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT

For the transition period from ___________ to __________

COMMISSION FILE NO. 000-51255

ZONE 4 PLAY, INC.
(Name of small business issuer in its charter)

NEVADA 98-037121
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

103 FOULK ROAD, WILMINGTON, DELAWARE 19803
(Address of principal executive offices) (Zip Code)

Issuer's telephone number: (972) - 3 - 6471884

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock,
par value $0.001

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: [_] No: [X]

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

Yes: [X] No: [_]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB:

Yes: [X] No: [_]

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

Yes: [_] No: [X]

State the issuer's revenues for fiscal year ended December 31, 2006: $1,656,379

State the aggregate market value of the voting and non-voting equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity as of a specified
date within the past 60 days: $4,167,095 as of March 31, 2007

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 32,319,301 shares of Common Stock as
of March 31, 2007

Transitional Small Business Disclosure Format:

Yes: [_] No: [X]

ZONE 4 PLAY, INC.

FORM 10-KSB
(FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005)

TABLE OF CONTENTS
PAGE
PART I
Item 1 Description of Business 1
Item 2 Description of Property 26
Item 3 Legal Proceedings 26
Item 4 Submission of Matters to a Vote of Security Holders 26

PART II
Item 5 Market for Common Equity, Related Stockholders Matters
and Small Business Issuer Purchases of Equity Securities 27
Item 6 Management's Discussion and Analysis or Plan of Operation 28
Item 7 Financial Statements 33
Item 8 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 34
Item 8A Controls and Procedures 34
Item 8B Other Information 34

PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 35
Item 10 Executive Compensation 37
Item 11 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 40
Item 12 Certain Relationships and Related Transactions 42
Item 13 Exhibits 43
Item 14 Principal Accountant Fees and Services 43

References in this Annual Report on Form 10-KSB to the "Company", "we", "us" or
"our" include Zone 4 Play, Inc. and its subsidiaries, unless the context
requires otherwise.

Zone4Play(R) is a trademark of the Company.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The statements contained in this Annual Report on Form 10-KSB that are not
historical facts are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 and other federal securities
laws. Such forward-looking statements may be identified by, among other things,
the use of forward-looking terminology such as "believes," "intends," "plan"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. In particular, our statements
regarding the potential growth of our markets and business outlook are examples
of such forward-looking statements. The forward-looking statements include risks
and uncertainties, including, but not limited to, the growth of the interactive
game market and other factors, including general economic conditions and
regulatory developments, not within our control. The factors discussed herein,
including those risks described at the end of Item 1, and expressed from time to
time in our filings with the Securities and Exchange Commission could cause
actual results and developments to be materially different from those expressed
in or implied by such statements. The forward-looking statements are made only
as of the date of this filing, and we undertake no obligation to publicly update
such forward-looking statements to reflect subsequent events or circumstances.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

OVERVIEW

We are a software and technology developer and provider to companies that
service the interactive gaming industry, delivering cross-platform systems that
are built for mass participation gaming over mobile devices, TV and the
internet. Our software provides and supports play-for-fun and play-for-real
interactive games. We offer five core solutions to companies that offer
play-for-real gaming, namely:

(i) Multiplayer blackjack tournaments ("Blackjack Software"): 24/7 availability
of a variety of blackjack tournaments games based on a peer-to-peer technology
allowing users to compete against each other and not against the "house".

(ii) Mobile gaming: the provision of services on mobile devices, including fixed
odds games, multiplayer games, sports betting services, scratch cards and
exchange betting.

(iii) Interactive TV gaming: the provision of software and technology currently
supporting fixed odds games.

(iv) Participating TV gaming: the provision of services via the interaction of
television broadcasts and mobile text messages, IVR (interactive voice response)
lines or Java interaction.

(v) Online gaming: the provision of fixed odds and casino games over the
internet.

We also provide marketing services related to our Blackjack Software business
and potentially other games thorough our subsidiary Get21 Limited ("Get21"),
which is using a third party for the full operation of the service which
includes payment, processing, customer support, fraud and collusion prevention
and other services.

We have recently re-prioritized our operations and currently plan to focus on
two products: the Winner Channel and our Blackjack Software related marketing
services.

Our technology allows our customers to generate additional revenue from their
existing infrastructure and user base by allowing a subscriber to switch from
one platform, such as Interactive TV, mobile, internet or participating TV to
another platform using a single account with the same account balance and user
information. In addition, our technology allows mobile service providers, TV
broadcasters and channels to provide additional content, as well as an increased
variety of services, to their customers.

We were incorporated under the laws of the State of Nevada on April 23, 2002, as
Old Goat Enterprises, Inc. (the "Predecessor"). On February 1, 2004, the
Predecessor issued the shareholders of Zone 4 Play, Inc., a Delaware corporation
("Zone4Play Delaware"), 10,426,190 shares of common stock, in consideration for
the entire share capital of Zone4Play Delaware. Immediately after the issuance,
the shareholders of Zone4Play Delaware held 58% of the issued and outstanding
share capital of the Predecessor, and subsequently changed its name to Zone 4
Play, Inc., a Nevada corporation. The transaction was accounted for as a reverse
acquisition, whereby the Predecessor was treated as the acquired company and
Zone4Play Delaware as the acquirer. The historical financial statements of
Zone4Play Delaware became our historical financial statements. We conduct our
operations through our wholly owned subsidiaries, Zone4Play (Israel) Ltd., an
Israeli corporation incorporated in July 2001, Zone4Play (UK) Limited, a United
Kingdom corporation incorporated in November 2002, and Zone4Play Delaware. On
April 27, 2005, pursuant to an agreement with NetFun Ltd., we increased our
ownership percentage of the issued and outstanding share capital of MIXTV Ltd.
from 50.1% to 100%. On July 11, 2006, we formed a wholly owned subsidiary in the
Isle of Man, named Gaming Ventures plc ("Gaming"). Gaming has two wholly owned
subsidiaries, RNG Gaming Limited ("RNG") and Get21, both of which are Isle of
Man companies.

On July 12, 2006, Zone4Play Delaware and Gaming entered into an agreement under
which our wholly owned subsidiary Gaming purchased from Zone4Play Delaware all
right, title and interest in its intellectual property rights and assets related
to its newly developed Blackjack Software on a "going concern" and "as is"
basis, in exchange for a secured promissory note in the principal amount of
$2.25 million. The purchase price was based on an appraisal report made by an
independent appraiser. This promissory note has a term of five years. Principal
is payable in five equal annual installments of $450,000 and carries an annual
interest of US Libor +1.5%. On July 17, 2006, Gaming entered into an agreement
with RNG under which Gaming assigned all of its rights in the Blackjack Software
to RNG in consideration for all outstanding and issued ordinary shares of RNG.

The purpose of RNG is to exploit the Blackjack Software and related intellectual
property and further develop this software and potentially other gaming
software. RNG is expected to license its software to third parties in exchange
for revenue shares and license fees.

Our other indirect subsidiary, Get21, provides marketing services related to the
Blackjack Software business and potentially other games. Get21 seeks to and has
in fact outsourced to a third party the full operation of the service which
includes payment, processing, customer support, fraud and collusion prevention
and other services.

Concurrently, Gaming, RNG and Golden Palace entered into a shareholders
agreement under which Golden Palace has a right to appoint one of RNG's 4
directors (as long as Golden Palace owns 20% of RNG) and we have a right to
appoint the 3 other directors. Upon Golden Palace becoming an owner of 50% of
RNG, it will have the right to appoint an equal number of directors to the
number we are entitled to appoint.

On October 31, 2006, RNG and Golden Palace entered into a software license
agreement under which RNG has a granted Golden Palace a non transferable,
limited license to use, perform, present and operate RNG's Blackjack Software
for the purpose of displaying, managing and operating online gaming according to
the terms and conditions of the agreement. In return, Golden Palace has agreed
to pay RNG a total of $1,000,000 in license fees, integration costs, technical
support fees and advanced royalty fees, as well as additional royalty fees equal
to 15% of the fees charged by Golden Palace from players who participate in the
blackjack game. According to the terms of the agreement, the Blackjack Software
shall not be used in the U.S. and/or offered for use to U.S. residents, and
Golden Palace has agreed to take certain actions to ensure that the Blackjack
Software is unavailable for U.S. residents.

On November 9, 2006, Get21 and Golden Palace entered into a sublicense and
software agreement under which Golden Palace granted Get21 a world wide, non
exclusive, non transferable sublicense to user interface portion of the
multiplayer blackjack and poker gaming software ("Player Software") and to grant
players the right to use the Player Software. According to the terms of the
agreement, Get21 shall be responsible for performing all marketing and
promotional functions with respect to bringing players through the URL web
address www.get21.com and www.get21poker.com ("URL") to online gaming
multiplayer blackjack and poker rooms ("Gamerooms") which are operated by Golden
Palace. Get21 and Golden Palace shall share the revenues generated from players
who played in the Gamerooms through the URL according to the terms specified in
the agreement.

On August 4, 2006, Gaming filed with the Securities and Exchange Commission
("SEC") a registration statement on Form 20-F, which is now effective. As a
result, Gaming is now a separate reporting entity with the SEC that has the
reporting obligations of a foreign private issuer, despite it being our wholly
owned subsidiary. As disclosed in our Current Report on Form 8-K filed with the
SEC on June 20, 2006, we intend to declare a dividend of Gaming's shares on a
one-for-one pro rata basis to our shareholders as of a record date to be
determined by our Board of Directors. Our shares of common stock are currently
traded on the OTC Bulletin Board under the trading symbol "ZFPI.OB".

THE MARKET

The interactive entertainment market has emerged as a result of the growth and
technological advancement in the communications industry. One of the key
segments of the interactive entertainment market is online gaming which has
experienced growth since its emergence in the early 1990s. Estimates and growth
rates of the online gaming market vary. The upper end of these estimates
suggests that the online gaming market generated gross winnings in excess of
US$10.0 billion in 2005. Nevertheless, estimates suggest that the penetration of
online gaming compared to traditional land-based gaming remains low. We believe
that growth in the online gaming market will be driven by the increased
availability of the internet and broadband connectivity, increased branding and
marketing efforts by online gaming operators, the availability of alternative
distribution platforms

It is the anticipated expansion of alternative distribution platforms that we
are seeking to exploit with our software and technology. Internet gaming is the
most developed interactive gaming platform, and although still relatively new,
most interactive gaming operators already have an internet offering. In relation
to gaming, other platforms such as mobile applications, Interactive TV and
participating TV are still in their early stages and are the primary focus of
the Company.

ONLINE GAMING MARKET/MULTIPLAYER BLACKJACK TOURNAMENTS MARKET

Industry sources estimate that the global revenues of "brick-and-mortar casinos"
were $70 billion in 2004 and are expected to grow to $100 billion by 2009. With
additional revenues coming from sports betting and lotteries, the gaming market
generated an estimated $247 billion in 2004 and is expected to reach revenues of
over $300 billion by 2009. With $10 billion in revenues, the online gaming
market is estimated to have generated 4.6% of the global betting market revenues
in 2005 and is predicted to reach 7% of market revenues by 2009. Gaming market
revenues are expected to keep growing at a compound annual growth rate (CAGR) of
5% in coming years, while the online gaming market is expected by industry
sources to grow at a much more rapid pace of 20% to 25% to accumulate to an
estimated market size of $23 billion in 2009.

The online gaming market is divided into segments according to game types,
reflecting different gamer characters and tastes; however, some of the market
segments, such as blackjack, attract gamers of different gaming choices.

The P2P emerging segment, which currently includes mostly poker, is predicted to
grow from a market share of 22%, which reflects $1.44 billion in year 2005, to
38% and $9 billion by year 2009. (Poker reflects $6 billion.) Poker operators
are now targeting more casual gamers which are considered the mass market. As
more casual gamers and less affluent nations enter the poker players market ARPC
(Average Revenue Per Customer) per annum is expected to fall from an average of
$762 in 2004 to $619 in 2008. Consequently, poker operators are constantly
looking for new ways to attract casual players (U.S. and non-U.S. players) to
the international P2P networks on the one hand, while increasing the ARPC on the
other hand.

P2P blackjack is simpler and more intuitive than poker and therefore may be more
attractive to casual gamers who do not play online poker.

Blackjack is the most popular casino game outside of the U.S. As part of the
poker network efforts to diversify their client portfolio risk, networks adjust
their offerings to new non-U.S. markets. Introducing another P2P game which
shares the proven poker revenue model on the same poker network is expected to
increase ARPC and allow network operators to better compete in the player
acquisition market. Better ARPC means more revenue sharing affiliate marketing
partners and better marketing budgets. These factors promote growth in the
particular P2P network. High network liquidity is the principal factor to
generate player trust and player interest. P2P poker showed a compound annual
growth rate of more then 334% in the four years since it emerged as an
independent market segment. We believe that blackjack has the potential to be
the most popular P2P game after poker.

The online gaming market is one of the fastest-growing and most profitable
online businesses. It has experienced rapid growth in recent years, fueled by
the growth of broadband penetration throughout the world, increasing consumer
confidence in the safety and security of online payment systems, increasing
customer demand, and ongoing investments by online gaming operators in product
development and marketing.

Online gaming has a number of advantages for players: it is convenient and
easily accessible at any time, day or night, and relatively anonymous. Casino
websites provide a wide variety of games, including free-play games that
encourage players to experience online gaming for the first time. According to
an industry research report, the worldwide market for online gaming has grown
from virtually no revenue in 1995 to approximately $6 billion in 2003 and
increased to over $8 billion in 2004. Forecasters expect this market to grow by
an additional 20% to 25% in each of 2005 and 2006. According to one specialist
gaming consultancy, the online gaming market will continue to grow rapidly in
the coming years, reaching $15 billion in 2007 and $22 billion in 2009.

MOBILE GAMING MARKET

Mobile gaming is in its infancy. However, as a distribution channel it is
beginning to finally emerge due to technological advancements (e.g., 3G) as well
as more robust relationships between the content originators, the operators and
the end user. As a result the availability and demand for interactive mobile
content such as news, sports and information services, images, and music, is
growing rapidly. Juniper Research estimates that the global mobile content
market was worth $10.3 billion in 2004 and is expected to rise to $59.1 billion
by 2009, a CAGR of 42%.

The growth of the mobile content market is largely being driven by the emergence
of innovative content providers providing a growing array of compelling content
to the end user. The emergence of this distribution channel and the potential
market opportunity that it offers - there are currently 1.5 billion global
mobile users - has not gone unnoticed by the gaming providers. As a result,
providers of gaming services, both online and land-based, are seeking ways to
exploit the mobile distribution platform for gaming, to add additional revenue
channels.

According to Juniper Research, the global mobile gambling market was worth $468
million in 2004. This represents less than 5% of the online gaming market.
However, Juniper Research estimates that mobile gaming revenues, even allowing
for limited growth in the US (due to regulatory constraints), are expected to
exceed $19 billion by 2009, almost on a par with online gaming. This translates
into an average annual growth rate of 110%.

Sports-betting is currently estimated to be the largest of the three sectors of
the mobile gaming market, representing 47% ($218 million). Juniper Research
estimates that the mobile lottery market, currently less than 25% of the total,
will be the biggest mobile gaming winner, rising to 40% of revenue by 2009. The
rationale for this assumption is the overall ubiquity of lotteries amongst the
adult population and the general government apathy towards lotteries versus
other forms of gambling, resulting in them becoming established more quickly in
a greater number of markets. We believe that with the advent of next generation
network technologies (e.g, 3G) and more advanced graphic technologies on
handsets, mobile gaming services will become more akin to the gambling
experiences offered online.

INTERACTIVE TV MARKET

Interactive TV enables two-way communications using a television as a display.
Uses include entertainment, information retrieval, education and shopping. One
of the consequences of the growth of Interactive TV is that interactive
entertainment channels and services are becoming increasingly popular. These
channels and services create new forms of revenue streams that are driven not
exclusively from traditional advertising but primarily from the monetization of
the interactivity, for example, paying to play games and wagering on games.

PARTICIPATING-TV MARKET

The emergence of cellular infrastructure has given solutions for issues like
always-on connectivity and availability, and provided with potentially good
answers for questions of dependence of availability on location and timing. The
convergence of wireless and TV serving technologies has created a rare
opportunity for the `Cellularifiaction of TV' - enabling enhanced and enriched
TV experience. This convergence of cross media content provides the ability to
embed additional program data such as home audience cellular-based interaction
into live feeds or prerecorded shows and programs.

Wireless entertainment and communications have grown in very rapid pace in
certain European countries. Wireless operators are evaluating key application
services and new content while TV and new media producers are excited about
reaching their audiences in new ways.

Cross Media formats represent challenges to broadcasters as well as producers.
New content formats that cross over the broadband web, linear or interactive
television and fixed or mobile devices typically come packaged with software
tools, content management tools and other elements that require going beyond the
regular television program buying and selling that the broadcasters are used to
dealing with.

SMS texting and other user interactions in response to television programming or
to influence television programming have gained a lot of popularity lately.
Entertainment, sports and Fixed-Odds services will be at the heart of demand for
such services. `Getting the audience involved' experience lets viewers interact
with one another or with content associated with reality shows, regular shows,
advertisement or fixed-odds games by sending in messages that are displayed or
accumulated on the television screen.

Television is a highly effective medium through which to market mobile
entertainment services, which are now a significant part of the mobile content
sector. Research and Markets forecasts that the mobile content market will
generate in the region of $78 billion in revenues worldwide by 2007, up from
$16.7 billion in 2003. A number of companies produce and broadcast interactive
formats. These operators focus on the sale of their formats and/or on buying
airtime to promote them. They tend to focus on a single genre such as
interactive quiz shows and formats and do not have the extensive portfolio of
live interactive formats.

The growth of special interest cable and satellite television channels in the
digital broadcast environment has resulted in audiences and revenues being
spread over an increasing number of channels. For example, in the UK, one of the
most competitive markets in the world, Ofcom issued 162 new licenses to
broadcast television services in 2004, and over 370 channels are now available
to UK audiences. Competition for customers is thus intense and, as a result,
traditional television broadcasting models, which are based on advertising
revenue, are coming under pressure. Broadcasters are seeking to find new ways of
winning audience share and generating revenue streams, while seeking to reduce
the operational costs of providing new formats and services. Among early
participation television applications, voting and polling demonstrated the
potential of the new medium. This is evidenced by the success of programs such
as Big Brother and Pop Idol.

The market has grown rapidly since its inception. In 2003, the 900 million
messages sent in the European SMS-TV market generated an estimated $400 million
shared by broadcasters, mobile operators, and technology providers. According to
a report in the McKinsey Quarterly (McKinsey & Company), the addition of SMS
boosts the viewership of popular free-to-air television shows by up to 20
percent and can encourage ratings growth of approximately 50 to 100 percent for
niche cable and satellite channels.

OUR BUSINESS

PLAY-FOR-REAL

We currently provide five core solutions for play-for-real gaming mobile gaming,
interactive TV gaming, participating TV gaming, online gaming and multiplayer
blackjack tournaments gaming. We also provide marketing services to our
Blackjack Software in order to attract online gamblers to gambling websites.
Though we continue to operate in all of these areas, we recently decided to
focus primarily on the Winner Channel and on our Blackjack Software related
marketing services.

MULTIPLAYER TOURNAMENTS BLACKJACK

Our indirect subsidiary RNG has signed a non-exclusive license agreement with
industry leader Golden Palace Ltd to offer non-U.S. customers the Blackjack
Software service. The agreement allows for Golden Palace poker players to be
integrated into a single E-Cash wallet, to enhance the cross-marketing
opportunities between Golden Palace poker players and the new multiplayer
blackjack tournament service. As a result, Golden Palace online poker players
will be able to participate in the game by using their existing account without
the need to re-register. We intend to further develop the Blackjack Software,
and we intend to develop other products in the future. We have developed a
patent application for the Blackjack Software which is currently pending with
the U.S. Patent and Trademark Office.

Get21, our other indirect subsidiary has launched online multiplayer Blackjack
tournaments to non-U.S. players. The Get21 service (www.get21.com), allows
Internet users to participate in multiplayer Blackjack tournaments rather than
playing against the 'house'. Get21 is using the services of Golden Palace Ltd
under a service agreement to provide operating services to non-US players and to
share the same players' community. In exchange for these services, Golden Palace
will receive a minority percentage share of net revenues generated by Get21's
multiplayer Blackjack tournaments.

Get21 will focus on marketing activities to promote multiplayer blackjack
tournaments in multiple languages by acquiring and retaining non-U.S. players.
The company has launched an affiliate program (www.get21partners.com) to enable
a fast distribution of its services.

MOBILE GAMING

Mobile gaming is in its infancy. However, as a distribution channel, mobile is
beginning to gain momentum due to handset and network technological advancements
(e.g. 3G) as well as user acceptance. We are at the forefront of this market,
extending interactive gaming technologies to the mobile world and enabling
gaming service providers to do the same.

Our mobile solutions are compatible with in excess of 100 different mobile
handsets. We offer both proprietary white label games as well as popular branded
games that our software specifically adapts to work on the mobile platform. The
game applications interface with Java, SMS, WAP and Brew protocols. Our mobile
solutions offer high levels of security integrating state of the art SSL
encrypted protocols and encryption keys allowing secure access to account
management features, such as deposits and withdrawals. By combining our
server-based solution ("ZoneITS") with our mobile solution, we are able to
deliver a complete cross-operator/cross-media environment - i.e. real time
interaction between mobile, iTV, satellite and online based gaming operations -
enabling a single-account, cross platform gaming experience.

Our current offerings to our mobile gaming operator customers include certain
fixed odds games (such as roulette, dice, keno, hi-lo), virtual horseracing,
casino games and exchange betting.

We offer an end-to-end (server side and clients), plug-and-play, trusted and
unique gaming solution for the mobile device market empowering:

o Gaming operators, willing to extend their existing services to the
next generation gambling medium; and

o New gaming operators willing to adopt the mobile device medium as
their primary gambling offering

Our customers for our play-for-real mobile gaming solutions are based in the
U.K. where fixed odds betting is permitted if conducted by a licensed bookmaker.
.. We have entered into a revenue-sharing agreement with Eurobet, which is a one
of the largest book makers in the world, to provide fixed odds games via mobile
devices. This service was officially launched in October 2005 and offers dice,
keno, hi-lo and slots to existing Eurobet/Coral customers. We also provide fixed
odds games on mobile devices to Two Way Media (operator of the Winner Channel,
an interactive gaming TV channel in the U.K.), under a revenue-sharing agreement
.. We have also launched new mobile betting service for Betfair users. Betfair
supports 100,000 active users each week and is the world's leading betting
exchange operator processing 5 million bets per day. The software is available
to Betfair users under the brand 'Layback' (www.layback.co.uk) and will provide
access to Betfair's markets to players via mobile and PDA devices. This will
enhance the 'anywhere, anytime' mobile betting experience for existing Betfair
users, as well as for new customers to the Betfair exchange.

INTERACTIVE TV GAMING

iTV is evolving as a valuable distribution channel to enable gaming operators to
reach their customers in the comfort of their own living rooms. Our iTV
technology solution is compatible with 8 different global standards (including
Open TV, TV/Scientific Atlanta, Microsoft TV, Liberate and NDS Core) that are
operated on the largest middleware systems for either cable satellite or IPTV
operators. As such we estimate that our iTV solution can reach approximately 85%
of the iTV market. Our iTV technology has been deployed in the UK on Sky, NTL
and Telewest (Through Two Way Media operator of the Winner Channel) to provide
interactive fixed odds games on TV on a revenue-sharing basis and by major cable
and satellite service providers in the US, such as Cablevision Echostar and RCN.

Our iTV portfolio includes fixed odds and casino games (including Keno, Hi Lo,
Dice, Roulette, Blackjack, Virtual Horse racing and several Slots versions),
lottery and scratch cards as well as offering of multiplayer Texas Hold'em
Poker, Blackjack and Bingo.

PARTICIPATING TV GAMING

We have developed technology that uses SMS, interactive voice recognition (IVR)
lines and Java-based applications to bring interactive gaming to subscribers
without a return path and enables the seamless delivery of interactive gaming
services to analogue, digital, terrestrial, cable and satellite viewers without
any reliance on the set-top box. We believe that our Participation TV solution
is a real differentiator, opening up a completely new medium for interactive
gaming. Our patent pending Participation TV solution uses SMS, mobile phone Java
based applications and IVR lines to bring interactive gaming to subscribers
regardless of the availability of a return-path and without any reliance on the
set top box. It therefore offers an interactive gaming service to analogue,
digital, terrestrial, cable or satellite TV viewers, therein significantly
extending the potential market opportunity of the TV distribution channel as
well as providing the opportunity to generate additional revenue from telephone
and wireless data traffic.

The broadcasting component integrated with the Company's server component offers
an end-to-end solution. Integration of all fixed odds activities takes place on
the back-end systems between the Company and the gaming operator's back office.

Our portfolio of applications for launching real gambling channels includes
fixed odds games, all of which are stand-alone interactive applications or are
overlaid on broadcast programs. Currently the Company offers fixed odds games
(roulette, hi-lo, dice and keno) and racing (horse racing, motor racing and
greyhound racing), and a new version of poker enabling, for the first time, TV
viewers to play any version of poker for real money. In addition, it enables TV
viewers to participate in poker TV shows by betting during each hand on the
results of the game.

Our solutions are being broadcast on several channels in the UK though our
agreement with Two Way Media (operator of the Winner Channel), such as Cellcast,
Teletext and more.

ONLINE GAMING

We offer an online gaming solution to fully complement our existing product and
service solutions. The market for online gaming is already significant and
software developers in this market are well entrenched. Our ability to offer an
online solution is invaluable as it is able to demonstrate our ability to offer
a fully interoperable cross platform solution, that we believe is unique in the
market. We provide end-to-end online gaming solutions, including branded and
white label front end, middleware and back office solutions. The service
includes extensive applications for Casino and fixed odds games, Lottery and
scratch card services as well as Multi player games. We provide end-to-end
online gaming solutions, including branded and white label front end, middleware
and back office solutions. The service includes extensive applications for
Casino and fixed odds games, Lottery and scratch card services, as well as Multi
player games.

DEPENDENCE ON THREE CUSTOMERS

In 2006, we derived approximately 84% of our revenues from three major
customers:

Golden Palace Ltd(51%); Two Way TV Australia (21%) and Two Way Media Ltd(12%).

OUR STRATEGY

We have recently re-prioritized our operations and currently plan to focus on
two products: the Winner Channel and our Blackjack Software related marketing
services.

Our aim is to strengthen our position as a developer of gaming technology to the
mobile, Interactive TV, participating TV and internet markets with particular
emphasize on the development of the Blackjack Software. At the same time we aim
at becoming a leading provider of marketing services related to our Blackjack
Software and other online games through our subsidiary Get21. The development of
a diversified portfolio of high quality, innovative applications is critical to
the business. We intend to:

o DOMINATE THE MULTIPLAYER BLACKJACK TOURNAMENTS MARKET. Our new solution is
intended to enable gaming operators to supply their users with a scalable
multiplayer service, based on our technologies.

o DEVELOP INNOVATIVE APPLICATIONS. We continue to devote significant resources
to the development of high-quality, innovative applications and work with
skilled content developers. As the interactive gaming landscape continues to
evolve, we intend to extend our cross-platform solutions to accommodate
advancements in network and device technology.

o EMPHASIZE OUR BRANDED TECHNOLOGY. We intend to broaden our applications to
enhance the end user's experience, thereby offering our customers (e.g. mobile
phone networks) the opportunity to increase their subscribers satisfaction,
leading to a reduction in subscriber churn.

o WINNER CHANNEL PARTNERSHIP- We and Two Way Media Ltd, a leading interactive
television company, have announced the intention to form a privately held
company to house their consumer betting brand, 'The Winner Channel'. The Winner
Channel platform has been operating in the UK for a year and has launched
services on TV, mobile phones and the internet - providing customers
opportunities to be on all platforms from a single account. In its first year of
operation, the platform has established a strong presence in the UK market. It
operates its own brand and white label gambling services for leading UK media
companies including ntl:, the Sun Newspaper, Channel 4, Five, Teletext and
Flextech Television, among others.

The two companies have used the past 12 months to establish the technical and
commercial infrastructure necessary to operate cross platform products. The new
vehicle intends to capitalize on this, focusing on high end entertainment TV
betting, using the television as the primary means of acquiring customers that
can then be monetized through its other platforms.

We believe that the UK Gambling Act 2005 discussed below under "Government
Regulation", scheduled to be implemented in September 2007, will allow the
provision of remote gaming services, which will benefit the Winner Channel and
us.

o EMPHASIZE OUR BUSINESS MODEL. We continue to highlight the revenue-share
model's collaborative features for our customers. We believe that the
revenue-share model incentivizes our customers to upgrade and enhance the
capabilities of their applications.

o FACILITATE DISTRIBUTION AND SUPPORT. We continually promote all of our
products in their relevant markets to enable the best market penetration and
customer support. We place emphasis on getting the product right and supporting
the product with the correct combination of technology, distribution and
support.

OUR COMPETITIVE STRENGTHS

We believe that our competitive strengths include:

o UNIQUE, FIRST TO MARKET, PATENT PENDING PEER TO PEER ("P2P") BLACKJACK PRODUCT
.. Our P2P application is a unique product, first introduced to the market by us.
We have filed a patent application with the U.S. Patent and Trademark Office
with respect to the P2P application which is still pending. One of its unique
aspects is that it allows for constant gaming opportunities and nonstop
blackjack online events. A game is available whenever a player is looking for
one. Players do not play against the house - players compete against each other
allowing the most skillful player to win. We expect to be one of the leading
software providers in the Multiplayer blackjack tournaments market.

o PROPRIETARY, AWARD-WINNING TECHNOLOGY AND COMMITMENT TO RESEARCH AND
DEVELOPMENT. We invest in research and development to create applications and
technologies that incorporate the advanced capabilities of next-generation
networks. We have developed proprietary technologies that enable us to
distribute our solutions across different platforms. We offer our cross-platform
technologies through revenue-sharing arrangements with our customers. The
cross-platform nature of our technologies allows us to remain neutral to the
network choices made by our customers, and enables our customers to reach a
larger number of subscribers. We have patent pending proprietary multiplayer
blackjack product and a patent-pending participating TV solution.

o CUSTOMER RELATIONSHIPS AND DISTRIBUTION CHANNELS ACROSS MULTIPLE PLATFORMS.
Service providers are our primary customers and the distributors of our
applications. Over the past two years, we have established agreements to
distribute our applications through major wireless operators, Internet service
providers, and cable and satellite companies. We believe that we are able to
build our distribution channels as a result of our focus on customer service,
the quality of our applications and our ability to deploy those applications on
a broad range of devices and networks. We believe that the time and difficulty
involved in building a global distribution channel represents a significant
barrier to entry for our potential competitors. We are first to market position
in the participating TV gaming market and have an early mover in the mobile
gaming and in the online multiplayer application market.

o DIVERSE PORTFOLIO OF ORIGINAL AND LICENSED PROPERTIES. We publish a diverse
portfolio of interactive entertainment applications. Our applications span
multiple categories and are based on intellectual property that we create and
own, and well-established brands that we license from third parties. We believe
that our approach to develop branded content for our platform has broad customer
appeal and reduces our reliance on any particular application. In addition to
introducing new applications, we continuously update our existing applications
to take advantage of enhanced functionality of new media platforms.

o RECURRING REVENUE-GENERATING BUSINESS MODEL. Our business strategy emphasizes
the collaborative nature of our approach to customers. We prefer to enter into
revenue-share agreements with our customers, rather than license our technology.
We believe this approach will continue to generate revenue long after the
technology's initial release. The market data we collect from sales and usage of
our applications also provides us with valuable insight into carrier and
subscriber preferences and guides the development of future application.

OUR PRODUCTS AND TECHNOLOGY

We currently provide four layers of technology enabling the full range of
services required to supply gaming solutions across multiple platforms. The four
layers include: back office, game engines, middleware and front-end solutions.
Customers can select the full solution from front end to back office, or can
select a part of the service which is then integrated with their existing
offering.

MULTIPLAYER TOURNAMENTS BLACKJACK SOFTWARE

Blackjack's simple rules and extremely visible play permit players to enter the
game with little knowledge. At the same time, the unique blackjack tournament
rules add skill elements to the traditional blackjack game and therefore attract
professional and savvy players who implement complicated gaming strategies.

One of the unique aspects of our P2P application is that it allows for constant
gaming opportunities and nonstop blackjack online events. A game is available
whenever a player is looking for one. Players do not play against the house -
players compete against each other allowing the most skillful player to win.
Once a set number of players arrive, the game begins. Multi-table tournaments
consist of a number of 5-player tables, allowing bigger prizes and a more
exciting tournament.

We developed the Blackjack Software with the assistance of professional
blackjack players. We believe that our new multi-player blackjack application
may be an attractive product for major online casinos and sports books. Our
blackjack product is the first on the market to combine a full range of
multi-player blackjack games: Multi-table Sit & Go tournaments; Single table Sit
& Go Tournaments; Heads-Up Blackjack; Blackjack Shootout tournaments; and daily
Blackjack Special Tournaments.

Each player has to pay the same amount of money, "a buy-in", and the house fee
in order to register for the game. The players choose the game with the amount
of rounds they prefer and enter the table. All players receive an equal amount
of chips. The chips are used as counters and are accumulated by beating the
computer-generated dealer's hand. Each player determines the amount of chips to
bet in every hand. The player who accumulates the most chips wins the pot.

BACK OFFICE - ZONEMAS

Our strategy is to provide gaming operators with all the software tools they
need to deploy gaming services to their customers in the most efficient and
lucrative manner. Whether connecting to existing enterprise operations or
starting from scratch, our ZoneMAS is a robust, highly secure and cost-effective
back-office suite that is specially designed to cater to the dynamic needs of
gaming operators.

ZoneMAS is an advanced cross-platform back-office system that enables the
delivery of betting services on numerous interactive platforms such as the
internet, mobile, iTV, and broadcast TV, using a one-time registration process
and a single account. ZoneMAS supports fixed odds games, lottery games, number
games, bingo games and more. ZoneMAS is a cross-platform solution designed to
meet these unique requirements. ZoneMAS includes advanced marketing and
advertising tools, including a bonus system mechanism, VIP system, customer
retention system, lifetime value mechanism, tournament systems, data mining and
an in-house affiliation system.

ZoneMAS advanced features include:

o Cross platform capabilities (Internet, mobile and iTV)

o Familiar web-based interface that enables access from any browser

o State-of-the-art security systems for sites include SSL Personal Key
management for every system access

o User-friendly interfaces and features

o Real-time reporting of trends, individual account analysis and performance

o Marketing and advertising subsystems

o Full third party support via an application program interface.

GAME ENGINES

The game engine is responsible for the gaming operations and includes the rules
and logic of each game. The game engine includes a random number generator,
gaming statistics, odds and other characteristics that enable gaming operations.
Information from the game engine is displayed on the front end device that
serves as an application program interface (API). The game engine operates as a
separate server and communicates with the communications manager and the back
office. The game engine can function as a single player server or as a
multiplayer server.

o STAND-ALONE GAMES SERVER. This server's function is to manage the game logic
of fixed-odds betting. The server supports the installation of games in a
uniform protocol to connect with the back-office and different customers'
interfaces. We developed several game engines for roulette, dice, keno, hi-lo,
slots, bingo-keno, horse racing and more which have been successfully deployed
for several years at different clients. The server also supports installation of
games developed by third parties.

o MULTI-PLAYER GAMES SERVER. This server controls the multi-player games
developed by us. The server operates two types of games: games where several
players play against each other, like poker, and the server manages the game
tables and the tournaments; and games where drawings take place every few
minutes and can be observed by all participants, such as SMS TV.

MIDDLEWARE TECHNOLOGIES

We provide two middleware servers: ZoneITS, an interactive terminal server, and
MIXTV, a broadcast video server.

o ZONEITS. ZoneITS is a designated server that is located on the customer's
network and handles all incoming requests from mobile handsets, such as
subscriber registration, access to applications and all Java-enabled
interactivity. The server's architecture enables reliance on a single uniform
protocol between the mobile client and terminal. The server is specifically
designed to manage updated versions of handsets by providing information about
the client's memory status and other resources. This allows all monitoring and
repairs to take place in the server environment which eliminates the need for
changing the basic code on the Java client. The architecture is designed to
increase security and create an additional buffer between the client and the
server, making the content transferred between mobile clients and the terminal
uniformly encrypted. While no system is completely secure, we have devised
numerous security measures designed to assist in the prevention of fraudulent
activity and unauthorized access to its systems. We work on a four tier security
protocol including obfuscation software (to deter copying of the software),
protocol encryption, client server monitoring, firewalls and logging
protections.

o MIXTV. Our products include games and virtual community tools to broadcast
live. Our solutions are predominantly designed as mass-multiplayer games, with
no limit to the number of players at one given moment. A wide spread audience
can play the same game throughout as many platforms as the channel is deployed
on. As these applications are video-streamed, they run on a number of different
broadcast networks: analogue, digital, terrestrial, cable and satellite. This
new patent-pending technology uses mobile text messaging to bring interactive
gaming communities to subscribers without a return-path and creating a virtual
community around the channel. The delivery of participating/SMS-TV requires a
suite of software and hardware that delivers multi-mode solutions for
broadcasters and other application service providers, by integrating into the
existing infrastructure of both the broadcaster's control room and the
operator's communications networks. The system comprises two main components,
MIXTV Entertainment Server and MIXTV Director, that are together responsible for
running the interactive solution, collecting the audience input and delivering
all of the data as a video stream onto the television screen.

FRONT END

Front end solutions have been developed for Interactive TV, mobile, internet and
participating/SMS-TV. The front end solution includes all of the customer
interface applications and is essentially the game the customers see on their
televisions, computers or mobile phones.

RESEARCH AND DEVELOPMENT

We strive to develop the latest software and technology for the gaming market,
and accordingly over 75% percent of our employees are involved in research and
development. Research and development expenses for 2005 and 2006 were
approximately $2,549,635and $2,923,572 respectively, which represents
approximately 54 percent and 41 percent of our total operating expenses for 2005
and 2006, respectively. We believe that research and development is one of the
key reasons for our success and is crucial to our future prospects and it is our
intention to continue to invest heavily in research and development in order to
enhance our existing solutions and launch new products into the gaming market.

COMPETITION

The interactive gaming applications market is highly competitive and
characterized by frequent product introductions, new technologies and evolving
platforms. As demand for applications continues to increase, we expect new
competitors to enter the market and existing competitors to allocate more
resources to develop and market their applications. As a result, we believe
competition in the interactive gaming market will intensify. The current and
potential competition in the interactive gaming applications market includes
major media companies, traditional video game publishing companies, service
providers in interactive mobile, TV and internet markets, software applications
providers, content aggregators and other pure-play interactive entertainment
companies. Larger and more established companies are increasingly focused on
developing and distributing wireless applications that directly compete with us.
In addition, we expect that online gaming companies will themselves continue to
develop applications that allow their products and services to be available on
new distribution platforms.

MULTIPLAYER TOURNAMENTS BLACKJACK

Some of the leading software and system providers in the online gaming industry
operate their own gaming websites while still providing their proprietary gaming
systems to other operators. There are about 90 proprietary gaming systems
offered by some 120 software and system providers; however, the market is
dominated by 15 leading software vendors, including WorldGaming, MicroGaming,
Playtech, RealTime Gaming, Boss Media, and others.

Major software vendors may provide their proprietary gaming platforms to dozens
of operating websites simultaneously and have been offering a range of services
including: gaming software, customer support, back office systems, and payment
processing and hosting, allowing vendors to offer solutions ranging from
specific software to `plug and play' gaming platforms.

For small to mid-size operators, in-house development is usually inefficient;
therefore, in these cases, software licensing may often be the most appropriate
solution.

Using standard gaming engines that can be customized to client needs allows the
software vendors to offer their customer a distinctive user interface and
different `skins'. Although most competitors seek to offer new and innovative
games, there are practically only a few new games in the industry. The reason is
that most of the software vendors choose to get more market share by adding new
operators while focusing on developing back office functionalities, service and
support to their operators.

Vendors generate revenue streams through software and support licensing as well
as customization, payment processing, hosting and other services that are partly
fixed but are mainly calculated as a percentage of each licensee's level of
activity.

P2P blackjack is a new concept that has been introduced by few operators,
including: Global Player Casino, Game Account (a skill game company),
blackjack.com, and RiverBelle Casino. All of these websites offer different
kinds of multi-player blackjack, but none of them offers a tournaments blackjack
application.

Few gaming operators such as PartyPoker.com, sportingbet.com, Bet21.com, have
recently launched multiplayer tournaments blackjacks which are competitors to
our Get21 brand.

o MOBILE

We compete with wireless content aggregators, who combine applications from
multiple developers (and sometimes publishers) and offer them to carriers or
through other sales channels. We generally differentiate ourselves in several
key respects by funding development, providing design input and quality
assurance for our applications, and owning the application copyright and thereby
increasing revenues from application sale. We consider the primary competitors
in the wireless market to be Chartwell Technologies, Boss Media, Micro Gaming,
Phantom Fiber, Probability Games and Mfuse.

o INTERACTIVE TV.

Currently, we consider the primary competitors in the Interactive TV market to
be Visiware (provider of Interactive TV solutions), Pixel Technologies (provider
of gaming solutions), Yoomedia (U.K.- based interactive entertainment provider),
Static2358 (gaming applications developer of the OpenTV platform and owner of
the "PlayJam" gaming channel), Visionik (developer of front end gaming graphics
and presentation layers to the end user) and Betting Corp. (which develops
server and gaming engines).

o INTERNET.

There are numerous competitors in the internet market and we consider the
primary competitors in the internet service provider market to be online gaming
sites and outsourcing providers, such as Boss Media, Cryptologic, Orbis,
Microgaming, RTG and Playtech. Many of these companies have their own in-house
software developers and some have significantly greater capital resources and
personnel than the Company.

o PARTICIPATING TV.

Currently, to our knowledge, there are no competitors in the field of
participating TV gaming.

INTELLECTUAL PROPERTY

We own the key intellectual property rights in the software developed for use in
our operations. We rely on the protection of trademark, copyright and trade
secret laws, contractual obligations and license agreements with our employees,
customers, partners and others to protect our proprietary rights.

In order to protect our trademarks, we have registered "Zone 4 Play" as a trade
mark in the U.S. in respect of computer games software. We have also made
application for a U.S. trademark for "MIX TV."

We have also applied for patent protection in relation to our participating
solution and the methodology of our multiplayer blackjack products, and these
applications are currently being processed.

o On January 25, 2005, we filed a U.K. patent application entitled "Broadcasted
Games".

o On June 24, 2005, we filed a U.S. utility patent application entitled
"Multiplayer Card Tournaments and Methods" which was assigned to Gaming and than
to RNG.

o On December 22, 2005, we filed a U.K. patent application entitled "Face up
Holdem" which provides fixed odds wagering that employs computer-generated card
dealings and automatically calculates the odds associated with each computer
generated hand (CGH) to win a broadcasted poker game.

GOVERNMENT REGULATION

The gaming industry is prohibited or restricted in some countries and highly
regulated in others. In a number of countries the legal position is uncertain.
In general terms, it is possible that, subject to the courts in the relevant
countries being able to establish jurisdiction, online gaming and our activities
in relation to it do or may constitute (in a manner and to a degree which varies
between countries) a breach of the applicable criminal and/or civil legislation
in the countries of residence of our registered players. This may potentially
expose us, and/or our officers and directors, to fines and other sanctions
(including imprisonment). That is why, we do not directly target individuals
residing in the United States and mainly target online markets in Europe. We
have no control over where and to residents of which country third party
operators to which we may license the Blackjack Software, market their games or
otherwise conduct operations, which can be all over the world.

Although the regulatory regime for land-based gaming operations is
well-established in many countries, the gaming laws in such countries will not
necessarily have been amended to take account of the internet, and the ability
to offer gaming services online. Consequently, there is uncertainty as to the
legality of online gaming in most countries. In several countries local
regulators are willing to license and regulate local and often state-owned
operators, but prohibit foreign operators, in some cases possibly to protect the
tax and gaming revenues of the relevant government. Authorities in certain
jurisdictions have taken indirect steps to restrict online gaming by seeking to
prevent or deter banks, payment processors, media providers and other suppliers
from transacting with and providing services to online gaming operators. The
application or enforcement (or threat of enforcement) of gaming laws or
regulations, or a change in sentiment by regulatory authorities on the enactment
of new legislation prohibiting or restricting online gaming or services used by
online gaming businesses or the taking of such indirect steps, may severely and
adversely impact the business and financial position of online gaming companies.
The legality of the customers themselves engaging in online gaming is also
uncertain in a number of countries.

Nonetheless, customers in such countries have proved willing to engage in online
gaming despite the fact that they may be prohibited by their domestic law from
doing so. If online gaming were liberalized, or licensed and regulated,
particularly in the U.S., online gaming companies would be likely to face
increased competition from large land-based operators and internet companies
that may not currently offer such services as a result of the regulatory
restrictions.

U.S. GAMING REGULATION

The U.S. Department of Justice takes the position that online gaming is illegal
in the United States under existing federal law. In addition, U.S. federal law
prohibits activities that use the means of interstate commerce to facilitate or
promote activities that violate state law, and federal courts have held with
respect to other matters under U.S. law that "means of interstate commerce"
includes the internet. At a state level, most states make gaming and the
promotion of gaming unlawful. Most of these state laws do not specifically apply
to internet gaming, but some have amended their laws to affirmatively make such
activity, including the marketing or promotion of internet gaming, unlawful. To
date, to our knowledge, there has been no successful criminal or civil action
against an entirely offshore online casino operator where there has been no U.S.
national ownership or management. Only a small number of legal actions have been
brought against online gaming operators in the U.S., and most of these have been
where the owners of the operators are U.S. citizens or the assets and personnel
of the online gaming operator have been located in the U.S.

The future of regulation of the online gaming industry in the United States is
unclear. For the past several years, the U.S. Congress has considered federal
legislation which would impose civil and criminal penalties on online gaming
operations for accepting wagers from U.S. residents and accepting credit card
payments, electronic fund transfers and other banking instruments used to fund
online gaming transactions from U.S. residents. Such legislation also would
direct U.S. regulatory authorities to impose regulations that would prevent
financial institutions regulated by U.S. banking authorities or otherwise
subject to U.S. jurisdiction from processing payments related to wagering
activities. The legislation has varied from session to session, but has yet to
pass the U.S. Congress and become law. An increase in participation in online
gaming in the U.S. has attracted significant attention. Opponents continue to
threaten to seek enactment of legislation at the state and federal levels
barring online gaming or participation in online gaming activity in the U.S. No
guarantee can be given that the U.S. authorities will not seek to prosecute
offshore gaming operators, nor companies who promote them, and no prediction can
be given as to the success of any such prosecutions. Any significant restriction
on participation in, or marketing or promotion of, online gaming in the U.S.
would have a significant adverse effect on our business, financial position and
future prospects.

Because online gaming may be illegal in some states, debts incurred by players
may be unenforceable under certain state laws, thus leading some credit card
affiliates to refuse to allow players to open accounts with online bookmakers.
There was a 1999 case in California brought by a bettor who accumulated online
gaming debts and then successfully argued that she should not be responsible for
such debts because the activity was illegal.

On April 7, 2005, the World Trade Organization (WTO) ruled that the United
States had established that its laws prohibiting gaming are "necessary to
protect public morals or maintain public order". The United States, however,
failed to show that the prohibitions in its laws related to horse race wagering
are applied equally to foreign and domestic remote gaming services, thereby
contravening international trade rules. The WTO's ruling highlights the need for
the U.S. to clarify its policies on internet gaming on horse race wagering and
the purported extraterritorial application of its laws, although there can be no
certainty as to how the U.S. will make such clarification or that it will make
such clarification at all. There is therefore a risk that U.S. authorities might
seek to curb any participation by individuals in online gaming.

FEDERAL PROHIBITION PROPOSALS

On May 25, 2006, the Internet Gaming Prohibition Act, also known as the
Goodlatte bill, was passed by a U.S. Congressional Committee on a nearly
straight party vote of 25-11. The act will be considered by the full Congress
this summer. The legislation has the support of the Justice Department because
it would close a loophole in the Wire Act of 1961, which outlawed the
transmission of wagers over phone lines but has no jurisdiction over the
Internet.

Rep. Goodlatte's bill as well as another proposed bill by Rep. Leach seek to
criminalize the electronic transmission of funds for gaming purposes. The Leach
bill would make it illegal for credit card companies to accept transactions at
online gaming websites, while the Goodlatte bill goes further and forces U. S.
financial institutions to cooperate with federal law enforcement agencies and
report customers transactions. It would also look to force Internet Service
Providers (ISPs) to cut off access to offshore websites their customers might
use for online poker and gaming.

On July 11, 2006, the U.S. House of Representatives passed legislation that
would ban most forms of Internet gambling and require banks to develop systems
to block their customer's transactions to gambling Web sites. By a 317 to 93
vote, the House approved the Internet Gambling Prohibition and Enforcement Act.
The bill amends the 1961 Wire Act, which prohibits gambling using telephone
wires, to include Internet gambling as a prohibited activity. The bill, which
would have to be approved by the Senate and signed by the President before
becoming law, allows states to continue to regulate gambling within their
borders. The bill would increase criminal penalties for gambling businesses that
settle Internet wagers with credit cards, checks, or fund transfers, and it
would require financial institutions to create systems for blocking payments to
gambling sites. The bill allows states to continue to regulate gambling within
their borders.

On July 17, 2006, Betonsport's founder Gary Kaplan, together with Chief
Executive Officer ("CEO") David Carruthers and other individuals, have been
charged with conspiracy, fraud, and racketeering through taking sports bets from
US residents. That company allegedly breached the 1961 Wire Act by taking bets
using the telephone line. Betonsports is a London Stock Exchange listed online
sports betting company.

On October 13, 2006, President Bush signed into law the "Security and
Accountability for Every Port Act of 2006", which included the "Unlawful
Internet Gambling Enforcement Act of 2006" (the "Act"). The Act prohibits credit
card companies and other financial institutions from paying or receiving funds
for the purpose of internet gambling. The Act also authorizes state and federal
law enforcement officials to seek injunctions against persons who facilitate
illegal internet gambling. The Act requires the Department of the Treasury (DOT)
and the Federal Reserve Board (FRB) to draft regulations to require each
"designated payment system" to identify and block these restricted transactions
through the establishment of policies and procedures.

There can be no assurance that online gaming or the provision of payment
processing services to online gaming operators will not be specifically
prohibited in the U.S. in the future. In the event of such a prohibition, The
relevant U.S. authorities would be likely now become more active in seeking to
enforce U.S. laws against companies and persons based outside the U.S. or
against companies that provide services to online gaming companies which could
have a material adverse effect on us.

INDIRECT PROHIBITION EFFORTS

U.S. laws are being used, or threatened to be used, by federal prosecutors,
state attorneys general and other authorities against third parties who provide
services to online gaming companies or who directly or indirectly facilitate
online gaming operators such as licensees, internet service providers, software
and technology providers, payment processors and internet portals to attempt to
impede the growth of online gaming in the U.S. or prohibit the provision of
services and supplies to the industry. These efforts may take various forms,
including requests that online service providers `cease and desist' from
offering a service within a particular jurisdiction, civil actions seeking to
enjoin a service and demand a refund of gaming proceeds originating from a
particular jurisdiction, or criminal indictments, alleging a violation of state,
federal and/or local law. These efforts which raise legal and moral concerns
about the industry may also have the effect of causing us to avoid dealing with
the online gaming industry.

U.K. REGULATION OF ONLINE GAMING

On April 7, 2005, the UK Gambling Act 2005 (the "UK Act") was given Royal
Assent. The UK Act introduces fundamental reforms of current gaming legislation,
including online gaming. The UK Act envisages that a new single regulator, the
"Gaming Commission", would be formed and that the remaining provisions of the UK
Act will come into force from the second half of 2005 onwards, with the full
regime to be in place by September 2007.

All current legislation specifically relating to gaming, including online
gaming, none of which the we believe applies to our activities, will be repealed
when the UK Act comes into force and most entities involved in the provision of
gaming activities in the UK, including us, will be regulated by the Gaming
Commission. The Gaming Commission will have comprehensive powers which are set
out in the UK Act.

The UK Act makes provision for the licensing of online betting and gaming in the
UK, which is defined as "remote gaming". However, the UK Act does not clearly
specify what services and facilities will need to be licensed in the UK. There
is, however, specific provision in the UK Act relating to the use of "remote
gaming equipment", which is defined as including facilities for registration,
payment and the hosting of a random number generator in connection with gaming
businesses. Such definition is likely to include servers which host gaming
websites or gaming software. An operator and/or supplier of such equipment will
need to obtain a license in the UK or relocate all of the remote gaming
equipment used in connection with its licensed activities outside Great Britain.

The UK Act makes it illegal to supply, in the course of business, computer
software for remote gaming unless a license is held for such activity. As
players can download gaming software from our promoted websites, it is possible
that we may need to obtain a license, even though we neither own nor can alter
any of the gaming software to which we provide access. Whether the UK Act will
be interpreted in such a way as to require us to obtain a license for this
reason is, at present, unclear. This part of the UK Act dealing with the supply
of gaming software does not refer to any territorial application. Therefore, it
is conceivable that it may apply to any person who, although having no physical
presence in the UK, is deemed to supply gaming software from websites capable of
being accessed in the UK.

All gaming operators with remote gaming equipment in the UK will have to obtain
approvals and licenses from the Gaming Commission. We are not conducting any
gaming operations in the U.K. and currently do not intend to seek a license from
a Gaming Commission. We do intend, however, to provide marketing services to
licensed gaming operators by acting as affiliate of such gaming operators and
provide gambling marketing services in the U.K. to gaming operators through our
websites such as www.get21.com and according to the various marketing methods
described under the above heading: "Marketing Plan" under Item 4 of the
Registration Statement on Form 20-F, as amended, filed by Gaming on August 4,
2006. There can be no certainty that should such licenses be required by one of
our gaming operators, such gaming operator will be able to obtain such licenses
on terms which are adequate for us in respect of our activities. The costs
relating to such approvals and licenses and ongoing compliance with the new
regulatory framework are as yet unknown. There are also provisions in the UK Act
which restrict the ability to advertise in the UK unless the jurisdiction from
which the gaming operator supplies its services is in the European Economic Area
(which for these purposes specifically includes Gibraltar). It would also be
unlawful for us to advertise any online gaming operator which is based in the UK
and which does not have a license. As the licensing regime is not yet in
operation, there is no guarantee that, should our key clients seek licenses,
they will be granted.

At this stage, the extent to which online gaming companies with UK activities
will be affected either by the UK Act or the regulatory framework it will
introduce is not clear. In this regard, it should be noted that the UK Act
proposes that the Secretary of State also be delegated broad additional powers,
including the power to determine what constitutes remote communications
equipment facilities. It is possible the Secretary of State will interpret such
terms widely.

At this stage no proposals have been published by HM Treasury and/or HM Customs
& Excise on the likely level of taxation that will be levied on UK licensed
online gaming operators.

We have been granted a U.K. bookmaker license to operate fixed odds games.

REST OF EUROPE

In Europe, countries such as Denmark and Sweden attempt to restrict the actions
of gamblers and aim to curtail the supply of gaming products and services by
attempting to limit such supply to domestic operators, often with links to the
local government.

In Sweden, as revenues from domestic lotteries (and for these purposes, card
games and other casino games are deemed to be lotteries) are only permitted to
be used for the benefit of the public, it is not possible for a private company
to obtain a license to operate an online gaming website. The Swedish Lottery Act
applies to lotteries arranged in Sweden. The Swedish government recently
considered amending the Lottery Act to prohibit foreign lotteries intended for
participants in Sweden, but concluded that such a prohibition would be difficult
to enforce. Since then, however, the Swedish government has announced that it
intends to reconsider a possible ban on foreign online gaming businesses which
operate in Sweden. Any resulting legislation may have an adverse impact on our
business and operations.

Under the Swedish Lotteries Act, it is illegal in Sweden to promote a foreign
operated gaming business. Promotion includes advertising in Swedish newspapers
and magazines, placing banners on Swedish websites and running other similar
advertising campaigns (the promotional activities undertaken by us to date would
fall into this category). Accordingly, we are unable to undertake specific
promotions in Sweden or to specifically target Swedish players and, as a result,
our ability to operate in Sweden is restricted.

Under Danish law, any online gaming business (as well as any marketing or
promotion of such business) aimed at the Danish market is illegal unless the
business concerned has been granted a license from the Danish Ministry of
Taxation. The extent to which a website is assessed as targeting the Danish
market depends on an overall assessment of the activities offered and the
content of the website concerned. Websites not specifically targeting the Danish
market (e.g. where the content is not in Danish, no payments and/or winnings are
calculated in Danish Kroner and no Danish language helpline is provided) will,
in general, not be encompassed by the Danish prohibition provided the relevant
websites are not hosted in Denmark. It is possible that the Danish Gaming Board
or other relevant authority may object to our future marketing activities. We
intend to take such steps as are required to ensure compliance with Danish law
if any such objections arise.

It is possible that Cyprus will introduce online gaming legislation in the next
12 months. To the extent that the Cypriot authorities do implement such
legislation, we intend, to the extent we are required to do so, to comply with
all aspects of such legislation.

Some enforcement action has been taken by European governments pursuant to
regulations against gaming operators to attempt to prevent the supply of online
gaming services to users in their jurisdictions. This has occurred in the
Netherlands, for example, where the state monopoly provider has challenged the
supply of online bookmaking and gaming to Dutch citizens by operators based in
the UK. In one case, a UK operator has now successfully challenged the judgments
against it in the lower Dutch courts, although the Dutch Government has not
endorsed such judgments.

OTHER LAWS AND REGULATIONS

The application to us of existing laws and regulations relating to such issues
as taxation, quality of services, electronic contracting, consumer protection
and intellectual property ownership and infringement (to the extent that they
relate to internet businesses) is unclear. In addition, we may become subject to
new laws and regulations directly applicable to our activities. Any new
legislation applicable to us could expose us to substantial liability and
expenses necessary to comply with these laws and regulations. There is a risk
that criminal and civil proceedings, including class actions brought by or on
behalf of public entities or private individuals, could be initiated against our
company, our subsidiaries, our officers and directors, other members of our
company and their directors, and others involved in providing facilities to the
internet gaming industry.

EMPLOYEES

We have downsized our workforce and currently employ 61 employees, all of whom
work full-time. None of our employees are covered by a collective bargaining
agreement. We consider our relations with our employees to be good.

ZONE4PLAY(ISRAEL) LTD 53

MIXTV LTD 8

RISKS RELATED TO OUR BUSINESS

Our business involves a high degree of risk, and our securities are highly
speculative. Potential investors should carefully consider the risks and
uncertainties described below and the other information in this report on Form
10-KSB before deciding whether to invest in shares of our common stock. If any
of the following risks actually occur, our business, financial condition, and
results of operations could be materially and adversely affected. This could
cause the trading price of our common stock to decline, with the loss of part or
all of an investment in our common stock.

OUR BRIEF OPERATING HISTORY MAKES OUR FUTURE SUCCESS UNCERTAIN.

We have a brief operating history. In 2001, we began our business of developing,
commercializing and marketing games software and technologies. We are continuing
to develop our business, enhance and extend our product suite and build our
organization. Our brief operating history makes our success uncertain. As a
result of our brief operating history, it is difficult to accurately forecast
our revenues, and we have limited meaningful historical financial data upon
which to base planned operating expenses and new business revenue.

WE HAVE INCURRED LOSSES SINCE OUR INCEPTION, AND THERE IS NO ASSURANCE THAT
PROFITABLE OPERATIONS, IF ACHIEVED, CAN BE SUSTAINED.

We have not yet realized a profit, and we do not expect to be profitable in the
near future. We cannot assure you that we will ever achieve profitability. At
December 31, 2006, we had an accumulated deficit of $13,347,994. We expect to
incur substantial costs that may not be offset by increased revenues. These
costs include the following: continued brand development, marketing and other
promotional activities; continued product development, upgrading and maintenance
of our software; increased administrative costs related to infrastructure and
business support systems, the expansion of our product offerings and the
continued enhancements to our technologies; and development of strategic
business relationships.

EVEN IF WE ACHIEVE A SUBSTANTIAL INCREASE IN OPERATING REVENUES, OUR OPERATING
RESULTS ARE LIKELY TO BE DIFFICULT TO PREDICT AND ARE LIKELY TO FLUCTUATE
SUBSTANTIALLY.

Our operating results are likely to fluctuate significantly due to a variety of
factors, many of which are outside of our control. Factors that may harm our
business or cause our operating results to fluctuate include the following:

o the ability of customers to obtain players and grow their games business;

o the mix of games and other products developed by us;

o our inability to obtain new customers and strategic partners;

o our inability to adequately maintain, upgrade and develop our technologies;

o technical difficulties with respect to the use of our software;

o the ability of our competitors to offer new or enhanced games technologies,
services or products;

o price competition;

o adverse regulatory developments in the business of games for pay;

o our inability to license additional games from third parties; and

o the amount and timing of operating costs and capital expenditures relating to
commercializing our technologies.

LACK OF CONTINUED ACCEPTANCE OF OUR PRODUCTS WILL AFFECT OUR BUSINESS.

Poor market acceptance of our products or other unanticipated events may result
in lower revenues than anticipated, making anticipated expenditures on
development, advertising and promotion not feasible. Initially, our success may
be limited by our limited experience in marketing online gaming technologies,
our limited international marketing experience and our lack of brand
recognition.

Our Blackjack Software licensing fees revenue model will be dependent upon the
revenues of our customers. If our technology and games are not widely accepted
by our future customers' subscribers, our financial condition and results of
operations will be materially and adversely affected.

We typically enter into agreements with our new customers under which they offer
our applications to subscribers and we receive a percentage of our customers'
related revenues. The subscribers are charged a one-time, monthly or per-use
subscription fee for the application. It is expected that our customers will
retain a percentage of the fee and remit the balance to us. If our technology
and games are not widely accepted by our customers' subscribers, our financial
condition and results of operations will be materially adversely affected.

WE HAVE FINANCED OUR OPERATIONS PRIMARILY THROUGH THE SALE OF EQUITY SECURITIES
AND MAY BE UNABLE TO CONTINUE TO DO SO.

Since inception through December 31, 2006, we have incurred a cumulative deficit
of $13,374,994 and have raised net proceeds from the sale of equity securities
of approximately $12,945,961. We may need to continue to finance our operations
with the sale of equity securities. If we do so, our shareholders will
experience dilution to their percentage interest in us, which may be
substantial, and the new equity securities may have rights, preferences or
privileges senior to those of existing holders of our shares of common stock.
For example, in March 2006, we raised an aggregate of $6,520,000 through the
sale of 8,234,485 units comprising of one share of our common stock and one
warrant, to certain accredited investors. If we unable to obtain future
financing, we may have to substantially curtail or cease operations or find a
merger partner on terms which, if available at all, may be unfavorable.

WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUES FROM A LIMITED NUMBER OF
CUSTOMERS.

In 2006, we derived approximately 84% of our revenues from three major
customers: Golden Palace Ltd (51%); Two Way TV Australia (21%) and Two Way media
Ltd(12%).

ERRORS OR DEFECTS IN OUR SOFTWARE PRODUCTS COULD DIMINISH DEMAND FOR OUR
PRODUCTS AND REDUCE OUR OPERATING RESULTS.

Our software products are complex and may contain errors that could be detected
at any point in the life of the product. We cannot assure you that errors will
not be found in new products or releases after shipment. This could result in
diminished demand for our products, delays in market acceptance and sales,
diversion of development resources, injury to our reputation or increased
service and warranty costs. If any of these were to occur, our operating results
could be adversely affected.

MOBILE GAMING, INTERACTIVE TV GAMING AND PARTICIPATING TV GAMING ARE NEW
PLATFORMS AND MAY NOT GAIN POPULARITY.

The market for our products and platforms on which they operate may not grow.
Consumer behavior may change and consumers may lean towards technologies and/or
leisure activities which are not within our sphere of activity.

WE ARE EXPOSED TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES.

A significant portion of our business is conducted outside the United States.
Although a majority of our revenues are transacted in U.S. Dollars, we are
exposed to currency exchange fluctuations in other currencies such as the
British pound and the New Israeli Shekel. Moreover, a portion of our expenses in
Israel and UK are paid in Israeli currency (NIS) and pounds, which subjects us
to the risks of foreign currency fluctuations. Our primary expenses paid in NIS
are employee salaries and lease payments on our Israeli facilities.

RAPID TECHNOLOGICAL CHANGES MAY ADVERSELY AFFECT OUR FUTURE REVENUES AND
PROFITABILITY.

The software industry is subject to rapid technological change. We need to
anticipate the emergence of new hardware and software technologies, assess their
market acceptance, and make substantial development and related investments. New
technologies in software programming or operations could render our technology
obsolete or unattractive to our customers, thereby limiting our ability to
recover development costs and potentially adversely affecting our future
revenues and profitability. Because a feature of our technology is its ability
to operate across platforms, we must continuously monitor the development of new
platforms and changes in existing platform technologies in order to keep our
software from becoming obsolete.

WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.

The interactive games industry is new, rapidly evolving and intensely
competitive. The competition among developers of games software is increasing
rapidly. Currently, we compete with a number of competitors, many of which have
similar product offerings. Many of our competitors have substantially greater
financial, marketing and other resources than us and offer a broader range of
services than us. Some of our competitors have longer operating histories and
have established customer relationships. The possibility of the very largest
software providers entering into new markets is always a competitive threat in
the software industry. Many of these software providers are known for their
aggressive marketing tactics.

Our competitors may be able to develop technologies more effectively or may be
able to license their technologies on more favorable terms given their larger
customer base. Competitors may also adopt more aggressive pricing or licensing
policies than us, which may hinder our ability to penetrate the market and
license our technologies.

In addition, increased competition is likely to result in price reductions,
reduced gross margins and an increased number of competitors competing for
market share, any of which could seriously harm our ability to generate revenues
and our results of operations. We expect competition to intensify in the future
because current and new competitors can enter our market with little difficulty,
and our competitors may sell their software at reduced prices.

OUR PRODUCTS WILL BECOME OBSOLETE IF WE DO NOT UPGRADE AND IMPROVE OUR PRODUCTS
AND DEVELOP NEW TECHNOLOGIES.

The success of our products and our ability to sublicense our technologies and
to develop a competitive advantage in the market will depend on our ability to
improve our products and develop new and innovative technologies. Our operations
will be at risk if our products are not continually upgraded and improved. The
high technology industry is characterized by a consistent flow of new product
and service offerings, which may render existing products and services obsolete.

OUR SUCCESS DEPENDS ON OUR ABILITY TO PREVENT OTHERS FROM INFRINGING ON OUR
TECHNOLOGIES.

Our success is heavily dependent upon proprietary technology. To protect our
proprietary technology, we rely principally upon copyright and trade secret
protection. There can be no assurance that the steps taken by us in this regard
will be adequate to prevent misappropriation or independent third-party
development of our technology. Further, the laws of certain countries in which
we intend to license our technologies or products may be inadequate to protect
us. We do not include in our software any mechanism to prevent or inhibit
unauthorized use, but we generally require the execution of an agreement that
restricts unauthorized copying and use of our products. If unauthorized copying
or misuse of our products were to occur, our business and results of operations
could be materially adversely affected. While the disclosure and use of our
proprietary technology, know-how and trade secrets are generally controlled
under agreements with the parties involved, we cannot assure you that all
confidentiality agreements will be honored, that others will not independently
develop similar or superior technology, that disputes will not arise concerning
the ownership of intellectual property, or that dissemination of our proprietary
technology, know-how and trade secrets will not occur.

INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD IMPAIR OUR
BUSINESS.

We believe that our products and technology do not infringe patents or other
proprietary rights of third parties. There can be no assurance however those
third parties will not claim that our current or future products infringe such
rights of third parties. We expect that software developers will increasingly be
subject to such claims as the number of products and competitors providing games
software and services grow and overlap occur. Any such claim, with or without
merit, could result in costly litigation or require us to enter into royalty or
licensing agreements in order to obtain a license to continue to develop and
market the affected products. There can be no assurance that we would prevail in
any such action or that any license (including licenses proposed by third
parties) would be made available on commercially acceptable terms, if at all. If
we become involved in litigation over proprietary rights, it could consume a
substantial portion of our managerial and financial resources, which could have
a material adverse effect on our business and financial condition.

OUR ABILITY TO LICENSE OUR TECHNOLOGY WILL BE ADVERSELY AFFECTED IF OUR
TECHNOLOGY'S SECURITY MEASURES FAIL.

Our technologies incorporate security and authentication protections designed to
allow licensees to protect certain personal information of players, such as
credit card numbers, player information and player account balances. We cannot
predict that whether events or developments will result in a compromise or
breach of the technology we use to protect a player's personal information. If
the security measures in our software fail, licensees may lose many customers
and our ability to license our technologies will be adversely affected.

Furthermore, the servers and computer systems of licensees may be vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions,
which could disrupt their operations and their ability to pay us licensing fees.
Any material failure of such systems may have a material affect on our business.
We may need to expend significant additional capital and other resources to
protect against a security breach or to alleviate problems caused by any
breaches. We cannot assure you that we can prevent all security breaches.

ERRORS OR DEFECTS IN OUR SOFTWARE PRODUCTS COULD DIMINISH DEMAND FOR OUR
PRODUCTS, INJURE OUR REPUTATION AND REDUCE OUR OPERATING RESULTS.

WE MAY NEED TO CHANGE THE MANNER IN WHICH WE INTEND TO CONDUCT A PORTION OF OUR
BUSINESS IF GOVERNMENT REGULATION INCREASES.

A portion of our business involves the licensing of software used to conduct
games-for-pay, or gambling the Internet and otherwise. The regulation of the
gambling industry is complex, intensive and constantly changing. The adoption or
modification of laws or regulations relating to Internet gambling could
adversely affect the manner in which we currently conduct this portion of our
business. Many countries are currently struggling with issues surrounding
Internet gambling. More specifically, they are considering the merits,
limitations and enforceability of prohibition, regulation or taxation of
wagering and games transactions that are transacted over the Internet. There are
significant differences of opinion and law. In addition, the growth and
development of the market for online commerce may lead to more stringent
consumer protection laws that may impose additional burdens on us. Laws and
regulations directly applicable to games, communications or commerce over the
Internet are becoming more prevalent.

The law of the Internet, however, remains largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws such as those governing intellectual property, privacy,
libel and taxation apply to the Internet. In order to comply with new or
existing laws regulating online commerce, we may need to modify the manner in
which we do business, which may result in additional expenses. We may need to
hire additional personnel to monitor our compliance with applicable laws.

We are not aware of any regulations or laws that prohibit the development and
the licensing of Internet games software that may potentially be used in
violation of applicable statutes. It is possible that our planned activities,
even though we currently do not operate Internet casinos or otherwise directly
engage in the gambling business, may be alleged to violate an applicable statute
based on an interpretation of the statute or based on a future change of law or
interpretation or enforcement policy. Such allegations could result in either
civil or criminal proceedings brought by governmental or private litigants. As a
result of such proceedings, we could incur substantial litigation expense,
fines, diversion of the attention of key employees, and injunctions or other
prohibitions preventing us from engaging in various anticipated business
activities. Such an outcome would have a material adverse effect on our business
and our results of operations.

BECAUSE WE INTEND TO OPERATE IN MULTIPLE INTERNATIONAL MARKETS, WE ARE SUBJECT
TO ADDITIONAL RISKS.

We currently sell our software products in a number of countries and we intend
to enter additional geographic markets. Our business is subject to risks, which
often characterize international markets, including:

o potentially weak protection of intellectual property rights;

o economic and political instability;

o import or export licensing requirements;

o trade restrictions;

o difficulties in collecting accounts receivable;

o longer payment cycles;

o unexpected changes in regulatory requirements and tariffs;

o seasonal reductions in business activities in some parts of the world, such as
during the summer months in Europe;

o fluctuations in exchange rates; and

o potentially adverse tax consequences.

IF WE ARE NOT ABLE TO MANAGE GROWTH OF OUR BUSINESS, OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS WILL BE NEGATIVELY AFFECTED.

We believe that rapid growth and expansion could cause significant strains on
our managerial, operational, financial and other resources. Any failure to
manage the anticipated growth and expansion of our business could have a
material adverse effect on our financial condition.

THE LOSS OF OUR KEY MANAGEMENT PERSONNEL MAY ADVERSELY AFFECT OUR BUSINESS.

We depend on a relatively small number of key employees, including Shimon
Citron, our Chief Executive Officer, , the loss of any of whom could have an
adverse affect on the financial performance of our business. Even though we have
employment agreements with certain of these individuals, we cannot assure you
that they will continue their service with us.

IF WE ARE UNABLE TO HIRE AND RETAIN SKILLED PERSONNEL, OUR BUSINESS AND
FINANCIAL RESULTS WILL BE NEGATIVELY AFFECTED.

Our success depends to a significant extent on our ability to identify, hire and
retain skilled personnel. The software industry is characterized by a high level
of employee mobility and aggressive recruiting among competitors for personnel
with technical, marketing, sales, product development and management skills. We
may not be able to attract and retain skilled personnel or may incur significant
costs in order to do so. If we are unable to attract additional qualified
employees or retain the services of key personnel, our business and financial
results could be negatively impacted.

OUR OFFICERS, DIRECTORS AND FOUNDING SHAREHOLDERS CONTROL A SIGNIFICANT PORTION
OF OUR OUTSTANDING COMMON STOCK. ACCORDINGLY, OUR OUTSIDE SHAREHOLDERS MAY NOT
COLLECTIVELY OWN ENOUGH SHARES TO SIGNIFICANTLY INFLUENCE MATTERS THAT ARE VOTED
UPON BY OUR SHAREHOLDERS, INCLUDING THE ELECTION OF DIRECTORS.

Our officers, directors and founding shareholders own approximately 19% of our
issued and outstanding stock. We do not have cumulative voting in the election
of directors. Thus, purchasers of our common stock may not be able to affect the
election of any directors to our Board of Directors.

RISKS RELATED TO OUR COMMON STOCK

THE LIMITED MARKET FOR OUR SHARES WILL MAKE OUR STOCK PRICE MORE VOLATILE.
THEREFORE, YOU MAY HAVE DIFFICULTY SELLING YOUR SHARES.

The market for our common stock is limited and we cannot assure you that a
larger market will ever be developed or maintained. Currently, our common stock
is traded on the Over-The-Counter Bulletin Board. Securities traded on the OTC
Bulletin Board typically have low trading volumes. Market fluctuations and
volatility, as well as general economic, market and political conditions, could
reduce our market price. As a result, this may make it difficult or impossible
for our shareholders to sell our common stock. In addition, unlike NASDAQ and
the various international stock exchanges, there are few corporate governance
requirements imposed on OTC Bulletin Board-traded companies.

OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC, AND THE
TRADING MARKET IN OUR COMMON STOCK IS LIMITED. THIS MAKES TRANSACTIONS IN OUR
COMMON STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF YOUR SHARES.

The Securities and Exchange Commission has adopted Rule 3a51-1 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:

o that a broker or dealer approve a person's account for transactions in penny
stocks; and

o the broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to be
purchased

In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:

o obtain financial information and investment experience objectives of the
person; and

o make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and experience
in financial matters to be capable of evaluating the risks of transactions in
penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Securities and Exchange
Commission relating to the penny stock market, which, in highlight form:

o sets forth the basis on which the broker or dealer made the suitability
determination; and

o that the broker or dealer received a signed, written statement from the
investor prior to the transaction.

Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in its market
value.

Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.

RISKS RELATED TO OUR MARKETING ACTIVITY

ONLINE GAMING REGULATION MAY CHANGE AND AS A RESULT, OUR ACTIVITIES MAY BE
CONSIDERED ILLEGAL BY RELEVANT AUTHORITIES.

There is uncertainty as to the legality of online gaming in most countries and
in many countries, including the United States, our activities would be
considered to be illegal by relevant authorities. In several countries where
online gaming may be illegal, companies in the gaming business rely on the
apparent unwillingness or inability of regulators generally to bring actions
against businesses and persons with no physical presence in the country
concerned. However, authorities in certain jurisdictions have taken indirect
steps to restrict online gaming by seeking to prevent or deter payment
processors, media providers and other suppliers from transacting with online
gaming businesses. The application or enforcement of existing gaming laws or
regulations, a change in sentiment by regulatory authorities or the enactment of
new legislation prohibiting or restricting online gaming (or services used by
online gaming businesses) could severely and adversely impact our proposed
business and financial position.

We, through a third party service provider, will depend on banks, credit card
companies, payment processors and other financial institutions, networks and
suppliers to enable funds to be paid in and withdrawn by customers. Disruption
of those relationships through, for example, the enactment of any legislation
prohibiting or restricting the use of credit cards or other bank instruments for
online gaming transactions, the tightening of money laundering regulations or
the relevant authorities taking action against or exerting pressure on banks,
credit card companies, payment processors and other financial institutions,
networks and suppliers to cease transacting with online gaming businesses could
severely and adversely affect our business and financial position.

It is possible that our planned activities may be alleged to violate an
applicable statute based on an interpretation of the statute or based on a
future change of law or interpretation or enforcement policy. Such allegations
could result in either civil or criminal proceedings brought by governmental or
private litigants. As a result of such proceedings, we could incur substantial
litigation expense, fines, diversion of the attention of key employees, and
injunctions or other prohibitions preventing various anticipated business
activities. Such an outcome would have a material adverse effect on our business
and our results of operations.

FAILURE OF THIRD PARTY SYSTEMS ON WHICH WE RELY, MAY ADVERSELY IMPACT OUR
REPUTATION, REVENUES AND PROSPECTS.

We, through our subsidiary Get21, expect to rely on our client gaming operators'
systems to prevent collusion, fraud, under-age gaming, money laundering and
other unacceptable and illegal activities by players. Failure of the system to
put in place effective policies and procedures to prevent these activities by
such operators may expose it to enforcement actions by relevant authorities and
would be likely to have a material adverse impact on our reputation and
consequently upon our revenues, profits and future prospects.

WE RELY ON THIRD PARTIES' SERVERS AND THE FAILURE OF SUCH SERVERS MAY HARM OUR
BUSINESS.

We, through our subsidiary Get21, expect to depend on third parties for the
hosting of data servers and for the physical security of the servers. We,
through our suppliers, will maintain a fully functional back-up site which
should be operational in the event of failure of the main server site and should
result in services being available again within minutes of such failure.
However, this downtime could result in increased costs and lost revenues which
would be detrimental to our business.

STRONG COMPETITION AND A RAPIDLY EVOLVING MARKET MAY FORCE US TO LOWER THE SHARE
OF REVENUES WE ARE ENTITLED TO.

Our competitors have longer operating histories and significantly greater
financial, technical, marketing and other resources than ours. Our competitors
may respond to new or emerging technologies and changes in customer requirements
faster and more effectively than us. We may, in response, be forced to lower our
share of the revenues or agree to other revenue sharing terms with our
licensees.

THE PROMOTION OF OUR SERVICES DEPENDS ON THE INTERNET.

In order for our company to be able to promote its services via the internet,
the infrastructure of the internet must continue to be reliable. There can be no
assurance that the infrastructure of the internet will be able to support the
demands placed on it by the expected growth in internet usage. Predictions which
have been made about growth in internet usage depend on a number of assumptions,
for example, that consumer confidence in the internet will increase as a result
of the adoption of new security protocols, or that the cost of access to the
internet will be reduced. Given that the internet is dependent upon relations
between a large number of third parties, there can be no assurance that it will
continue to develop in a satisfactory manner. Indeed, there can be no assurance
that the internet's infrastructure will continue to be able to support the
demands currently placed upon it. Any failure of the internet infrastructure to
support these demands may have a material adverse impact on our business.
Equally, the growth in use of the internet by consumers for e-commerce purposes
may not continue, or use of the internet may decline in the future.

WE DEPEND ON INTERNATIONAL PAYMENT PROCESSING SYSTEMS AND ANY INTERFERENCE WITH
THE PROVISION OF SUCH SERVICES MAY HARM OUR BUSINESS.

Our client gaming operators will be dependent upon successful commercial
relationships with payment processing systems provided by third parties. Any
interference with the provision of these services, or the enactment of any
legislation prohibiting the use of credit or debit cards and certain bank
instruments for gaming transactions, or the tightening of money laundering
regulations, may adversely affect the business of our clients and consequently
our business. For example, since 2002 a number of North American credit card
issuers have refused to allow the use of their credit cards for internet betting
and gaming transactions, the most prominent of which are Citibank, Bank of
America and Providence Bank, and it is possible that other card issuers might in
the future adopt similar or even more stringent policies. In light of this, it
may become more difficult for players to deposit money in their online gaming
accounts. In addition, many governments may seek to impede the online gaming
industry by introducing legislation designed to prevent customers or financial
institutions based in their respective jurisdictions from transferring money to
online gaming operations or by seeking to impose a tax on such transfers.

TECHNOLOGY FAILURES MAY DAMAGE THE INTEGRITY AND OPERATION OF OUR SYSTEMS.

The successful operation of our business will depend on our client gaming
operators maintaining the integrity and operation of our and their respective
computer and communication systems. However, these systems and operations are
vulnerable to damage or interruption based on events which are beyond our
control.

FAILURE TO MAINTAIN AND ENHANCE OUR BRAND NAME MAY IMPAIR OUR ABILITY TO EXPAND
OUR BASE OF CUSTOMERS, AND HARM OUR BUSINESS.

Our success will be dependant on the creation and the maintenance of one or more
brands, and if the company is not able to maintain and enhance its brands, its
ability to expand its base of customers, advertisers and affiliates will be
impaired and its business and operating results will be harmed. As the online
gaming market has become increasingly competitive, maintaining and enhancing a
company's brands has become increasingly difficult and expensive.

WE CANNOT GUARANTEE THE SUCCESS OF BLACKJACK TOURNAMENTS APPLICATION CONCEPT,
WHICH IS MATERIAL TO OUR SUCCESS.

The blackjack tournaments concept is a new game introduced to the online gaming
world. Although the concept of multi-player tournaments is known in the gaming
world in other games (poker and backgammon, for example), there can be no
assurance that the concept of blackjack tournaments will be attractive to the
online gaming world, in which case our business may be adversely materially
affected.

RISKS RELATED TO OUR LOCATION IN ISRAEL

POTENTIAL POLITICAL, ECONOMIC AND MILITARY INSTABILITY IN ISRAEL MAY ADVERSELY

AFFECT OUR RESULTS OF OPERATIONS.

Our principal offices and operations are located in Israel. Accordingly,
political, economic and military conditions in Israel directly affect our
operations. Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors. A state
of hostility, varying in degree and intensity, has led to security and economic
problems for Israel. Since October 2000, there has been an increase in
hostilities between Israel and the Palestinians, which has adversely affected
the peace process and has negatively influenced Israel's relationship with its
Arab citizens and several Arab countries. Such ongoing hostilities may hinder
Israel's international trade relations and may limit the geographic markets,
where we can sell our products. Furthermore, the United States Department of
State has issued advisories regarding travel to Israel, impeding the ability of
travelers to attain travel insurance. Furthermore, during July and August of
2006 there have been hostilities between Israel and the Hezbollah terrorist
organization operating in Lebanon, and the north of Israel has been hit by
rockets launched from Lebanon. Any hostilities involving Israel or threatening
Israel, or the interruption or curtailment of trade between Israel and its
present trading partners, could adversely affect our operations.

OUR RESULTS OF OPERATIONS COULD BE NEGATIVELY AFFECTED BY THE OBLIGATIONS OF OUR
PERSONNEL TO PERFORM MILITARY SERVICE.

Our operations could be disrupted by the absence for significant periods of one
or more of our executive officers, key employees or a significant number of
other employees because of military service. Some of our executive officers and
some of our male employees in Israel are obligated to perform military reserve
duty, which could accumulate annually from several days to up to two months in
special cases and circumstances. The length of such reserve duty depends, among
other factors, on an individual's age and prior position in the army. In
addition, if a military conflict or war occurs, these persons could be required
to serve in the military for extended periods of time. Any disruption in our
operations as the result of military service by key personnel could harm our
business.

UNDER CURRENT ISRAELI LAW, WE MAY NOT BE ABLE TO ENFORCE COVENANTS NOT TO
COMPETE AND THEREFORE MAY BE UNABLE TO PREVENT OUR COMPETITORS FROM BENEFITING
FROM THE EXPERTISE OF SOME OF OUR FORMER EMPLOYEES.

Israeli courts have required employers seeking to enforce non-compete
undertakings against former employees to demonstrate that the former employee
breached an obligation to the employer and thereby caused harm to one of a
limited number of legitimate interests of the employer recognized by the courts
such as, the confidentiality of certain commercial information or a company's
intellectual property. We currently have non-competition clauses in the
employment agreements of most of our employees. The provisions of such clauses
prohibit our employees, if they cease working for us, from directly competing
with us or working for our competitors. In the event that any of our employees
chooses to work for one of our competitors, we may be unable to prevent our
competitors from benefiting from the expertise of our former employees obtained
from us, if we cannot demonstrate to the court that a former employee breached a
legitimate interest recognized by a court and that we suffered damage thereby.

IT COULD BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST OUR OFFICERS, OUR
DIRECTORS AND US.

All of our executive officers and directors are non-residents of the United
States, and virtually all of our assets and the assets of these persons are
located outside the United States. Therefore, it could be difficult to enforce a
judgment obtained in the United States against us or any of these persons.

ITEM 2. DESCRIPTION OF PROPERTY

On August 31, 2004, we entered into an agreement to lease premises located at
Atidim Park in Tel-Aviv, Israel. This location consists of approximately 750
square meters of office space and the rent is approximately $7,500 per month, as
of December 31, 2006. The term of this lease is for five years beginning
December 1, 2004. The rent on this property increases once every 12 months by 5%
of the space rate ($0.70 per sq/ft). We do not own or lease any real property
elsewhere. In June 2006, we entered into an agreement to rent an additional 270
square meters at the same building on the same terms as the first agreement and
for the same period. We believe that our current space is adequate for our
needs.

ITEM 3. LEGAL PROCEEDINGS

We are not currently a party to, nor is any of our property currently the
subject of, any pending legal proceeding. None of our directors, officers or
affiliates is involved in a proceeding adverse to our business or has a material
interest adverse to our business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders in the last quarter of
our fiscal year ended December 31, 2006.

PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES

MARKET FOR OUR SECURITIES

Our common stock began quotation on the Over-the-Counter Bulletin Board during
the third quarter of 2003, and is currently quoted under the symbol "ZFPI.OB."
The following sets forth the high and low bid quotations for the common stock as
reported on the Over-the-Counter Bulletin Board for each quarter in the last two
fiscal years. These quotations reflect prices between dealers, do not include
retail mark-ups, markdowns, and commissions and may not necessarily represent
actual transactions. The prices are adjusted to reflect all stock splits.

HIGH LOW

----- -----
FISCAL YEAR ENDED DECEMBER 31, 2006
First Quarter Ended March 31, 2006 $1.11 $0.45
Second Quarter Ended June 30, 2006 $1.17 $0.71
Third Quarter Ended September 30, 2006 $0.85 $0.60
Fourth Quarter Ended December 31, 2006 $0.65 $0.35

FISCAL YEAR ENDED DECEMBER 31, 2005
First Quarter Ended March 31, 2005 $1.84 $1.74
Second Quarter Ended June 30, 2005 $1.65 $1.48
Third Quarter Ended September 30, 2005 $1.20 $1.10
Fourth Quarter Ended December 31, 2005 $0.70 $0.68

As of March 26, 2007, there were 74 stockholders of record of our common stock.

DIVIDEND POLICY

Historically, we have not declared or paid any cash dividends on our common
stock. Any future determination to pay dividends on our common stock will depend
upon our results of operations, financial condition and capital requirements,
applicable restrictions under any contractual arrangements and such other
factors deemed relevant by our Board of Directors.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The following discussion and analysis should be read in conjunction with the
audited financial statements and notes thereto included elsewhere in this annual
report. This discussion should not be construed to imply that the results
discussed herein will necessarily continue into the future, or that any
conclusion reached herein will necessarily be indicative of actual operating
results in the future. Such discussion represents only the present assessment by
our management.

Our financial statements are stated in United States Dollars (US$) and are
prepared in accordance with United States generally accepted accounting
principles (U.S. GAAP).

This discussion contains forward-looking statements that reflect our plans,
estimates and beliefs. Our actual results could differ materially from those
anticipated in these forward-looking statements. See "Cautionary Note Regarding
Forward-Looking Statements" elsewhere in this annual report.

OUR BUSINESS

We are a software and technology developer and provider to companies that
service the interactive gaming industry, delivering cross-platform systems that
are built for mass participation gaming over mobile devices, TV and the
internet. Our software provides and supports play-for-fun and play-for-real
interactive games (currently such play-for-real gaming solutions are only
provided in the United Kingdom where fixed odds gaming are permitted by licensed
bookmakers).

We enter into license and/or revenue-sharing agreements with our customers under
which the customers use our software and technology to offer games to their
subscribers and pay us a fixed fee and/or a percentage of the net revenues
generated from those games.

We devote substantially all of our efforts toward conducting research,
development and marketing of our technology. In the course of these activities,
we have sustained operating losses and expect such losses to continue in the
foreseeable future. To date, we have not generated sufficient revenues to
achieve profitable operations or positive cash flow from operations. On December
31, 2006, we had a working capital surplus of $2,756,780 and an accumulated
deficit of $13,274,994. There is no assurance that profitable operations, if
ever achieved, will be sustained on a continuing basis. During the year ended
December 31, 2006, we derived 84% of our revenues from three major customers.

We refer in this discussion to the fiscal years ended December 31, 2006 and
December 31, 2005, as "2006," and "2005," respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements are prepared in accordance with U.S. GAAP.
In connection with the preparation of the financial statements, we are required
to make assumptions and estimates about future events, and apply judgments that
affect the reported amounts of assets, liabilities, revenue, expenses and the
related disclosure. We base our assumptions, estimates and judgments on
historical experience, current trends and other factors that management believes
to be relevant at the time the consolidated financial statements are prepared.
On a regular basis, management reviews our accounting policies, assumptions,
estimates and judgments to ensure that our financial statements are presented
fairly and in accordance with U.S. GAAP. However, because future events and
their effects cannot be determined with certainty, actual results could differ
from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 2 of the notes to the
consolidated financials statements, "Significant Accounting Policies", included
elsewhere in this annual report.

IMPAIRMENT OF LONG-LIVED ASSETS:

Our long-lived assets are reviewed for impairment in accordance with Statement
of Financial Accounting Standard ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long- Lived Assets" ("SFAS No. 144") whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to the future undiscounted cash
flows expected to be generated by the asset. If such asset is considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value. As of December 31, 2006, no
impairment losses have been identified.

REVENUE RECOGNITION

We account for revenues from software applications agreements in accordance with
Statement of Position 97-2, "Software Revenue Recognition", as amended ("SOP
97-2"). The revenue from license fees is recognized when persuasive evidence of
an agreement exists, delivery of the product has occurred, no significant
obligations with regard to implementation remain, the fee is fixed or
determinable and collectibility is probable.

SOP 97-2 specifies that extended payment terms in a licensing arrangement may
indicate that the license fees are not deemed to be fixed or determinable. If
the fee is not fixed or determinable, revenue is recognized as payments become
due from the customer unless collection is not considered probable then revenue
is recognized as payments are collected from the customer, provided that all
other revenue recognition criteria have been met.

The arrangements that include multiple elements are usually arrangements where
we sell software products and Post Contract Support (PCS). For these multiple
elements, SOP 97-2 requires that the fair value of each component in a multiple
element arrangement will be determined based on the vendor's specific objective
evidence (VSOE) for that element, and revenue is allocated to each component
based on its fair value. SOP 98-9 requires that revenue be recognized under the
"residual method" when VSOE does not exist for all the delivered elements, VSOE
of fair value exists for all undelivered elements, and all other SOP 97-2
criteria are met. Under the residual method, any discount in the arrangement is
allocated to the delivered elements. The specific objective evidence for the PCS
is established by the price charged on separate PCS renewal contracts. The
revenue associated with the delivered elements is recognized using the residual
method discussed above.

Revenues from software licenses that require significant customization,
integration and installation that take a short period of time to complete are
recognized in accordance with Statement of Position 81-1, "Accounting for
Performance of Construction - Type and Certain Production Type Contracts" ("SOP
81-1"),using the complete contract accounting method. After delivery, if
uncertainty exists about customer acceptance of the software, license revenue is
not recognized until acceptance. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are first determined, in
the amount of the estimated loss on the entire contract. As of December 31,
2006, no such estimated losses were identified.

We're entitled to royalties from revenue sharing arrangements upon sublicensing
of our products to end-users. Royalties from revenue sharing arrangements are
recognized when such royalties are reported to us.

FOREIGN CURRENCY

Our revenues are generated in U.S. dollars ("dollar"). In addition a substantial
portion of our costs are incurred in U.S. dollars. Our management believes that
the dollar is the primary currency of the economic environment in which we are
operate. Thus, our functional and reporting currency and certain of our
subsidiaries is the U.S. dollar.

Accordingly, monetary accounts maintained in currencies other than the dollar
are remeasured into U.S. dollars in accordance with SFAS No. 52, "Foreign
Currency Translation" ("SFAS No. 52"). All gains and losses of the remeasurement
of monetary balance sheet items are reflected in the consolidated statements of
operations as financial income or expenses as appropriate.

The financial statements of Zone4Play (UK) Limited, whose functional currency
has been determined to be its local currency, have been translated into dollars.
All balance sheet amounts have been translated using the exchange rates in
effect at each balance sheet date. Statement of operation amounts have been
translated using the average exchange rate prevailing during the period. The
resulting translation adjustments are reported as a separate component of
accumulated other comprehensive loss in shareholder's equity.

ACCOUNTING FOR STOCK-BASED COMPENSATION:

Effective January 1, 2006, we adopted the provisions of SFAS No. 123 (revised
2004), "Share-Based Payment" ("SFAS123(R)"), which requires us to measure all
employee stock-based compensation awards using a fair value method and record
the related expense in the financial statements. We elected to use the modified
prospective method of adoption which requires that compensation expense be
recorded in the financial statements over the expected requisite service period
for any new options granted after the adoption of SFAS 123(R) as well as for
existing awards for which the requisite service has not been rendered as of the
date of adoption and requires that prior periods not be restated.

ACCOUNTING FOR INCOME TAXES

Significant judgment is required in determining our worldwide income tax expense
provision. In the ordinary course of a global business, there are many
transactions and calculations where the ultimate tax outcome is uncertain. Some
of these uncertainties arise as a consequence of cost reimbursement arrangements
among related entities, the process of identifying items of revenue and expense
that qualify for preferential tax treatment and segregation of foreign and
domestic loss and expense to avoid double taxation. Although we believe that our
estimates are reasonable, the final tax outcome of these matters may be
different than the one which is reflected in our historical income tax
provisions and accruals. Such differences could have a material effect on our
income tax provision and net income (loss) in the period in which such
determination is made.

Our accounting for deferred taxes under SFAS No. 109, "Accounting for Income
Taxes" ("Statement 109"), involves the evaluation of a number of factors
concerning the realization of our deferred tax assets. In concluding that a
valuation allowance is required, we primarily consider such factors as our
history of operating losses and expected future losses in certain jurisdictions
and the nature of our deferred tax assets. Management currently believes that it
is more likely than not that the deferred tax regarding the carry forward of
losses and certain accrued expenses will not be realized in the foreseeable
future.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:

In February 2006, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 155, "Accounting for Certain Hybrid Financial Instruments, an Amendment of
FASB Statements No. 133 and 140". This statement permits fair value measurement
for any hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation. This statement is effective for all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins after September 15, 2006. We are currently
evaluating the impact of this statement, if any, on our consolidated financial
statements.

In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - an interpretation of FAS 109" ("FIN 48") This financial
interpretation clarifies the accounting for uncertainty in income taxes, and
prescribes a recognition threshold and measurement attributes for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on various related matters
such as derecognition, interest and penalties and disclosure. As applicable to
us, the interpretation prescribed by FIN 48 became effective commencing January
1, 2007. We are currently evaluating the impact that the adoption of FIN 48
would have on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This
standard establishes a framework for measuring fair value and expands related
disclosure requirements; however, it does not require any new fair value
measurement. As applicable to us, this statement will be effective as of the
year beginning January 1, 2008. We are currently evaluating the impact that the
adoption of FAS 157 would have on our consolidated financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) 108, which
expresses the Staff's views regarding the process of quantifying financial
statement misstatements. The bulletin was effective as of the year beginning
January 1, 2006. The implementation of this bulletin had no impact on our
consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." This standard permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. As applicable to us, this statement will be
effective as of the year beginning January 1, 2008. We are currently evaluating
the impact that the adoption of FAS 159 would have on our consolidated financial
statements.

In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans--An Amendment of FASB No.
87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 requires that the funded status
of defined benefit postretirement plans be recognized on the company's balance
sheet, and changes in the funded status be reflected in comprehensive income,
effective fiscal years ending after December 15, 2006. The adoption of this
statement did not have an impact on the consolidated financial statements.

RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED
DECEMBER 31, 2005

REVENUES AND COST OF REVENUES

Total revenues for 2006 increased by 56% to $1,656,379 from $1,062,420 in 2005.
The increase in revenues due to new contract with Golden Palace Ltd for the
license of our multiplayer tournaments blackjack, and for marketing services of
our website www.get21.com, and an increase in revenues from existing customers
such as Two Way TV Australia, Two Way Media Limited and Winner.com (UK) Ltd.,
and NDS Limited offset by licenses revenues to Cosmotrade Investment Ltd, CTE,
and Cablevision that we had in 2005, and a decrease in revenues from the Gaming
Channel.

Cost of revenues for 2006 increased by 42% to $426,052 from $299,958 for 2005.
Gross profit increased by 61% for 2006 to $1,230,327 from $762,462 in 2005. The
increase in the cost of revenues is attributable to amortization of the
technology which was acquired on April 2005 by acquiring the minority shares in
our SMS-TV subsidiary, MIXTV Ltd and to costs related to the marketing services
provided by our indirect subsidiary Get21 Ltd.

RESEARCH AND DEVELOPMENT

Research and development expenses for 2006 increased by 15% to $2,923,572 from
$2,549,635 for 2005. The increase is primarily attributable to our new projects
in the United Kingdom, which involve adapting our software to new systems and
platforms (ITV, mobile, internet, and participation TV by our subsidiary, MixTV
Ltd.), development of our multi player black jack tournaments application,
recruitment of employees, increased general and administrative expenses
allocated to the research and development department due to its growth and due
to accounting charges related to stock options under SFAS 123(R).

SALES AND MARKETING

Sales and marketing expenses for 2006 increased by 202% to $2,618,371 from
$867,473 for 2005. The increase in sales and marketing expenses is primarily
attributable to a portion of the amortization of deferred compensation to stock
options granted to our Chief Executive Officer in the amount of $926,036 and to
accounting charges related to stock options under SFAS 123(R), and due to our
marketing preparations for the launch of our get21.com site through our indirect
subsidiary Get21.

GENERAL AND ADMINISTRATIVE

General and administrative expenses for 2006 increased by 60% to $2,098,142 from
$1,308,735 for 2005. The increase in general and administrative expenses is
primarily attributable ,to salary increases, additional expenses in relation to
the possible admission of our shares to trade on AIM, a market operated by the
London Stock Exchange plc, to a portion of the amortization of deferred
compensation to stock options granted to our Chief Executive Officer in the
amount of $231,509, to expenses related to evaluation of the spin off of our
multi player black jack tournaments application and due to accounting charges
related to stock options under SFAS 123(R).

NET FINANCIAL EXPENSES

Financial (income) expenses, net for 2006 were $9,181 compared to $94 financial
expenses. The increase in the financial income is primarily attributable to
interest received from bank deposits offset by bank fees and exchange rates
between the U.S. dollar and the NIS and the British pound.

NET LOSS AND NET LOSS PER SHARE

We incurred a net loss of $6,424,951 ($0.21 per share) in 2006 compared to a net
loss of $3,965,375 ($0.17 per share) in 2005. The increased net loss is
primarily attributable to our increased operating expenses. Our weighted average
number of shares of common stock outstanding at December 31, 2005 was 23,524,407
shares versus 30,400,789 shares at December 31, 2006. The increase is mainly
attributable to the issuance of 8,234,485 shares of our common stock which were
sold on a private placement in March 2006, to the issuance of 30,000 shares of
our common stock which were issued to a service provider pursuant to a
consulting contract and to 14,583 shares of our common stock issued pursuant to
an option exercises by employees.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31 2006, our total current assets were $4,189,091 and our total
current liabilities were $1,432,311. At December 31, 2006, we had a working
capital surplus of $2,756,780 and an accumulated deficit of $13,347,994. We
finance our operations with a combination of securities issuances and revenues
from product sales.

We had working capital surplus of $2,756,780 on December 31, 2006 compared with
a working capital deficit of $20,093 on December 31, 2005. Cash and cash
equivalents on December 31, 2006 were $3,019,282, an increase of $2,415,247 from
the $604,035 reported on December 31, 2005. Cash balances increased in the year
ended December 31, 2006 primarily as a result of a stock issuance, offset by the
increase in our net loss for the year ended December 31, 2006.

Operating activities used cash of $4,270,617 in the year ended December 31,
2006. Cash used by operating activities in the year ended December 31, 2006
results primarily from a net loss of $6,424,951, a $916,630 increase in account
receivables, offset by a $1,823,842 increase in amortization of deferred
compensation, $655,737 of depreciation and amortization, $471,862 increase in
accrued expenses and other liabilities, and $79,750 of compensation related to
issuance of common stock and warrants to a service providers.

Investing activities used cash of $245,028 in the year ended December 31, 2006.
Cash used by investing activities in the year ended December 31, 2006 results
from the purchase of computer and software equipment and office furnishings.

Financing activities generated cash of $6,932,615 during the year ended December
31, 2006. Cash provided by financing activities for the year ended December 31,
2006 results primarily from a stock issuance offset slightly by repayments of
short term loans.

On January 27, 2005, we completed a private offering to accredited investors
under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506
promulgated thereunder, pursuant to which we sold an aggregate of 2,659,998
shares of common stock, $0.01 par value per share, for aggregate gross proceeds
of $3,989,999. We agreed to prepare and file with the Securities and Exchange
Commission a registration statement covering the resale of the common stock on
or before February 17, 2005 for certain investors. The registration statement
became effective on April 29, 2005 and therefore no liquidated damages needed to
be paid.

On March 24, 2006, pursuant to Section 4(2) of the Securities Act of 1933, as
amended, and Rule 506 promulgated thereunder, we completed an offering that
consisted of 6,234,485 units sold at a price of $.725 per unit. Each unit is
comprised of one share of our common stock (the "March 24 Shares") and a warrant
to purchase one share at an exercise price of $1.125 per share for a period of
36 months ("March 24 Warrants"), to certain accredited investors ("March 24
Investors") for aggregate gross proceeds of $4,520,000.

On March 30, 2006, pursuant to Section 4(2) of the Securities Act of 1933, as
amended, and Rule 506 promulgated thereunder, we completed an offering that
consisted of 2,000,000 units sold at a price of $1.00 per unit. Each unit is
comprised of one share of our common stock ("March 30 Shares") and a warrant to
purchase one share at an exercise price of $1.35 per share for a period of 36
months (" March 30 Warrants"), to certain accredited investors ("March 30
Investors") for aggregate gross proceeds of $2,000,000.

We agreed to prepare and file with the Securities and Exchange Commission a
registration statement covering the resale of the March 24 Shares and March 30
Shares and the shares underlying the March 24 Warrants and March 30 Warrants.
The registration statement became effective on June 6, 2006 and therefore no
liquidated damages needed to be paid.

On September 14, 2006, Gaming, RNG, and Golden Palace Limited ("Golden Palace"),
entered into an agreement, which was amended on January 10, 2007, under which
Golden Palace has agreed to invest $600,000 in RNG in return for 20% of the
ordinary shares of RNG. Pursuant to terms of this agreement, Golden Palace has
an option to acquire an additional 30% of the ordinary shares of RNG (but not
more than 50% of RNG or more than the amount owned by Gaming) at a price of
$100,000 per each additional percentage interest of the ordinary shares of RNG,
if the option is exercised on or before September 14, 2008; $180,000 per each
additional percentage interest of the ordinary shares of RNG, if the option is
exercised upon RNG becoming a public traded company or upon the completion of a
private placement of securities for consideration of not less than $4,000,000 to
third parties, at a company valuation of $18,000,000. Such option can be
exercised by Golden Palace during a period commencing on the date of the
agreement and terminating upon the earliest of: (1) September 14, 2008; (2) RNG
becoming a public company; or (3) completion by RNG of a private placement for
securities for consideration of not less than $4,000,000 by third parties, at a
company valuation of $18,000,000. . We currently hold 80% of RNG's share
capital. RNG is accounted under the equity method and accordingly we consolidate
its financial statements in which the minority interest represents Golden Palace
current holdings. We have recorded the call option granted to Golden Palace as a
derivative in the long -term liability section. The call option is being
measured at fair value and it is marked to market in accordance with "Accounting
for Freestanding Derivative Financial Instruments Indexed to, and Potentially
Settled in, the Stock of a Consolidated Subsidiary" (EITF 00-6).

Our management believes that we have sufficient funds to operate for the next 12
months, with additional funds anticipated from the performance of agreements
that we have entered with our current customers, from contracts that we expect
to execute in the near future and from our Blackjack Software related marketing
services. Nonetheless, we may raise additional funds through equity financings
in order to broaden our financial strength and liquidity.

OUTLOOK

We believe that our future success will depend upon our ability to enhance our
marketing services related to the Blackjack Software as well as our existing
products and solutions and introduce new commercially viable products and
solutions addressing the demands of the evolving markets. As part of the product
development process, we work closely with current and potential customers,
distribution channels and leaders in our industry to identify market needs and
define appropriate product specifications. Our current anticipated levels of
revenue and cash flow are subject to many uncertainties and cannot be assured.
In order to have sufficient cash to meet our anticipated requirements for the
next twelve months, we may be dependent upon our ability to obtain additional
financing. The inability to generate sufficient cash from operations or to
obtain the required additional funds could require us to curtail operations. We
will attempt to reduce our operating expenses from $450,000 a month to below
$250,000 per month and have already downsized our workforce from 70 employees to
61. This level of expenses and our cash balance as of December 31, 2006 and
accounts receivable due to us should be sufficient to allow us to meet our
anticipated requirements for at least the next twelve months.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off balance sheet arrangements that are reasonably likely to
have a current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A majority of our revenues and a portion of our expenses are transacted in U.S.
dollars and our assets and liabilities together with our cash holdings are
predominately denominated in U.S. dollars. However, the bulk of our expenses are
denominated in currencies other than the U.S. dollar, principally the British
pound and the Israeli NIS. Increases in the volatility of the exchange rates of
the British pound and the NIS versus the U.S. dollar could have an adverse
effect on the expenses and liabilities that we incur when remeasured into U.S.
dollars. We review our monthly expected non-U.S. dollar denominated expenditures
and look to hold equivalent non-U.S. dollar cash balances to mitigate currency
fluctuations and this has resulted in a foreign exchange expense of $14,332 and
$58,655 in 2005 and 2006, respectively.

As a result of such currency fluctuations and the conversion to U.S. dollars for
financial reporting purposes, we may experience fluctuations in our operating
results on an annual and a quarterly basis going forward. We have not in the
past, but may in the future, hedge against fluctuations in exchange rates.
Future hedging transactions may not successfully mitigate losses caused by
currency fluctuations. We expect to continue to experience the effect of
exchange rate fluctuations on an annual and quarterly basis, and currency
fluctuations could have a material adverse impact on our results of operations.

We invest our cash in high grade certificates of deposits, U.S. government and
agency securities and corporate bonds. Cash held by foreign subsidiaries is
generally held in short-term time deposits denominated in the local currency.

Interest income and gains from bank deposits were $67,836 in 2006 and $14,238 in
2005.

We are exposed primarily to fluctuations in the level of U.S. interest rates. To
the extent that interest rates rise, fixed interest investments may be adversely
impacted, whereas a decline in interest rates may decrease the anticipated
interest income for variable rate investments.

We are exposed to financial market risks, including changes in interest rates.
We typically do not attempt to reduce or eliminate our market exposures on our
investment securities because the majority of our investments are short-term. We
do not have any derivative instruments.

ITEM 7. FINANCIAL STATEMENTS

The financial statements required to be filed pursuant to this Item 7 are
included elsewhere in this annual report. Reference is made to the Index to
Financial Statements on page F-1.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

On June 29, 2006, we filed a Current Report on Form 8-K which was amended on
July 10, 2007, to report the change in our independent registered public
accounting firm . Our Audit Committee authorized the engagement of Ziv Haft, a
member of the BDO Network ("BDO"), as the new independent auditor to audit our
financial statements. This appointment replaced Kost, Forer, Gabbay & Kassierer
a Member of Ernst & Young Global ("E&Y") which was dismissed by our Audit
Committee effective on June 23, 2006 as the independent accountant engaged to
audit our financial Statements. E&Y performed the audit of the our financial
statements since inception. The reports of E&Y on the financial statements for
the fiscal years ended December 31, 2004 and December 31, 2005 contained no
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles. During the fiscal years
ended December 31, 2004 and December 31, 2005 and the subsequent interim period
prior to its dismissal, there were no disagreements with E&Y on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements if not resolved to E&Y's satisfaction
would have caused E&Y to make reference to this subject matter of the
disagreements in connection with its reports or any reportable events as defined
in Item 304(a)(1)(iv)(B) of Regulation S-B, promulgated under the Securities
Exchange Act of 1934, as amended.

ITEM 8A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"). These
rules refer to the controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports
that it files under the Exchange Act is recorded, processed, summarized and
reported within required time periods. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by an issuer in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
issuer's management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. As of December 31, 2006 (the
"Evaluation Date"), we carried out an evaluation, under the supervision and with
the participation of our management, including our principal executive officer
and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based upon that evaluation,
the principal executive officer and principal financial officer have concluded
that, as of the Evaluation Date, such disclosure controls and procedures were
effective.

NO CHANGES IN INTERNAL CONTROLS

We maintain a system of internal accounting controls that are designed to
provide reasonable assurance that our transactions are properly recorded and
reported and that our assets are safeguarded against unauthorized or improper
use. As part of the evaluation of our disclosure controls and procedures, we
evaluated our internal controls. There were no changes to our internal control
over financial reporting during the quarter ended December 31, 2006, that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

ITEM 8B. OTHER INFORMATION

None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT

The following table identifies our current executive officers and directors:

NAME AGE CAPACITIES IN WHICH SERVED IN CURRENT POSITION SINCE
---- --- -------------------------- -------------------------

Shimon Citron 51 Chief Executive Officer and Director August 2001
Uri Levy 37 Chief Financial Officer and Corporate Secretary December 2003
Haim Tabak 60 Chief Operating Officer January 2003
Shlomo Rothman 61 Director February 2004
Oded Zucker 41 Director February 2004
Adiv Baruch 43 Director January 2006
Liron Edrey 31 Director April 2006
Ronen Zadok 48 Director April 2006

Officers are elected annually by the board of directors (subject to the terms of
any employment agreement) at our annual meeting, to hold such office until an
officer's successor has been appointed, unless an officer sooner dies, resigns
or is removed by the board. Some of our directors and executive officers also
serve in various capacities with our subsidiaries. There are no family
relationships among any of our directors and executive officers. Directors are
elected annually by the stockholders or, in the event of vacancy by the
directors of the company.

BACKGROUND OF EXECUTIVE OFFICERS

SHIMON CITRON, CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr. Citron founded
Zone4Play in 2001 and he has held the positions of Chief Executive Officer and
director since Zone4Play's inception. Mr. Citron is also the Chief Executive
Officer and a director of each of our wholly owned subsidiaries in Israel and in
the United Kingdom. He has held these positions since 2001. From 1999 to 2001,
Mr. Citron was the founder and President of Gigi Media Ltd., a private company
based in Israel engaged in the business of the development of Internet search
engines. From 1994 to 1999, he managed his own private investments in a number
of startup companies in Israel.

URI LEVY, CHIEF FINANCIAL OFFICER. Mr. Levy joined us as Chief Financial Officer
in December 2003. Prior to joining us, Mr. Levy was Vice President, Finance of
Loram Ltd., a company engaged in the business of real estate, from June 2002
until December 2003, and as a controller of EasyRun Communications Software
Systems from 1999 until June 2003. Mr. Levy is a Certified Public Accountant in
Israel and has a LL.M. Degree from the Bar Ilan University in Ramat Gan, Israel.

HAIM TABAK, CHIEF OPERATING OFFICER. Mr. Tabak joined us in January 2003 as
Chief Operating Officer. Prior to joining us, Mr. Tabak was General Manager of
Winner.com Ltd., Tel Aviv, Israel, a subsidiary of Winner.com, Inc., from 2000
to 2002. Winner.com is engaged in the business of marketing and advertising for
Internet sites. From 1998 to 1999, he held the position of Chief Operating
Officer for Transtech Systems Ltd, an IT logistics solution provider located in
Tel Aviv.

SHLOMO ROTHMAN, DIRECTOR. Mr. Rothman has been a member of our board of
directors since January 2004. Since February 2002, Mr. Rothman has been the
President and Chief Executive Officer of S.R. Consulting Ltd., a private company
that provides financial services, investment banking, mergers and acquisitions
and project financing. From 1987 until 2002, Mr. Rothman was Senior Deputy
General Manager of the First International Bank in Israel, a Safra bank in
Israel. From 1987 to 1999, he was the Head of Marketing, Capital Markets and
Investments Divisions of the First International Bank. From 1999 until 2002, Mr.
Rothman was also the head of the Retail and Commercial Banking Division of the
First International Bank. Mr. Rothman was a Director of the Tel Aviv Stock
Exchange from 1989 until 2000 and a Director of Maalot-Israeli Rating Co. from
1995 until 2000. He is currently a Director of the Menorah-Gaon Investment House
Ltd. and Edmond de Rothschild-Portfolio Management Ltd., both located in Israel.

ODED ZUCKER, DIRECTOR. Mr. Zucker has been a member of our board of directors
since January 2004. Mr. Zucker has been the United Kingdom Senior Vice President
for Prudential Bache Inc. since 1995. He was also a co-founder of the Israeli
operations for Prudential Bache. Mr. Zucker is a registered representative with
the New York Stock Exchange and the NASD. Mr. Zucker is also a Director of Nisko
Projects Electronics and Communication Ltd., which currently trades on the Tel
Aviv Stock Exchange in Israel.

ADIV BARUCH, DIRECTOR. Mr. Baruch is the President and Chief Executive Officer
of BOS Better On-Line Solutions Ltd. In addition, Mr. Baruch is actively
involved as the Chairman of the Israeli Export Institute Hi-Tech and Telecom
Division. Prior to joining BOS Mr. Baruch served as Executive Vice President
Business Development of Ness Technologies, the largest IT firm in Israel, and is
considered one of the founding members of the company. Mr. Baruch is also a
former partner and active director of IPEX, acquired by Ness. Mr. Baruch has
served in the capacity of founder, executive, and director for several IT
companies and Internet start-ups, and was significantly involved in the M&A
process and in assisting these companies in their global expansion.

LIRON EDREY, DIRECTOR. Mr. Edery is an active partner in REGL Investment &
Development Ltd., a provider of consultancy services, investment banking, and
M&A activities. Mr. Edery represents global institutional and private investors,
in various fields of interest with a strong focus in Israel and in Europe. Mr.
Edery serves as a member of the advisory board of Pontifax LP, a leading Life
Science venture capital, and as a director of CritiSense Ltd. - a leading
medical devices company. Mr. Edery served as a consultant and as a
representative for various world leading telecommunication and electronics
industrial companies. Prior to that, Mr. Edery founded two start-up ventures.
Mr. Edery holds a degree in electronics engineering from Coventry University in
the UK.

RONEN ZADOK, DIRECTOR. Mr. Zadok is a director in New Pole LTD. Prior to
founding New Pole Mr. Zadok served as a founder, partner and Chief Financial
Officer of the Ipex group in Israel which was acquired by Ness Technologies. Mr.
Zadok has served in the capacity of Chief Financial Officer and director for
several IT companies and Internet start-ups. Mr. Zadok Holds a B.A. in
accounting and economics and an MBA in finance and accounting from Tel Aviv
University.

AUDIT COMMITTEE FINANCIAL EXPERT

During fiscal 2006, our Audit Committee was comprised of Mr. Rothman and Mr.
Adiv Baruch. Using the NASDAQ stock market marketplace rules definition of an
independent director, our board of directors determined that Shlomo Rothman and
Adiv Baruch both qualify as independent directors. Our board of directors has
determined that Mr. Rothman and Mr. Baruch both satisfy the definition of an
"audit committee financial expert" as set forth in Item 401(e) of Regulation S-B
promulgated by the SEC. Our Audit Committee held one (1) meetings during fiscal
year 2006.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires a company's directors, officers and
stockholders who beneficially own more than 10% of any class of equity
securities of Zone4Play registered pursuant to Section 12 of the Exchange Act,
collectively referred to herein as the Reporting Persons, to file initial
statements of beneficial ownership of securities and statements of changes in
beneficial ownership of securities with respect to the company's equity
securities with the SEC. All Reporting Persons are required by SEC regulation to
furnish us with copies of all reports that such Reporting Persons file with the
SEC pursuant to Section 16(a). Based solely on our review of the copies of such
reports and upon written representations of the Reporting Persons received by
us, we believe that all Section 16(a) filing requirements applicable to such
Reporting Persons have been met for 2006 except with respect to the following
directors:

Mr. Adiv Baruch who failed to timely file a Form 4 reporting the grant dated
January 15, 2006 of an option to purchase 192,261 shares of our common stock.
Mr. Baruch filed a Form 4 reporting this grant on January 19, 2006.

Mr. Ronen Zadok and Mr. Liron Edrey each failed to file a Form 4 reporting a
grant dated December 7, 2006, to each of them of an option to purchase 192,261
shares of our common stock. Mr. Zadok has filed a Form 4 reporting this grant
only on March 1, 2007 while Mr. Edrey filed a Form 4 reporting this grant on
March 6, 2007.

CODE OF BUSINESS ETHICS AND CONDUCT

Pursuant to the requirements of Section 406 of the Sarbanes-Oxley Act of 2002
and related SEC rules, in March 2005, our board of directors adopted a Code of
Business Ethics and Conduct, or Code of Ethics, applicable to our employees,
officers and directors. Our Code of Ethics can be viewed on our corporate
website, www.zone4play.com. Our Code of Ethics contains written standards
designed to deter wrongdoing and to promote:

o honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships;

o full, fair, accurate, timely, and understandable disclosure in reports and
documents filed with the SEC and in other public announcements;

o compliance with applicable governmental laws, rules and regulations;

o the prompt internal reporting of violations of our Code of Ethics to an
appropriate person or persons identified in our Code of Ethics; and

o accountability for adherence to our Code of Ethics.

Each of our employees, officers and directors completed a signed certification
to document his or her understanding of and compliance with our Code of Ethics.
We intend to disclose any amendment to, or waiver from, a provision of our Code
of Ethics and Business Conduct applicable to our Chief Executive Officer, Chief
Financial Officer or principal accounting officer or controller by posting such
information on our website.

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE FOR 2006

The following Summary Compensation Table sets forth information concerning
compensation during fiscal 2006 for services in all capacities awarded to,
earned by or paid to Mr. Citron, and Mr. Levy who served as our Chief Executive
Officer and Chief Financial Officer, respectively throughout the period. No
other executive officers who were serving as our executive officers at the end
of fiscal years 2006 received more than $100,000 in salary and bonus in fiscal
years 2006, and there were no individuals for whom disclosure would have been
provided but for the fact that the individual was not serving as an executive
officer at the end of fiscal years 2006.

NAME AND PRINCIPAL OPTION
POSITION YEAR SALARY BONUS AWARDS(1) TOTAL
------------------ ---- ------- ------- --------- ---------

Shimon Citron,
Chief Executive
Officer 2006 190,408 305,727 1,157,545 1,653,680

Uri Levy,
Chief financial
Officer 2006 114,318 -0- 111,130 225,448

(1) The dollar value recognized for the stock option awards was determined in
accordance with SFAS123(R). For a disclosure of the assumptions made in the
valuation please refer to footnote 2(i) in our financial statements filed under
Item 7 of this Annual Report on Form 10K-SB.

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2006

The following table presents the outstanding equity awards held as of December
31, 2006 by our Chief Executive Officer and Chief Financial Officer. All such
awards were stock options.

Number of Securities
Underlying Unexercised Options
OPTION OPTION
NAME EXERCISABLE UNEXERCISABLE EXERCISE PRICE EXPIRATION DATE
------------- --------- ------- ---- --------

Shimon Citron 1,656,000 207,000 1.15 4/3/2016

Uri Levy 183,333 16,667 0.55 12/31/2004
50,000 350,000 1.15 4/3/2016

OPTION GRANTS IN FISCAL 2006

On April 3, 2006, pursuant to Section 4(2) of the Securities Act of 1933, as
amended, we issued to a company, which is owned by our Chief Executive Officer,
an option to buy 1,863,000 shares of our common stock with an exercise price of
$1.15 per share in consideration for services provided by the Chief Executive
Officer to us. The option vests in the following manner: 1,500,750 shares on
July 1, 2006, 155,250 shares on October 1, 2006, 155,250 shares on January, 1,
2007 and 51,750 shares on April 1, 2007.

On April 3, 2006, we issued to our Chief Financial Officer 400,000 options
pursuant to our 2004 Global Share Option Plan. The option vests in sixteen equal
quarterly installments of 25,000 shares beginning on July 1, 2006.

On April 3, 2006, we issued to our Chief Operating Officer 400,000 options
pursuant to our 2004 Global Share Option Plan. The option vests in sixteen equal
quarterly installments of 25,000 shares beginning on July 1, 2006.

COMPENSATION OF DIRECTORS

We have agreements with Shlomo Rothman and Oded Zucker (but not with Adiv
Baruch), pursuant to which we have agreed to pay each director a director's fee
of $7,000 per annum, payable in quarterly installments during the director's
tenure on our board. In addition, we have agreed to pay them $750 per board
meeting and to reimburse them for reasonable and necessary expenses incurred in
connection with attendance at meetings of the board of directors and other
Zone4Play business.

In accordance with a resolution unanimously approved by our board of directors
on March 31, 2005, we granted to each of Messrs. Rothman and Zucker options to
purchase 192,261 shares of our common stock, in each case pursuant to and in
accordance with our 2004 Global Share Option Plan, as consideration for their
service on our board of directors. The options granted to Messrs. Rothman and
Zucker have an exercise price equal to $1.00 per share, have a term of ten (10)
years, and are exercisable in three equal annual installments commencing on May
1, 2005.

Upon his appointment as a director of our company, we also agreed to grant Adiv
Baruch an option to purchase up to 192,261 shares of our common stock under the
terms of our 2004 Global Share Option Plan ("Option") at an exercise price per
share of $1. The Option vests in three equal annual installments, whereby Mr.
Baruch has the right to purchase 1/3 of the shares subject to the Option at the
expiration of the first, second and third year respectively from the date of the
agreement, provided that Mr. Baruch remains a member of the Board of Directors
at such time. In the event of a termination of the agreement for cause at any
time, the Option, to the extent not exercised, shall terminate and be cancelled
and non-exercisable.

In April of 2006, in recognition of his services to us, we granted Adiv Baruch
an additional 200,000 options to purchase 200,000 shares of our common stock at
an exercise price of $0.725 per share for a period of 3 years.

On October 22, 2006, we granted to two of our non-employee directors, an option
under the terms of our 2004 Global Share Option Plan, to purchase 113,537 shares
of Common stock of our at an exercise price of $ 1.15 per share. Each director's
right to exercise such option will vest in 2 equal annual installments during a
period of three years commencing in 30.10.07 provided that our agreement with
such director does not terminate earlier.

On December 7, 2006, we granted to two of our non-employee directors, an option
under the terms of our 2004 Global Share Option Plan, to purchase 192,261 shares
of our common stock at an exercise price of $1 per share. Each director's right
to exercise such option vests in 12 equal quarterly installments during a period
of three years commencing in April 3, 2006, provided that our agreement with
such director does not terminate earlier.

The following table provides information regarding compensation earned by,
awarded or paid to each person for serving as a non-employee director during the
year ended December 31, 2006.

FEES EARNED O OPTION
NAME PAID IN CASH AWARDS (1) TOTAL
----- -------------- ------------------ ------------
Shlomo Rothman (2) $ 7,000 77,097 84,097
Oded Zucker (3) $ 7,000 77,097 84,097
Adiv Barcuh (4) $ 0 20,925 20,925
Ronen Zadok (5) $ 0 9,598 9,598
Liron Edrey (6) $ 0 9,598 9,598

(2) Mr. Shlomo Rothman had 305,798 options outstanding as of December 31, 2006.

(3) Mr. Oded Zucker had 305,798 options outstanding as of December 31, 2006.

(4) Mr. Adiv Baruch had 392,261 options outstanding as of December 31, 2006.

(5) Mr. Ronen Zadok had 192,261 options outstanding as of December 31, 2006.

(6) Mr. Liron Edery had 192,261 options outstanding as of December 31, 2006.

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS

On July 25, 2005, Zone 4 Play (Israel) Ltd., a wholly-owned Israeli subsidiary
(the "Subsidiary") of our company, and Mr. Shimon Citron, the President and
Chief Executive Officer of the Company who also serves as a member of the
Company's board of directors (the "Executive") entered into an amended
employment agreement (the "Agreement").

Pursuant to the terms of the Agreement, the Executive shall serve as President
and Chief Executive Officer of the Subsidiary for a period of three (3) years,
which commenced on February 1, 2004. The term may be extended for an additional
one (1) year by the board of directors unless terminated earlier pursuant to the
terms of the Agreement.

The Subsidiary agreed to pay the Executive an initial base salary of $8,000 per
month. Such base salary shall increase to $10,000 per month if our revenues
exceed $500,000 in a quarter and $15,000 per month if our revenues exceed
$750,000 in a quarter. In the fourth quarter of 2006, since our revenues
exceeded $750,000, the Executive's base salary has increased to $15,000 a month
effective February 1, 2004. The Executive shall also be entitled to receive the
difference between any such increased base salary and the previous base salary
retroactive to the commencement of the Agreement. The Subsidiary shall also
contribute each month an amount equal to 13.33% of the Executive's monthly
salary as a managers' insurance for the benefit of the Executive and 2.5% of the
Executive's monthly salary for disability insurance and shall grant the
Executive other benefits, including reimbursement for the use of car, cellular
phone and laptop computer. The Subsidiary agreed to obtain officers liability
insurance covering the Executive and undertook to indemnify the Executive as
permitted under applicable law.

In addition, pursuant to the terms of the Agreement, the Executive is entitled
to the following additional benefits: (i) Bonus - the Subsidiary shall pay the
Executive for each year of employment, an annual cash bonus equal to three
percent (3%) of the annual net profits (as such term is defined in the
Agreement) of the Company on a consolidated basis, in excess of $2,000,000 for
such year; (ii) Options - the Executive shall be entitled to a one-time grant of
options to purchase up to three percent (3%) of the outstanding capital stock of
the Company with an exercise price of $0.55 per share and up to an additional
two percent (2%) of the outstanding capital stock of the Company with an
exercise price of $1.20 per share based on the Company's market capitalization
as set forth in the Agreement; (iii) Acquisition Bonus - in certain events of
acquisition of the Company as set forth in the Agreement, the Executive shall be
entitled to a cash bonus in an amount equal to 5% or 10% of the value of the
Company that was set in such event, subject to the terms of the Agreement.

In the Agreement, the Executive undertook not to compete with the business of
the Subsidiary within the U.S. or Israel during the term of his employment and
for one year thereafter and not to solicit customers, suppliers or employees of
the Subsidiary during the term of his employment and for two years thereafter.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table provides information about the securities authorized for
issuance under our equity compensation plans as of December 31, 2006. Our only
equity compensation is our 2004 Global Share Option Plan.

NUMBER OF SECURITIES
NUMBER OF SECURITIES TO WEIGHTED AVERAGE REMAINING AVAILABLE FOR FUTURE
BE ISSUED UPON EXERCISE OF EXERCISE PRICE OF ISSUANCE UNDER EQUITY
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, COMPENSATION PLANS (EXCLUDING
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS SECURITIES REFLECTED IN COLUMN (A))
------------- ------------------- ------------------- -----------------------------------

Equity compensation
plans approved by
security holders 7,653,046 $1.01 2,209,954

Equity compensation
plans not approved by
security holders -- -- --

Total 7,653,046 $1.01 2,209,954

2004 GLOBAL SHARE OPTION PLAN

At the annual meeting of our stockholders held on June 20, 2005, our
stockholders approved our 2004 Global Share Option Plan in substantially the
form attached to the proxy statement filed with the SEC on April 29, 2005. The
2004 Global Share Option Plan is intended to provide incentives to our
employees, directors and consultants by providing them with opportunities to
purchase shares of our common stock. The 2004 Global Share Option Plan was
effective as of its approval by our board of directors on November 23, 2004 and
terminates at the end of ten years from such date. We have reserved 5,000,000
authorized but unissued shares of common stock to be issued under the 2004
Global Share Option Plan.

On May 4, 2006, our board of directors approved an amendment to our 2004 Global
Share Option Plan, under which the number of shares reserved by us for the
purpose of the Plan was increased from 5,000,000 to 8,000,000.

Our Board of Directors is authorized to administer the 2004 Global Share Option
Plan. In doing so, our Board of Directors may: (i) designate optionees; (ii)
determine the terms and provisions of respective option agreements (which need
not be identical) including, but not limited to, the number of shares to be
covered by each option, provisions concerning the time or times when and the
extent to which the options may be exercised and the nature and duration of
restrictions as to transferability or restrictions constituting substantial risk
of forfeiture; (iii) accelerate the right of an optionee to exercise, in whole
or in part, any previously granted option; (iv) interpret the provisions and
supervise the administration of the 2004 Global Share Option Plan; (v) determine
the fair market value of shares issuable under the 2004 Global Share Option
Plan; (vi) designate the type of options to be granted to an optionee; and (vii)
determine any other matter which is necessary or desirable for, or incidental
to, the administration of the 2004 Global Share Option Plan.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding beneficial
ownership of common stock as of March 29, 2007 by each person known to us to own
beneficially more than 5% of the total number of shares of our common stock
outstanding as of such date, each of our directors, and the officers named in
the summery compensation table under item 10 of this annual report; and all
executive officers and directors as a group.

NAME AND ADDRESS OF BENEFICIAL OWNER (1) AMOUNT AND NATURE OF PERCENT
5% BENEFICIAL OWNERS AND CHIEF EXECUTIVE OFFICER: BENEFICIAL OWNERSHIP(2) OF CLASS(3)
------------------------------------------------- ----------------------- -----------

Shimon Citron (4) 5,221,772 15.3%

Pini Gershon 2,706,950 8.4%

Sedna Capital (5)
200 Park Avenue, 39th Floor
New York, NY 10166 1,858,768 5.8%

Orinda Capital (6)
11 El Sueno, Orinda, CA 94563 4,965,518 14.3%

Walham Investments Group Inc (7)
c/o Patton Moreno and Asvat (BVI) Ltd.
P.O. Box 3174, Road Town, Tortola,
British Virgin Islands 2,758,620 8.2%

Dave Games Invest Corporation Inc.(8)
c/o 24 Ramban Street, Jerusalem, Israel 2,758,620 8.2%

Smithfield Fiduciary LLC (9) 2,064,200 6.4%
Cayman Islands, British West Indies

OTHER DIRECTORS

Ronen Zadok 80,109 %
Liron Edrey 80,109 %

Adiv Baruch (10) 264,087 %
Shlomo Rothman 128,174 %
Oded Zucker 128,174 %
All directors and current executive officers as a
group (8 persons) (11) 6,585,878 16.9%

* = Less than 1%

(1) Unless otherwise provided, all addresses are c/o Zone 4 Play, Inc. at the
address set forth on the cover page of this annual report on Form 10-KSB.

(2) Except as otherwise indicated, all shares are beneficially owned and sole
investment and voting power is held by the persons named.

(3) Applicable percentage of ownership is based on 32,319,301 shares of our
common stock outstanding as of the March 29, 2007, plus any common stock
equivalents and options or warrants held by such holder which are presently or
will become exercisable within 60 days after the Record Date.

(4) Includes an option to purchase 1,863,000 shares at an exercise price of
$1.15 per share. Also includes 494,449 shares owned by Yariv Citron, son of
Shimon Citron. Yariv Citron has reached the age of 18 and Mr. Citron disclaims
any beneficial ownership of Yariv Citrons's shares.

(5) Paul Yook and Rengan Rajaratnam are the managing members of Sedna Capital
Management LLC and report shared investment power over these shares, plus 5,500
shares of common stock over which Rengan Rajaratnam reports sole voting and
investment power. The information is based solely on a Schedule 13G/A filed with
the Securities and Exchange Commission by the beneficial owner on February 14,
2007, describing the holdings of the beneficial owner as of December 31, 2006.

(6) Includes warrants to acquire 2,482,759 shares.

(7) Includes warrants to acquire 1,379,310 shares. The information is based
solely on a Schedule 13G filed with the Securities and Exchange Commission by
the beneficial owner on August 14, 2006, describing the holdings of the
beneficial owner as of December 31, 2006.

(8) Includes warrants to acquire 1,379,310 shares. The information is based
solely on a Schedule 13G filed with the Securities and Exchange Commission by
the beneficial owner on January 22, 2007, describing the holdings of the
beneficial owner as of March 20, 2006.

(9) Includes warrants to acquire 500,000 shares. Smithfield Fiduciary LLC is the
beneficial owner of and shares the voting and investment power with respect to
500,000 shares of our common stock and warrants to purchase an additional
500,000 shares of our common stock. Highbridge International LLC is the
beneficial owner of and shares the voting and investment power with respect to
1,564,200 shares of our common stock. In addition, each of Highbridge
International LLC, Highbridge Master L.P., Highbridge Capital Corporation,
Highbridge Capital L.P., Highbridge GP, Ltd., Highbridge GP, LLC, Highbridge
Capital Management, LLC, Glenn Dubin and Henry Swieca may be deemed the
beneficial owner of the 500,000 shares of our common stock and warrants to
purchase an additional 500,000 shares of our common stock owned by Smithfield
Fiduciary LLC and 1,564,200 shares of our common stock owned by Highbridge
International LLC. The information is based solely on a Schedule 13G/A filed
with the Securities and Exchange Commission by the beneficial owner on February
14, 2007, describing the holdings of the beneficial owner as of December 31,
2006.

(10) Includes warrants to acquire 200,000 shares.

(11) See preceding footnotes.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In February 2005, we entered into an Interactive Fixed Odds Betting Services
Agreement (the "Agreement") with Winner.Com (UK) Ltd. ("Winner") and Two Way
Media Limited ("TWM"). TWM, which establishes fixed odds betting services on
digital television, the Internet, mobile telecommunications networks and other
digital platforms, engaged us and Winner to provide client-side game
applications, server-side software for the management of such platforms and
project management support and technical services using Winner's trademark and
brand. Each party is entitled to a certain profit share, based on the kind of
platform pursuant to which the profit was generated and the amount of profit
generated. Shimon Citron, our Chief Executive Officer, is a director and
shareholder of Winner. Mr. Citron and his family beneficially own 60 percent of
the outstanding shares in Winner. In 2006, we received $181,742 from TWM as a
result of the Agreement. We did not receive any payments from Mr. Citron, his
family or Winner in connection with the Agreement.

ITEM 13. EXHIBITS

Reference is made to the Exhibit Index appearing immediately after the signature
page below.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table summarizes the fees of Kost Forer Gabbay & Kasierer, a
member of Ernst & Young Global, our independent registered public accounting
firm until June 23, 2006, billed for each of the last two fiscal years for audit
services and other services:

Fee Category 2006 2005
-------- --------

Audit Fees (1) $ 8,000 $108,000

Tax Fees (2) $ - $ 9,000

All Other Fees(3) $ 4,000 -
-------- --------

Total Fees $ 12,000 $117,000
-------- --------

(1) Consists of fees for professional services rendered in connection with the
audit of our financial statements for the year ended on December 31, 2005,
and the reviews of the financial statements included in each of our
Quarterly Reports on Form 10-QSB during 2005 and for the first quarter of
2006, and fees for professional services rendered in connection with
documents filed with the Securities and Exchange Commission during those
years and of fees in connection with services relating to our registration
statements filed in 2004 and 2006 and expenses related to the AIM listing
possibility in 2005.

(2) Consists of fees relating to our tax compliance and tax planning.

(3) Consists of fees relating to review of our registration statement on form
SB-2.

The following table summarizes the fees of Ziv Haft, a member of the BDO
Network, our independent registered public accounting firm, billed for the last
fiscal year for audit services and other services since the engagement of BDO as
the our independent registered public accounting firm in June of 2006:

Fee Category 2006 2005
------- -------

Audit Fees (1) $72,000 $ 0

Tax Fees (2) $ 8,000 $ 0

All Other Fees $ - -
------- -------

Total Fees $80,000 $ 0
------- -------

(1) Consists of fees for professional services rendered in connection with the
audit of our financial statements for the year ended on December 31, 2006, and
the reviews of the financial statements included in each of our Quarterly
Reports on Form 10-QSB during 2006 as of the beginning of the second quarter,
and fees for professional services rendered in connection with documents filed,
including the registration statement on Form 20-F for Gaming, with the
Securities and Exchange Commission during those quarters.

(2) Consists of fees relating to our tax compliance and tax planning.

AUDIT COMMITTEE PRE APPROVAL POLICIES AND PROCEDURES

The Audit Committee pre-approves all auditing services and permissible non-audit
services provided to the Company by the independent registered accounting firm.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

ZONE 4 PLAY, INC.

By: /S/ Shimon Citron
---------------------
Shimon Citron
President and Chief Executive Officer

Date: March 30, 2007

In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ Shimon Citron President, Chief Executive Officer March 30, 2007
------------------ and Director(Principal Executive Officer)
Shimon Citron

/s/ Uri Levy Chief Financial Officer March 30, 2007
------------------ (Principal Financial and Accounting
Uri Levy Officer)

Director March 30, 2007
------------------
Shlomo Rothman

/s/ Oded Zucker Director March 30, 2007
------------------
Oded Zucker

/s/ Ronen Zadok Director March 30, 2007
------------------
Ronen Zadok

/s/ Liron Edrey Director March 30, 2007
------------------
Liron Edrey

/s/ Adiv Baruch Director March 30, 2007
------------------
Adiv Baruch

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
------ -----------

3.1 Composite copy of the Company's Articles of Incorporation as amended
on February 5, 2004(incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10K-SB filed with the Securities and
Exchange Commission on April 11, 2006).

3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Form
SB-2 (File No. 333-91356) filed with the Securities and Exchange
Commission on June 27, 2002).

4.1 Registration Rights Agreement dated March 20, 2006 between the Company
and certain accredited investors (incorporated by reference to Exhibit
4.1 to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 24, 2006).

4.2 Form of Stock Purchase Warrant (incorporated by reference to Exhibit
4.2 to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 24, 2006).

4.3 Registration Rights Agreement dated March 29, 2006 between the Company
and certain accredited investors (incorporated by reference to Exhibit
4.1 to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 31, 2006).

4.4 Form of Stock Purchase Warrant (incorporated by reference to Exhibit
4.2 to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 31, 2006).

10.1 Director Appointment Agreement of Oded Zucker dated January 1, 2004
(incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-QSB filed with the Securities and Exchange
Commission on August 16, 2004).+

10.2 Director Appointment Agreement of Shlomo Rothman dated January 1, 2004
(incorporated by reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-QSB filed with the Securities and Exchange
Commission on August 16, 2004).+

10.3 Employment Agreement with Haim Tabak dated April 1, 2004 (incorporated
by reference to Exhibit 10.4 to the Company's Form SB-2 (File No.
333-120174) filed with the Securities and Exchange Commission on
November 3, 2004).+

10.4 Master Services Agreement dated April 17, 2006, by and among
Zone4Play, Inc., Two Way Media Limited and Ladbrokes Gaming Limited,
and Statement of Work dated April 17, 2006 issued by Ladbrokes
E-Gaming Limited(incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 20, 2006).

10.5 Amendment to 2004 Global Share Option Plan of Zone 4 Play, Inc.
(incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission
on May 10, 2006).+

10.6 Option Agreement between Zone 4 Play, Inc. and Citron Investments Ltd.
dated April 3, 2006 (incorporated by reference to Exhibit 10.1. to the
Company's Quarterly Report on Form 10-QSB filed with the Securities
and Exchange Commission on August 15, 2006)+

10.7 10.1 Share Subscription and Option Agreement dated September 14, 2006,
by and among, RNG Gaming Ltd., Golden Palace Ltd.,and Gaming Ventures
plc. (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 14, 2006).

10.8 Software License Agreement dated October 31, 2006, by and among, RNG
Gaming Ltd. and Golden Palace Ltd. (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on November 6, 2006).

10.9 Securities Purchase Agreement dated January 3, 2005 by and among the
Company and a list of the purchasers identified on the signature pages
thereto (incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on January 7, 2005).

10.10 Agreement dated January 17, 2005 between Eurobet UK Limited and Zone
Play (UK) Limited (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 24, 2005).

10.11 Agreement dated January 24, 2005 between The Poker Channel Ltd. And
Zone4Play Inc. (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 27, 2005).

10.12 Interactive Fixed Odds Betting Services Agreement dated February 22,
2005 by and among Zone4Play Inc. Winner.Com (UK) Limited and Two Way
Media Limited (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 28, 2005).

10.13 Agreement, dated January 17, 2005 between Eurobet UK Limited and
Zone4Play (UK) Limited (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K/A filed with the Securities
and Exchange Commission on April 28, 2005).

10.14 Securities Purchase Agreement dated January 27, 2005 among the Company
and the purchasers identified on the signature pages thereto
(incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission
on January 27, 2005).

10.15 Amended Employment Agreement with Uri Levy dated May 1, 2005
(incorporated by reference toExhibit 10.4 to the Company's Quarterly
Report on Form 10-QSB filed with the Securities and Exchange
Commission on August 9, 2005).+

10.16 Amended Employment Agreement dated July 25, 2005, by and between Zone
4 Play (Israel) Ltd. and Mr. Shimon Citron. (incorporated by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on July 27, 2005).+

10.17 Securities Purchase Agreement dated March 20, 2006 between the Company
and certain accredited investors (incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 24, 2006).

10.18 Securities Purchase Agreement dated March 29, 2006 between the Company
and certain accredited investors (incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 31, 2006).

10.19 Director Appointment Agreement dated as of January 15, 2006 by and
between Zone 4 Play, Inc. and Adiv Baruch ((incorporated by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on January 18, 2006).+

10.20 A Summary of Directors Ongoing Compensation(incorporated by reference
to Exhibit 10.29 to the Company's Annual Report on Form 10K-SB filed
with the Securities and Exchange Commission on April 11, 2006).+

10.21 Sample Agreement under the Company's 2004 Global Option Share
Plan(incorporated by reference to Exhibit 10.25 to the Company's
Annual Report on Form 10K-SB filed with the Securities and Exchange
Commission on April 11, 2006).

10.22 2004 Global Share Option Plan of Zone 4 Play, Inc. (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on November 30,
2004).+

16.1 Letter from Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global to the Securities and Exchange Commission dated July 10, 2006
(incorporated by reference to Exhibit 16.1 to the Company's Current
Report on Form 8-K/A filed with the Securities and Exchange Commission
on July 10, 2006).

21.1 List of Subsidiaries*

23.1 Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global. *

23.2 Consent of Ziv Haft, a member of the BDO network.*

31.1 Certification required by Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934, as amended. *

31.2 Certification required by Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934, as amended. *

32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. **

32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. **

* Filed herewith

** Furnished herewith.

+ Management contract or compensation Plan.

ZONE4PLAY INC. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006

IN U.S. DOLLARS

INDEX

PAGE
---------------

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F - 2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F - 3

CONSOLIDATED BALANCE SHEETS F - 4 - F - 5

CONSOLIDATED STATEMENTS OF OPERATIONS F - 6

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY F - 7

CONSOLIDATED STATEMENTS OF CASH FLOWS F - 8 - F - 9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 10 - F - 32

----------

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE SHAREHOLDERS OF

ZONE4PLAY INC.

We have audited the accompanying consolidated balance sheet of Zone4Play
Inc. (the "Company") and its subsidiaries as of December 31, 2006 and the
related consolidated statement, of operations changes in stockholder's equity
and cash flows for the year ended December 31, 2006. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company and
its subsidiaries as of December 31, 2006 and the consolidated results of its
operations and cash flows for the year ended December 31, 2006, in conformity
with accounting principles generally accepted in the United States of America.

As discussed in Note 2I to the consolidated financial statements, the Company
changed the manner in which it accounts for share-based compensation effective
January 1, 2006 to conform with FASB Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment" In addition, as discussed in Note
1a to the consolidated financial statements, the Company ceased to report as a
development stage enterprise in accordance with SFAS No.7" Accounting and
Reporting by Development Stage Enterprises"

Tel Aviv, Israel
March 29 2007

/s/ Ziv Haft
------------
Ziv Haft
Certified Public Accountants (Isr.)
BDO Member Firm

F - 2

[ERNST & YOUNG LOGO]

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE SHAREHOLDERS OF

ZONE4PLAY INC.

We have audited the accompanying consolidated balance sheets of Zone4Play
Inc. (the "Company") and its subsidiaries as of December 31, 2005 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the two years in the period ended December 31, 2005.
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. We were not engaged to
perform an audit of the Company's 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 includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company and
its subsidiaries as of December 31, 2005 and the consolidated results of their
operations, and their cash flows for each of the two years in the period ended
December 31, 2005, in conformity with U.S. generally accepted accounting
principles

/S/ KOST FORER GABBAY & KASIERER
------------------------------------
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global

Tel-Aviv, Israel
April 10, 2006

F - 3

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

DECEMBER 31,
-------------------------
2006 2005
----------- -----------

ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 3,019,282 $ 604,035
Trade receivables 1,005,161 132,921
Other accounts receivable, prepaid expenses and related parties (Note 3) 164,648 120,186
----------- -----------

TOTAL current assets 4,189,091 857,142
----------- -----------

SEVERANCE PAY FUND 104,729 110,517
----------- -----------

PROPERTY AND EQUIPMENT, NET (Note 4) 699,040 724,828
----------- -----------

ACQUIRED TECHNOLOGY, NET (Note 5) 440,641 773,973
----------- -----------

Total assets $ 5,433,501 $ 2,466,460
=========== ===========

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

F - 4

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

DECEMBER 31,
----------------------------
2006 2005
------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term bank credit (Note 6) $ 16,750 $ 17,747
Trade payables 436,342 430,037
Employees and payroll accruals 427,106 349,200
Accrued expenses and other liabilities 552,113 80,251
------------ ------------

TOTAL current liabilities 1,432,311 877,235
------------ ------------

LONG TERM LIABILITIES:

Minority Interest 138,374 -
Call option (Note 9.b.11) 114,850 -
Accrued Severance pay 281,834 304,545
------------ ------------

TOTAL long term liabilities 535,058 304,545
------------ ------------

TOTAL liabilities 1,967,369 1,181,780

COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)

STOCKHOLDERS' EQUITY (Note 9):
Common stock of $ 0.001 par value:
Authorized: 75,000,000 shares at December 31, 2006 and 2005; Issued
and outstanding: 32,319,031 and 24,039,963 shares at December 31,
2006 and 2005, respectively 32,318 24,040
Additional paid-in capital 16,800,396 8,975,273
Deferred stock compensation - (774,952)
Accumulated other comprehensive loss (18,588) (16,638)
Accumulated deficit (13,347,994) (6,923,043)
------------ ------------

------------ ------------

TOTAL stockholders' equity 3,466,132 1,284,680
------------ ------------

TOTAL liabilities and stockholders' equity $ 5,433,501 $ 2,466,460
============ ============

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

F - 5

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

YEAR ENDED
DECEMBER 31,
--------------------------------------------
2006 2005 2004
------------ ------------ ------------

Revenues:
Sale of software applications $ 1,656,379 $ 1,062,420 $ 572,624
Sale of software applications to related parties - - 196,000
------------ ------------ ------------

Total revenues 1,656,379 1,062,420 768,624
Cost of revenues 426,052 299,958 127,944
------------ ------------ ------------

Gross profit 1,230,327 762,462 640,680
------------ ------------ ------------

Operating expenses:
Research and development 2,923,572 2,549,635 1,347,960
Selling and marketing 2,618,371 867,473 607,511
General and administrative 2,098,142 1,308,735 565,190
------------ ------------ ------------

TOTAL operating expenses 7,640,085 4,725,843 2,520,661
------------ ------------ ------------

Operating loss 6,409,758 3,963,381 1,879,981

Financial (Income) expenses, net (9,181) 94 40,896
------------ ------------ ------------

Loss before Taxes on Income 6,400,577 3,963,475 1,920,877
------------ ------------ ------------

Taxes on income - 1,900 -
------------ ------------ ------------
6,400,577 3,965,375 1,920,877

Minority interests in profits of subsidiaries 24,374 - -

------------ ------------ ------------

Net loss $ 6,424,951 $ 3,965,375 $ 1,920,877
============ ============ ============

Basic and diluted net loss per share $ 0.21 $ 0.169 $ 0.102
============ ============ ============

Weighted average number of common stock used in computing
basic and diluted net loss per share 30,400,789 23,524,407 18,831,765
============ ============ ============

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

F - 6

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

ADDITIONAL DEFERRED
COMMON SHARE PAID-IN STOCK
STOCK CAPITAL CAPITAL COMPENSATION
----------- ------------- ----------- ------------
NUMBER AMOUNT
----------- -------------

Balance as of December 31, 2003 10,426,190 $ 10,426 $ - $ -
Issuance of shares in respect of reverse shell acquisition 7,550,000 7,550 86,450 -
Issuance of shares and warrants, net on April 1, 2004 1,497,252 1,497 1,196,300 -
Issuance of shares to service provider on April 5, 2004 44,348 45 39,869 -
Issuance of shares and warrants, net on August 17, 2004 1,000,000 1,000 975,135 -
Issuance of shares to service provider on August 17, 2004 22,222 22 11,978 -
Deferred stock compensation - - 1,285,800 (1,285,800)
Amortization of deferred stock compensation - - - 302,251
Foreign currency translation adjustments - - - -
Net loss - - - -
----------- ------------- ----------- ------------
Total comprehensive loss

Balance as of December 31, 2004 20,540,012 20,540 3,595,532 (983,549)

Issuance of shares to service provider on January 3, 2005 50,000 50 68,950 -
Issuance of shares and warrants, net on January 2005 2,659,998 2,660 3,843,996 -
Issuance of shares in respect of minority interest
acquisition in subsidiary on March 10, 2005 625,000 625 999,375 -
Issuance of shares to service provider on April 20, 2005 50,000 50 79,450 -
Grants of options to service provider on December 22, 2005 114,953 115 80,352 -
Deferred stock compensation - - 307,618 (307,618)
Amortization of deferred stock compensation - - - 516,215
Foreign currency translation adjustments - - - -
Net loss - - - -
----------- ------------- ----------- ------------

Balance as of December 31, 2005 24,039,963 24,040 8,975,273 (774,952)
=========== ============= =========== ============

Reclassification of deferred stock Compensation (774,952) 774,952
Issuance of shares to service provider in January 2006 30,000 30 17,970
Issuance of shares and warrants, net in March, 2006 8,234,485 8,234 6,346,856
Exercise of employees stock options 14,583 14 8,507
Issuance of warrants to service providers in December 2006 61,750
Stock - based compensation 1,823,842
Unrealized gain resulting from share issuance to minority
shareholders in a subsidiary 341,150
Foreign currency translation adjustments -
Net loss
----------- ------------- ----------- ------------

Balance as of December 31, 2006 32,319,031 $ 32,318 $16,800,396 $ -
=========== ============= =========== ============

ACCUMULATED TOTAL
OTHER TOTAL STOCKHOLDERS'
COMPREHENSIVE ACCUMULATED COMPREHENSIVE EQUITY
INCOME (LOSS) DEFICIT LOSS (DEFICIENCY)
------------- ------------ ------------- -------------

Balance as of December 31, 2003 $ - $ (947,182) $ - $ (936,756)
Issuance of shares in respect of reverse shell acquisition - (89,609) 4,391
Issuance of shares and warrants, net on April 1, 2004 - - 1,197,797
Issuance of shares to service provider on April 5, 2004 - - 39,914
Issuance of shares and warrants, net on August 17, 2004 - - 976,135
Issuance of shares to service provider on August 17, 2004 - - 12,000
Deferred stock compensation - - -
Amortization of deferred stock compensation - - 302,251
Foreign currency translation adjustments 5,521 - 5,521 5,521
Net loss - (1,920,877) (1,920,877) (1,920,877)
------------- ------------ ------------- -------------
Total comprehensive loss (1,915,356)
=============
Balance as of December 31, 2004 5,521 (2,957,668) (319,624)

Issuance of shares to service provider on January 3, 2005 - - 69,000
Issuance of shares and warrants, net on January 2005 - - 3,846,656
Issuance of shares in respect of minority interest
acquisition in subsidiary on March 10, 2005 - - 1,000,000
Issuance of shares to service provider on April 20, 2005 - - 79,500
Grants of options to service provider on December 22, 2005 - - 80,467
Deferred stock compensation - - -
Amortization of deferred stock compensation - - 516,215
Foreign currency translation adjustments (22,159) - (22,159) (22,159)
Net loss - (3,965,375) (3,965,375) (3,965,375)
------------- ------------ ------------- -------------
(3,987,534)
=============
Balance as of December 31, 2005 (16,638) (6,923,043) 1,284,680
============= ============ =============
Reclassification of deferred stock Compensation -
Issuance of shares to service provider in January 2006 18,000
Issuance of shares and warrants, net in March, 2006 6,355,090
Exercise of employees stock options 8,521
Issuance of warrants to service providers in December 2006 61,750
Stock - based compensation 1,823,842
Unrealized gain resulting from share issuance to minority
shareholders in a subsidiary 341,150
Foreign currency translation adjustments (1,950) (1,950) (1,950)
Net loss (6,424,951) (6,424,951) (6,424,951)
------------- ------------ ------------- -------------
$ (6,426,901)
=============
Balance as of December 31, 2006 $ (18,588) $(13,347,994) $ 3,466,132
============= ============ =============

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

F - 7

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

YEAR ENDED
DECEMBER 31,
-----------------------------------------
2006 2005 2004
----------- ----------- -----------

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss $(6,424,951) $(3,965,375) $(1,920,877)
Adjustments required to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 655,737 420,572 47,421
Increase in trade and other accounts receivable
and prepaid expenses (916,930) (35,924) (161,023)
Amortization of deferred compensation 1,823,842 516,215 302,251
Increase (Decrease) in trade payables (45,284) 178,496 173,994
Increase in employees and payroll accruals 77,906 14,754 172,559
Increase (decrease) in accrued expenses and other
liabilities 471,862 (107,913) (117,307)
Minority interests in profits of subsidiaries 24,374
Accrued severance pay, net (16,923) 48,645 77,606
Issuance of options and common stock as a
compensation to service providers 79,750 228,967 51,914
----------- ----------- -----------

Net cash used in operating activities (4,270,617) (2,701,563) (1,373,462)
----------- ----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property and equipment (245,028) (672,475) (203,477)
----------- ----------- -----------

Net cash used in investing activities (245,028) (672,475) (203,477)
----------- ----------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES:

Issuance of shares in respect of reverse shell
acquisition (1) - - 4,391
Proceeds from Issuance of shares and warrants, net 6,355,090 3,846,656 2,173,932
Proceeds from exercise of stock option 8,521 - -
Short-term bank credit, net (996) 7,635 (26,741)
Issuance in subsidiary to a minority shareholders 570,000 - -
Repayment of short-term loans from stockholders and
related parties - (1,229) (483,066)
----------- ----------- -----------

Net cash provided by financing activities 6,932,615 3,853,062 1,668,516
----------- ----------- -----------
Effect of exchange rate changes on cash and cash
equivalents (1,723) (19,066) 2,618
----------- ----------- -----------

Increase in cash and cash equivalents 2,415,247 459,958 94,195
Cash and cash equivalents at the beginning of the
period 604,035 144,077 49,882
----------- ----------- -----------

Cash and cash equivalents at the end of the period $ 3,019,282 $ 604,035 $ 144,077
=========== =========== ===========

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

F - 8

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

YEAR ENDED
------------------------------------------
2006 2005 2004
------------ ------------ ------------

NON-CASH TRANSACTION
Purchase of property and equipment $ 51,589 $ 35,146 $ -
============ ============ ============

Issuance of shares in respect of minority interest
acquisition in subsidiary $ - $ 1,000,000 $ -
============ ============ ============

Gain on realization of shareholdings $ 341,150 $ - $ -
============ ============ ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 2,041 $ 2,152 $ 13,691
============ ============ ============

(1) On February 1, 2004, the Company was acquired by Zone4Play Inc. (Nevada)
through a reverse shell purchase acquisition.

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

F - 9

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 1: - GENERAL

a. Zone4Play Inc. ("the Company") was incorporated under the laws
of the State of Nevada on April 23, 2002 as Old Goat
Enterprises, Inc. On February 1, 2004, the Company acquired
Zone4Play, Inc. ("Zone4Play (Delaware))" (see c. below), which
was incorporated under the laws of the State of Delaware on
April 2, 2001, and subsequently changed the Company's name to
Zone4Play, Inc., a Nevada corporation. The Company develops
and markets interactive games applications for Internet,
portable devices and interactive TV platforms.

The Company conducts its operations and business with and
through its subsidiaries, (1) Zone4Play (Delaware), (2)
Zone4Play Limited, an Israeli corporation incorporated in July
2001, which is engaged in research and development and
marketing of the applications, (3) Zone4Play (UK) Limited, a
United Kingdom corporation, incorporated in November 2002,
which is engaged in marketing of the applications, (4) MixTV
Ltd., an Israeli corporation which develops and markets
participation TV games applications(see note 1d)., and (5)
Gaming Ventures Plc ("Gaming"), a company incorporated in the
Isle of Man (see note 1e).

The consolidated financial statements for prior years have
been presented as if the Company was considered to be a
development stage enterprise in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 7. In fiscal 2006
the Company ceased to report as a development stage
enterprise.

The Company's shares are currently traded on the OTC Bulletin
Board under the trading symbol "ZFPI.OB."

b. The Company and its subsidiaries are devoting substantially
all of its efforts toward conducting research, development and
marketing of its software. The Company's and its subsidiaries'
activities also include raising capital and recruiting
personnel. In the course of such activities, the Company and
its subsidiaries have sustained operating losses and expect
such losses to continue in the foreseeable future. The Company
and its subsidiaries have not generated sufficient revenues
and have not achieved profitable operations or positive cash
flow from operations. The Company's accumulated deficit
aggregated to $ 13,347,994 as of December 31, 2006. There is
no assurance that profitable operations, if ever achieved,
could be sustained on a continuing basis.

The Company plans to continue to finance its operations with a
combination of stock issuance and private placements and
revenues from product sales.

c. Acquisition of Zone4Play (Delaware):

According to the agreement between the Company and Zone4Play
(Delaware), the Company issued 10,426,190 Common stock to the
former holders of equity interest in Zone4Play (Delaware). The
acquisition has been accounted for as a reverse acquisition,
whereby the Company was treated as the acquiree and Zone4Play
(Delaware) as the acquirer, primarily because Zone4Play
(Delaware) shareholders owned a majority, approximately 58% of
the Company's Common stock, upon completion of the
acquisition. Immediately prior to the consumption of the
transaction, Zone4Play Inc. had no material assets and
liabilities, hence the reverse acquisition is treated as a
capital stock transaction in which Zone4Play (Delaware) is
deemed to have issued the Common stock held by the Company
shareholders for the net assets of the Company. The historical
financial statements of Zone4Play (Delaware) became the
historical financial statements of the Company.

F - 10

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 1: - GENERAL (CONT.)

d. In June 2004, the Company and NetFun Ltd. ("Netfun") formed a
new company named MIX TV Ltd ("MIX TV") in order to pursue the
marketing, deployment and support of the MIX TV system. The
controlling stake of 50.1% is held by the Company. NetFun had
a 20% share of the new company, which could had increased to
up to 49.9% as pre-defined two milestones: (a) Upon MIX TV
reaching its operational break-even, 10% of the shares will be
transferred to Netfun. (b) Upon repayment to the Company of
all the sums provided to MIX TV, 19.9% of the shares will be
transferred to Netfun. A trustee was holding the remaining
shares (29.9%). The Company provided capital for one year of
operating the new company, whereas NetFun delivered its
Intellectual Properties assets (MIX TV). MIX TV has commenced
its operations in July 2004 and generated losses as of
December 31, 2004 that had been consolidated in the company's
report since July 2004.

On March 10, 2005, the Company signed a stock purchase
agreement with NetFun, regarding which the closing took place
in April 2005. According to the Agreement, the Company
acquired the remaining minority interests held by NetFun of
49.9% in its consolidated subsidiary MIX TV, for a
consideration of 625,000 shares of Common stock of the
Company, which had a fair value of $ 1,000,000 based on the
average market price of the share around the announcement
date. As a result of the Agreement, the Company holds the
entire ownership interest in MIX TV. The acquisition was
accounted under the purchase method of accounting. The
purchase price has been attributed to MIX TV's technology. The
technology is amortized over its useful life which management
estimated to be three years. No other significant assets were
acquired and no other liabilities were assumed.

e. On July 11, 2006, the Company formed Gaming. Gaming conducts
its operations and business with and through its wholly-owned
subsidiaries: RNG Gaming Limited ("RNG"), an Isle of Man
corporation incorporated on July 12, 2006 which is engaged in
development of its software and licensing it to third parties,
and Get21 Limited ("Get21"), an Isle of Man corporation
incorporated on July 12, 2006 which is engaged in providing
marketing services of gaming applications. On August 4, 2006,
Gaming filed with the Securities and Exchange Commission
("SEC") a registration statement on Form 20-F, which is now
effective. As a result, Gaming is now a separate reporting
entity with the SEC that has the reporting obligations of a
foreign private issuer, despite it being the Company's wholly
owned subsidiary.

According to an agreement dated July 12, 2006 between Gaming
and Zone4Play (Delaware), Gaming purchased from Zone4Play
(Delaware) all right, title, and interest in its Intellectual
Property Rights and assets related to its Black Jack business
("BJ Business") on a "Going concern" and "As is" basis, in
exchange for a promissory note in the principal amount of
$2.25 million. The valuation was based on an appraisal report
made by an independent appraiser. This Promissory Note is in
effect for five years (60 months). Principal is paid in five
(5) equal annual installments of $450,000 each and is carrying
interest of $US Libor +1.5% per annum.

f. Concentration of risk that may have a significant impact on
the Company:

The Company derived 84% of its revenues in the year 2006 from
3 major customers (see Note 8b).

F - 11

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United States
("U.S. GAAP").

a. Use of estimates:

The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

b. Financial statements in U.S. dollars:

Most of the revenues of the Company and most of its
subsidiaries are generated in U.S. dollars ("dollar").
Company's management believes that the dollar is the primary
currency of the economic environment in which the Company
operates. Thus, the functional and reporting currency of the
Company and certain of its subsidiaries is the dollar.

Accordingly, monetary accounts maintained in currencies other
than the dollar are remeasured into U.S. dollars in accordance
with Statement of Financial Accounting Standard No. 52,
"Foreign Currency Translation" ("SFAS No. 52"). All
transactions gains and losses of the remeasurement of monetary
balance sheet items are reflected in the consolidated
statements of operations as financial income or expenses as
appropriate.

The financial statements of Zone4Play (UK) Limited, whose
functional currency has been determined to be its local
currency, have been translated into dollars. All balance sheet
amounts have been translated using the exchange rates in
effect at each balance sheet dates. Statement of operation
amounts have been translated using the average exchange rate
prevailing during the period. The resulting translation
adjustments are reported as a separate component of
accumulated other comprehensive loss in stockholder's equity.

c. Principles of consolidation:

The consolidated financial statements include the accounts of
the Company and its subsidiaries. Intercompany transactions
and balances, have been eliminated upon consolidation.

d. Cash equivalents:

Cash equivalents are short-term highly liquid investments that
are readily convertible to cash with original maturities of
three months or less.

F - 12

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)

e. Property and equipment:

Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line
method, over the estimated useful lives of the assets, at the
following annual rates:

%
----------------------------------

Computers and peripheral equipment 33
Electronic devices 15
Over the shorter of the lease term
Leasehold improvements or useful economic life

f. Impairment of long-lived assets:

The Company's long-lived assets are reviewed for impairment in
accordance with Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long- Lived
Assets" ("SFAS No. 144") whenever events or changes in
circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of
an asset to the future undiscounted cash flows expected to be
generated by the asset. If such asset is considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds the
fair value. As of December 31, 2006, 2005 and 2004 no
impairment losses have been identified.

g. Acquired technology:

Acquired technology is amortized over its useful life using a
method of amortization that reflects the pattern in which the
economic benefits of technology is consumed or otherwise used
up. Acquired technology is amortized on a straight line basis
over a period of three years.

h. Severance pay:

The Company's liability for severance pay in respect to its
Israeli employees is calculated pursuant to Israeli severance
pay law based on the most recent salary of the employees
multiplied by the number of years of employment as of the
balance sheet date. Israeli employees are entitled to one
month's salary for each year of employment, or a portion
thereof. The Company's liability for its employees is fully
provided by monthly deposits with severance pay funds,
insurance policies and by an accrual. The value of these
policies is recorded as an asset in the Company's balance
sheet.

F - 13

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)

The deposited funds may be withdrawn only upon the fulfillment
of the obligation pursuant to Israeli severance pay law or
labor agreements. The value of the deposited funds is based on
the cash surrendered value of these policies, and includes
immaterial profits.

Severance expenses for the years ended December 31, 2006, 2005
and 2004 amounted to $ 133,517 $ 107,953 and $ 103,923,
respectively.

i. Accounting for stock-based compensation:

Effective January 1, 2006, the Company adopted the provisions
of Statement of Financial Accounting Standard No. 123 (revised
2004) ("SFAS 123R"), "Share-Based Payment," and Staff
Accounting Bulletin No. 107 ("SAB 107"), which was issued in
March 2005 by the SEC. SFAS 123R addresses the accounting for
share-based payment transactions in which the Company obtains
employee services in exchange for equity instruments of the
Company. This statement requires that employee equity awards
be accounted for using the grant-date fair value method. SAB
107 provides supplemental implementation guidance on SFAS
123R, including guidance on valuation methods, classification
of compensation expense, income statement effects, disclosures
and other issues.

SFAS 123R supersedes the Company's previous accounting for its
employee stock option plans using the intrinsic value-based
method of accounting prescribed under Accounting Principles
Board Opinion No. 25 and related interpretations ("APB 25")..
The Company elected to adopt the modified prospective
transition method permitted by SFAS 123R. Under such
transition method, the new standard has been implemented as
from January 1, 2006, with no restatement of prior periods to
reflect the fair value method of expensing share-based
compensation.

The Company has expensed compensation costs, net of estimated
forfeitures, applying the accelerated vesting method, based on
the grant-date fair value estimated in accordance with the
original provisions of SFAS 123, and previously presented in
the pro forma footnote disclosures. Results for prior periods
have not been restated as explained above. For the year ended
December 31, 2006, the Company recorded stock-based
compensation costs in the amount of $1,823,842. The total
unrecognized compensation cost on employee stock options
amounted to $1,639,544, at December 31, 2006, and is expected
to be recognized over a weighted average period of 3 years.

The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the
following weighted-average assumptions:

YEAR ENDED DECEMBER 31,
---------------------------
2006 2005
------- -------

Dividend yield 0% 0%
Expected volatility 76% 63%
Risk-free interest rate 4.84 4.39%
Expected life (years) 6 years 3 years
Expected forfeiture 23% -

F - 14

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)

The Company issues stock options to its employees, directors
and certain consultants and provides the right to purchase
stock pursuant to approved stock option and employee stock
purchase programs. Prior to the adoption of FAS 123R, the
Company elected to follow APB 25, in accounting for its stock
option plans. Under APB No. 25, when the exercise price of an
employee stock option is less than the market price of the
underlying stock on the date of grant, compensation expense is
recognized.

The following table illustrates the effect on net income and
earnings per share, assuming the Company had applied the fair
value recognition provisions of SFAS 123 (as amended by SFAS
148) to its stock-based employee compensation in prior years:

YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2005 2004
------------ ------------

Net loss, as reported $ 3,965,375 $ 1,920,877
Deduct: stock-based employee compensation - intrinsic
value 516,215 302,252
Add: Total stock-based employee compensation expense
determined under the fair value based method of SFAS No.
123 for all awards 684,921 367,660
------------ ------------

$ 4,134,081 $ 1,986,285
============ ============
Pro forma net loss
Net loss per share:
Basic and diluted - as reported $ 0.169 $ 0.102
============ ============

Basic and diluted - pro forma $ 0.176 $ 0.107
============ ============

The Company applies EITF 96-18, "Accounting for Equity
Instruments that Are Issued to Other than Employees for
Acquiring or in Conjunction with Selling, Goods or Services"
with respect to options and warrants issued to non-employees.

j. Revenue recognition:

The Company accounts for revenues from software applications
agreements in accordance with Statement of Position ("SOP")
97-2, "Software Revenue Recognition", as amended ("SOP 97-2").
The revenue from license fees is recognized when persuasive
evidence of an agreement exists, delivery of the product has
occurred, no significant obligations with regard to
implementation remain, the fee is fixed or determinable and
collectibility is probable.

SOP 97-2 specifies that extended payment terms in a licensing
arrangement may indicate that the license fees are not deemed
to be fixed or determinable. If the fee is not fixed or
determinable, revenue is recognized as payments become due
from the customer unless collection is not considered probable
then revenue is recognized as payments are collected from the
customer, provided that all other revenue recognition criteria
have been met.

F - 15

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)

The arrangements that include multiple elements are usually
arrangements where the Company sells software products and
Post Contract Support ("PCS"). For these multiple elements,
SOP 97-2 requires that the fair value of each component in a
multiple element arrangement will be determined based on the
vendor's specific objective evidence ("VSOE") for that
element, and revenue is allocated to each component based on
its fair value. SOP 98-9 requires that revenue be recognized
under the "residual method" when VSOE does not exist for all
the delivered elements, VSOE of fair value exists for all
undelivered elements, and all other SOP 97-2 criteria are met.
Under the residual method, any discount in the arrangement is
allocated to the delivered elements. The specific objective
evidence for the PCS is established by the price charged on
separate PCS renewal contracts. The revenue associated with
the delivered elements is recognized using the residual method
discussed above.

Revenues from software licenses that require significant
customization, integration and installation that take a short
period of time to complete are recognized in accordance with
Statement of Position 81-1, "Accounting for Performance of
Construction - Type and Certain Production Type Contracts"
("SOP 81-1"), using the complete contract accounting method.
After delivery, if uncertainty exists about customer
acceptance of the software, license revenue is not recognized
until acceptance. Provisions for estimated losses on
uncompleted contracts are made in the period in which such
losses are first determined, in the amount of the estimated
loss on the entire contract. As of December 31, 2006, 2005 and
2004, no such estimated losses were identified.

The Company is entitled to royalties from revenue sharing
arrangements upon sublicensing of the Company's products to
end-users. The Company recognizes royalties from revenue
sharing arrangements during the period based on reports
obtained from its customers through the reporting period on a
monthly basis.

k. Research and development costs:

Research and development costs are charged to the Statement of
Operations as incurred. SFAS No. 86 "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise
Marketed", requires capitalization of certain software
development costs subsequent to the establishment of
technological feasibility.

Based on the Company's product development process,
technological feasibility is established upon completion of a
working model. Costs incurred by the Company between
completion of the working models and the point at which the
products are ready for general releases have been
insignificant. Therefore, all research and development costs
have been expensed.

F - 16

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)

l. Income taxes:

The Company and its subsidiaries account for income taxes in
accordance with SFAS, "Accounting for Income Taxes" ("SFAS No.
109"). This statement prescribes the use of the liability
method whereby deferred tax assets and liability account
balances are determined based on differences between financial
reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. The
Company and its subsidiaries provide a valuation allowance, if
necessary, to reduce deferred tax assets to their estimated
realizable value.

m. Concentrations of credit risk:

Financial instruments that potentially subject the Company and
its subsidiaries to concentrations of credit risk consist
principally of cash and cash equivalents and trade
receivables. The majority of the Company's cash and cash
equivalents are invested in dollar instruments with major
banks in Israel, the United Kingdom and the United States.
Such cash and cash equivalents in the United States may be in
excess of insured limits and are not insured in other
jurisdictions. Management believes that the financial
institutions that hold the Company's investments are
financially sound and accordingly, minimal credit risk exists
with respect to these investments.

Trade receivables of the Company and its subsidiaries are
derived from sales to customers located primarily in the U.S.,
U.K. and Israel. The Company performs ongoing credit
evaluations of its customers and to date has not experienced
any material losses.

The Company and its subsidiaries have no off-balance-sheet
concentration of credit risk such as foreign exchange
contracts, option contracts or other foreign hedging
arrangements.

n. Fair value of financial instruments:

The following methods and assumptions were used by the Company
and its subsidiaries in estimating their fair value
disclosures for financial instruments:

The carrying amounts of cash and cash equivalents, trade
receivables, other accounts receivable, short-term bank
credit, short-term loans, trade payables and other accounts
payable approximate their fair value due to the short-term
maturity of such instruments.

o. Basic and diluted net loss per share:

Earnings (loss) per share ("EPS") were computed in accordance
with provisions of SFAS No. 128"Earnings per share" ("SAFS
128"). SFAS 128 requires the presentation of both basic and
diluted EPS.

Basic net earnings (loss) per share is computed based on the
weighted average number of common shares outstanding during
each year. Diluted earnings (loss) per share is computed based
on the weighted average number of common shares outstanding
during each year, plus dilutive potential common shares
considered outstanding during the year. For the years ended
December 31, 2006, 2005 and 2004, all the options and warrants
outstanding have been excluded from the calculations because
the effect on net loss per share would have been antidilutive.

F - 17

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)

p. Gain on Realization of Shareholdings:

Gain on realization of shareholdings includes the results of
realization of the Company's shareholdings in investee arising
either from the sale of such shareholdings or from issuance of
stock by the investee to third parties, which is recognized in
accordance with the provisions of Staff Accounting Bulletin
No. 51 ("SAB 51") of the Securities and Exchange Commission
("SEC") or SAB Topic 5H. where the investee is a newly-formed,
in a process of research and development, start-up or
development Stage Company.

The Company charges such results to earnings, provided that
the conditions stipulated in SAB 51 for such recognition have
been met or into equity where SAB Topic H2 conditions have
been met.

p. Advertising Costs

The Company expenses advertising costs as incurred.
Advertising costs for the year ended December 31, 2006 were
$109,348. There were no advertising costs in prior years.

r. Impact of recently issued Accounting Standards:

In February 2006, the Financial Accounting Standards Board
("FASB") issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments, an Amendment of FASB Statements No. 133
and 140". This statement permits fair value measurement for
any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation. This
statement is effective for all financial instruments acquired
or issued after the beginning of an entity's first fiscal year
that begins after September 15, 2006. The Company is currently
evaluating the impact of this statement, if any, on its
consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No 48 ("FIN
48"), "Accounting for Uncertainty in Income Taxes an
interpretation of SFAS No. 109." This financial interpretation
clarifies the accounting for uncertainty in income taxes, and
prescribes a recognition threshold and measurement attributes
for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on various related matters such
as derecognition, interest and penalties and disclosure. As
applicable to the Company, the interpretation prescribed by
FIN 48 will be effective commencing January 1, 2007. The
Company is currently evaluating the impact that the adoption
of FIN 48 would have on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements". This standard establishes a framework for
measuring fair value and expands related disclosure
requirements; however, it does not require any new fair value
measurement. As applicable to the Company, this statement will
be effective as of the year beginning January 1, 2008. The
Company is currently evaluating the impact that the adoption
of SFAS No. 157 would have on its consolidated financial
statements.

F - 18

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)

In September 2006, the SEC issued Staff Accounting Bulletin
108, which expresses the Staff's views regarding the process
of quantifying financial statement misstatements. The bulletin
was effective as of the year beginning January 1, 2006. The
implementation of this bulletin had no impact on the Company's
consolidated financial statements.

In February 2007, the FASB issued FAS 159, "The Fair Value
Option for Financial Assets and Financial Liabilities." This
standard permits entities to choose to measure many financial
assets and financial liabilities at fair value. Unrealized
gains and losses on items for which the fair value option has
been elected are reported in earnings. As applicable to the
Company, this statement will be effective as of the year
beginning January 1, 2008. The Company is currently evaluating
the impact that the adoption of FAS 159 would have on its
consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other
Postretirement Plans--An Amendment of FASB No. 87, 88, 106 and
132(R)" ("SFAS 158"). SFAS 158 requires that the funded status
of defined benefit postretirement plans be recognized on the
company's balance sheet, and changes in the funded status be
reflected in comprehensive income, effective fiscal years
ending after December 15, 2006. The adoption of this statement
did not have an impact on the consolidated financial
statements.

NOTE 3: - OTHER ACCOUNTS RECEIVABLE, PREPAID EXPENSES AND RELATED PARTIES

DECEMBER 31,
---------------------
2006 2005
--------- ---------

Government authorities $ 44,428 $ 19,220
Prepaid expenses and other 81,332 62,118
Related parties 38,888 38,848
--------- ---------

$ 164,648 $ 120,186
========= =========

F - 19

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 4: - PROPERTY AND EQUIPMENT, NET

DECEMBER 31,
-------------------------
2006 2005
----------- -----------

Cost:
Computers and peripheral equipment $ 1,184,446 $ 894,453
Leasehold improvements 34,814 34,781
Electronic devices 72,293 66,242
----------- -----------

1,291,553 995,476
----------- -----------
Accumulated depreciation:
Computers and peripheral equipment 563,617 256,612
Leasehold improvements 10,747 6,265
Electronic devices 18,149 7,771
----------- -----------

592,513 270,648
----------- -----------

Depreciated cost $ 699,040 $ 724,828
=========== ===========

Depreciation expenses were $ 321,865 $ 194,545 and $ 47,421 for the
years ended December 31, 2006, 2005 and 2004, respectively.

NOTE 5: - ACQUIRED TECHNOLOGY, NET

Acquired technology from the acquisition of the business from MIX TV
in April 2005 (see Note 1d).

DECEMBER 31,
-------------------------
2006 2005
----------- -----------

Cost $ 1,000,000 $ 1,000,000
Accumulated amortization 559,359 226,027
----------- -----------

Amortized cost $ 440,641 $ 773,973
=========== ===========

Depreciation expenses were $ 333,332 and $ 226,027 for the years
ended December 31, 2006, and 2005, respectively.

Estimated amortization expenses for the year ended:

AMORTIZATION
YEAR ENDING DECEMBER 31, EXPENSES
------------------------------- ------------

2007 $ 333,333
2008 107,308
------------

$ 440,641
============

F - 20

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 6: - SHORT-TERM BANK CREDIT

INTEREST RATE DECEMBER 31,
--------------------- ---------------------
2006 2005 2006 2005
--------- --------- --------- ---------
%
---------------------

Short-term bank credit linked to New
Israeli Shekel (NIS) 9.0-10.0 8.0-9.0 $ 16,751 $ 17,747
========= =========

(1) Total authorized credit lines $ 23,669 $ 21,725
========= =========

NOTE 7: - COMMITMENTS AND CONTINGENT LIABILITIES

Lease commitments:

The Company leases its facilities under lease agreements in Israel,
which will expire in December 2009. The rent of this property
increases once every 12 months by 5% of the space rate. Future
minimum commitments under non-cancelable operating leases as of
December 31, 2006 are as follows:

RENTAL OF
YEAR ENDING DECEMBER 31, PREMISES
----------------------------------- ----------

2007 $ 150,222
2008 155,650
2009 151,376
----------

$ 457,248
==========

Total rent and other attendant expenses for the years ended December
31, 2006, 2005 and 2004 were approximately $120,072, $ 86,100 and $
21,947, respectively.

NOTE 8: - GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS

a. Summary information about geographic areas:

The Company manages its business on the basis of one
reportable segment (see Note 1 for a brief description of the
Company's business) and follows the requirements of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information".

The following is a summary of revenues within geographic
areas, based on customer's location:

YEAR ENDED DECEMBER 31,
---------------------------------------
2006 2005 2004
----------- ------------ ----------

Antigua and Barbuda $ 837,457 $ - $ -
United Kingdom 245,161 507,602 568,347
United States 220,003 340,392 154,606
Australia 350,000 175,000 -
Other 3,758 39,426 45,671
----------- ------------ ----------

$ 1,656,379 $ 1,062,420 $ 768,624
=========== ============ ==========

All long-lived assets are located in Israel at the Company's
premises.

F - 21

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 8: - GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS (CONT.)

b. Major customer data as percentage of total revenues:

2006 2005 2004
----------- ------------ ----------

Customer A 51% - -
Customer B - 21% 19% -
Customer C 12% 14% *) -
Customer D *) - 24% 38%
Customer E *) - 11% *) -
Customer F *) - 11% -
Customer G (related party) - - 26%
Customer h *) - *) - 11%

*) Represents an amount lower than 10%.

NOTE 9: - SHARE CAPITAL

a. Shareholders' rights:

The shares of common stock confer upon the holders the right
to elect the directors and to receive notice to participate
and vote in the stockholders meetings of the Company, and the
right to receive dividends, if and when declared.

b. Private placement:

1. In April 2001, upon commencement of operations, the
Company issued 104,314 shares of Common stock of $ 0.001
par value in consideration of $ 0.1 and in addition was
obligated to issue 10,321,876 shares of its Common stock
to its founders. These shares were issued in August 2003
(9,233,880 shares), in September 2003 (734,371 shares)
and in November 2003 (353,625 shares). All Common stock
and per share amounts have been adjusted to give
retroactive effect to these issuances of shares totaling
10,426,190, as described in note 1c.

2. In April 2004, the Company completed a $ 1.2 million
private placement, consisting of 1,497,252 shares of its
Common stock of $ 0.001 par value and two warrants to
purchase one share of Common stock each. One warrant is
exercisable for 24 months at a price of $ 1.85 per share
and one warrant is exercisable for 36 months at a price
of $ 2.50 per share. The purchase price for each Common
stock and two warrants was $ 0.80. The private placement
agreement was signed with a group of institutional and
individual investors.

According to the private placement, the Company has no
obligation to register the shares that would derive from
exercising the warrants.

F - 22

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 9: - SHARE CAPITAL (CONT.)

3. In April 2004, the Company issued 44,348 shares of
Common stock to a service provider, pursuant to his
service agreement. Expense in the amount of $ 39,914 was
recorded in the Company's statements of operations,
based on the market share price at the date of grant.

4. On August 17, 2004, the Company issued 22,222 shares of
Common stock to a service provider, pursuant to his
service agreement. Expense in the amount of $ 12,000 was
recorded in the Company's statements of operations,
based on the market share price at the date of grant.

5. On August 17, 2004, the Company completed a $ 1 million
private placement consisting of 1,000,000 shares of its
Common stock of $ 0.001 par value and two warrants to
purchase one share of Common stock each. One warrant is
exercisable for 24 months at a price of $ 2.00 per share
and one warrant is exercisable for 36 months at a price
of $ 2.50 per share. The purchase price for each Common
stock and two warrants was $ 1.

According to the private placement, the Company has no
obligation to register the shares that would derive from
exercising the warrants.

6. On January 27, 2005, the Company completed a private
placement, pursuant to which it sold an aggregate of
2,659,998 shares of Common stock for aggregate gross
proceeds of $ 3,989,999, in two steps (January 3 and
January 27). In connection with the aforementioned
private placement the Company issued to its investment
bank 25,000 warrants exercisable until December 31, 2007
at a price of $ 0.80 per share, and 53,200 warrants
exercisable until December 31, 2007 at a price of $ 1.50
per share, in compensation for services related to this
investment.

7. On January 3, 2005 and April 20, 2005, the Company
issued 50,000 and 50,000 shares of common stock
respectively to a service provider, pursuant to a
consulting contract. Expenses in the amounts of $ 69,000
and $ 79,500, respectively, were recorded in the
Company's statements of operations, based on the market
share price at the date of grant.

8. On February 2, 2006, the Company issued 30,000 shares of
common stock to a service provider, pursuant to a
service agreement. Therefore, an expense in the amount
of $18,000 was recognized on the date of grant,
according to Emerging Issues Task Force ("EITF")96-18,
"Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services" ("EITF 96-18").

F - 23

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 9: - SHARE CAPITAL (CONT.)

9. On March 24, 2006, the Company completed a $4.5 million
private placement consisting of 6,234,485 units
consisting of one share of its common stock of $0.001
par value and one warrant to purchase one share of
common stock each. The purchase price per unit for the
common stock and the warrant was $0.725. Each warrant is
exercisable for 36 months at a price of $1.125 per
share. The Company agreed to prepare and file with the
SEC a registration statement covering the resale of the
common stock on or before May 9, 2006 for certain
investors. If such registration statement covering the
shares of common stock purchased by those certain
investors was not declared effective within 120 days
from the closing date, then the Company would have had
to pay those investors liquidated damages equal to 1%
per month of the aggregate purchase price paid by them
which would not exceed fifteen percent (15.0%) of the
aggregate purchase. On May 4, 2006 the Company filed a
registration statement covering the resale of the shares
and the shares underlying the warrants, which went
effective on June 6, 2006.

10. On March 30, 2006, the Company completed a $2.0 million
private placement consisting of 2,000,000 units
consisting of one share of its common stock of $0.001
par value and one warrant to purchase one share of
Common stock each. The purchase price per unit for the
common stock and the warrant was $1. Each warrant is
exercisable for 36 months at a price of $1.35 per share.
The Company agreed to prepare and file with the SEC a
registration statement covering the resale of the common
stock on or before May 15, 2006 for certain investors.
If such registration statement covering the shares of
common stock purchased by those certain investors was
not declared effective within 120 days from the closing
date, then the Company would have had to pay those
investors liquidated damages equal to 1% per month of
the aggregate purchase price paid by them which would
not exceed fifteen percent (15.0%) of the aggregate
purchase. On May 4, 2006 the Company filed a
registration statement covering the resale of the shares
and the shares underlying the warrants, which went
effective on June 6, 2006.

11. On April 3, 2006 the Company issued to one of its
non-employee directors an option to purchase up to
200,000 shares of common stock of the Company under the
terms of the Company's option plan ("Director Option").
The exercise price for the shares subject to the
Director Option is $ 0.725 per share of common stock of
the Company. The option is fully vested. This
transaction was recorded in accordance with EITF 96-18.

12. On April 27, 2006, the Company issued to two of its
advisors warrants to purchase a total of 200,000 shares
of the Company's common stock with an exercise price of
$1.00 per share. . This transaction was recorded in
accordance with EITF 96-18.

13. On May 15, 2006, the Company issued to one of its
advisors a warrant to purchase a total of 200,000 shares
of the Company's common stock with an exercise price of
$1.35 per share. This transaction was recorded in
accordance with EITF 96-18.

F - 24

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 9: - SHARE CAPITAL (CONT.)

14. On June 6, 2006, the Company issued to its financial
advisor a warrants to purchase a total of 110,345 shares
of the Company's common stock with an exercise price of
$1.00 per share, and a warrant to purchase 40,000 shares
of the Company's common stock with an exercise price of
$1.35 per share. This transaction was recorded in
accordance with EITF 96-18.

15. On September 14, 2006, Gaming, RNG, and Golden Palace
Ltd. ("Golden Palace"), entered into an agreement under
which Golden Palace agreed to invest $600,000 in RNG in
return for 20% of the ordinary shares of RNG.. The
Company posted a gain of $341,150 resulting from this
issuance in accordance with SAB Topic 5H. According to
the SAB, realization of a gain is not assured where the
subsidiary is a newly-formed, in a process of research
and development, start-up or development Stage Company.
In such situations, the change in the holding company's
proportionate share of the subsidiary equity resulting
from the additional equity raised by the subsidiary
should be accounted for as an equity transaction and no
gain will be recognized. Accordingly, the Company
charged a gain of $341,150 into equity.

Pursuant to terms of this agreement, Golden Palace has
an option, that can be exercised upon the occurrence of
certain events as defined in the agreement, to acquire
an additional 30% of the ordinary shares of RNG (but not
more than 50% of RNG or more than the amount owned by
Gaming) at a price of $100,000 per each additional
percentage interest of the ordinary shares of RNG.
Concurrently, Gaming, RNG and Golden Palace entered into
a shareholders agreement under which Golden Palace has a
right to appoint one of RNG's 4 directors (as long as
Golden Palace owns 20% of RNG) and Gaming has a right to
appoint the 3 other directors. Upon Golden Palace
becoming an owner of 50% of RNG, it will have the right
to appoint an equal number of directors to the number we
are entitled to appoint. At issuance date, the Company
recorded the call option granted to Golden Palace as a
derivative against additional paid in capital. . The
call option is being measured at fair value and it is
marked to market in accordance with "Accounting for
Freestanding Derivative Financial Instruments Indexed
to, and Potentially Settled in, the Stock of a
Consolidated Subsidiary" ("EITF 00-6 ").

16. On December 7, 2006, the Company granted 250,000
warrants to service providers. Therefore, an expense in
the amount of $61,750 was recognized on the date of
grant, according to EITF 96-18.

c. Dividends:

In the event that cash dividends are declared in the future,
such dividends will be paid in U.S. dollars. The Company does
not intend to pay cash dividends in the foreseeable future.

F - 25

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 9: - SHARE CAPITAL (CONT.)

d. Stock option plans:

1. On November 23, 2004, the Company adopted the 2004
Global Share Option Plan (the "2004 Global Share Option
Plan"). The 2004 Global Share Option Plan is intended to
provide incentives to employees, directors and
consultants by providing them with opportunities to
purchase shares of the Company's common stock. Under the
terms of the 2004 Global Share Option Plan, it is
effective as of November 23, 2004 and terminates at the
end of ten years from such date. The Company has
reserved 5,000,000 authorized but unissued shares of
common stock to be issued under the 2004 Global Share
Option Plan. On May 4, 2006, our board of directors
approved an amendment to our 2004 Global Share Option
Plan under which the number of shares reserved by us for
the purpose of the Plan was increased from 5,000,000 to
8,000,000.

The exercise price of the options granted under the
plans may not be less than the nominal value of the
shares into which such options are exercised. The
options vest primarily over three years. Any options
that are forfeited or not exercised before expiration
become available for future grants.

2. On December 31, 2004, the board of directors issued an
aggregate of 1,460,000 options under the 2004 Global
Share Option Plan to various employees. 1,300,000 of
these options are exercisable at a price of $ 0.55 per
share and 160,000 of such options are exercisable at $
1.00 per share. All of the options expire on December
31, 2014.

3. On December 30, 2005, the board of directors issued an
aggregate of 370,000 options under the 2004 Global Share
Option Plan to various employees. All of these options
are exercisable at a price of $ 0.70 per share. All of
the options expire on December 31, 2015.

4. On February 15, 2005, the Company signed an agreement
with a non-employee director. Pursuant to the terms of
the agreement, the Company will pay an annual director's
fee of $ 7,000, payable in quarterly installments and an
additional $ 750 per each board meeting. In addition,
the Company agreed to grant an option to purchase up to
192,261 shares of common stock of the Company under the
terms of the Company's option plan. The exercise price
for the shares subject to the option is $ 1.368 per
share of common stock of the Company on the date of the
grant. The options were forfeited during 2005.

5. On March 31, 2005, the Company granted to two of its
non-employee directors, an option under the terms of the
Company's option plan, to purchase 192,261 shares of
Common stock of the Company at an exercise price of $ 1
per share. Each director's right to exercise such option
will vest in three equal annual installments during a
period of three years commencing in May 2005, provided
that the Company's agreement with such director does not
terminate earlier. The Company recorded in 2005 deferred
stock compensation in the amount of $ 307,618 in respect
of those options.

F - 26

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 9: - SHARE CAPITAL (CONT.)

6. On January 15, 2006, the Company signed an agreement
with a new non-employee director. Under which the
Company granted an option to purchase up to 192,261
shares of common stock of the Company under the terms of
the Company's option plan ("Option"). The exercise price
for the shares subject to the Option is $1 per share of
common stock of the Company on the date of grant. The
Option vests in three equal annual installments, whereby
the director has the right to purchase 1/3 of the shares
subject to the Option at the expiration of the first,
second and third year respectively from the date of the
agreement, provided that the director remains a member
of the Board of Directors at such time. In the event of
termination of the agreement for cause at any time, the
Option, if not exercised, shall terminate and be
cancelled and non-exercisable. During the reported
period the Company recognized an expense of $20,925
according to SFAS 123(R).

7. On April 3, 2006, pursuant to Section 4(2) of the
Securities Act of 1933, as amended, The Company issued
to a company, which is owned by the Company's Chief
Executive Officer, an option to buy 1,863,000 shares of
the Company's common stock with an exercise price of
$1.15 per share in consideration for services provided
by the Chief Executive Officer to the Company. The
option vests in the following manner: 1,500,750 shares
on July 1, 2006, 155,250 shares on October 1, 2006,
155,250 shares on January, 1, 2007 and 51,750 shares on
April 1, 2007. During the reported period the Company
recognized an expense in the amount of $1,157,545
according to SFAS 123(R). The Company used the graded
vesting attribution method for these options.

8. On October 22, 2006, the Company granted to two of its
non-employee directors, an option under the terms of the
Company's option plan, to purchase 113,537 shares of
Common stock of the Company at an exercise price of $
1.15 per share. Each director's right to exercise such
option will vest in 8 equal annual installments during a
period of two years commencing in October 2006 provided
that the Company's agreement with such director does not
terminate earlier.

9. On December 7, 2006, the Company granted to two of its
non-employee directors, an option under the terms of the
Company's option plan, to purchase 192,261 shares of
Common stock of the Company at an exercise price of $
1.00 per share. Each director's right to exercise such
option will vest in 12 equal annual installments during
a period of three years commencing in April 2006,
provided that the Company's agreement with such director
does not terminate earlier.

F - 27

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 9: - SHARE CAPITAL (CONT.)

14. A summary of the Company's share option activity to
employees and directors, and related information is as
follows:

YEAR ENDED DECEMBER 31,
------------------------------------------------
2006 2005
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF OPTIONS PRICE OF OPTIONS PRICE
---------- -------- ---------- --------
$ $
-------- --------

Outstanding at the 2,194,522 0.68 1,460,000 0.60
beginning of the year

Granted 7,106,857 1.01 946,783 0.96
Exercised 14,583 0.58 - -
Forfeited 1,633,750 0.99 212,261 1.33
---------- ----------

Outstanding at the end of
the year 7,653,046 1.01 2,194,522 0.68
========== ==== ========== ====

Options exercisable at the
end of the year 3,471,864 0.95 979,852 0.63
========== ==== ========== ====

Weighted-average fair value
of options granted during
the year $ 0.52 $ 0.82
========== ==========

o The fair value of each option granted is estimated
on the date of grant, using the Black-Scholes
option-pricing model with the following weighted
average assumptions: dividend yield of 0% for all
years: expected volatility: 2006 - 76%, 2005 -
63%' risk-free interest rate: 2006 - 4.84% and
2005 - 4.39%' and expected life: 2006 - 6 years
and 2005 3 years.

o The expected volatility is based on the historical
volatility of the Company's stock. The risk-free
interest rate assumption is based on observed
interest rates appropriate for the expected term
of the stock options granted. As permitted by SAB
107, the Company used the simplified method to
compute the expected option term for options
granted in 2006. The dividend yield assumption
reflects the expected dividend yield based on
historical dividends. Pre-vesting forfeiture rates
were estimated based on pre-vesting forfeiture
experience

F - 28

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 9: - SHARE CAPITAL (CONT.)

The options outstanding as of December 31, 2006, have
been classified by ranges of exercise price, as follows:

WEIGHTED
OPTIONS WEIGHTED OPTIONS AVERAGE
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE EXERCISE
AS OF REMAINING AVERAGE AS OF PRICE OF
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, OPTIONS
PRICE 2006 LIFE (YEARS) PRICE 2006 EXERCISABLE
-------- ------------ ------------ -------- ------------ -----------
$ $ $
-------- -------- -----------

0.55 1,034,167 8.5 0.55 953,334 0.55
0.575 1,640,000 10 0.575 67,083 0.575
0.70 132,500 9 0.70 62,500 0.70
1.00 1,081,305 8.5 1.00 407,947 1.00
1.15 3,765,074 9.43 1.15 1,981,000 1.15
------------ ------------

7,653,046 0.92 3,471,864 0.95
============ ============ ======== ============ ===========

NOTE 10: - RELATED PARTY TRANSACTIONS

a. On February 22, 2005, the Company signed an agreement with Two
Way Media Limited ("TWM") and a related party- Winner.Com (UK)
Limited ("Winner") to enter into an Interactive Services
Agreement (the "Agreement"). TWM, entered into an agreement
with the Company and Winner to provide client-side game
applications, server-side software for the management of such
platforms and project management support and technical
services using Winner's trademark and brand. Each party is
entitled to a certain profit share, based on the kind of
platform pursuant to which the profit was generated and the
amount of profit generated.

b. During the year 2004 the Company sold software application as
part of its regular course of business one of its related
parties.

c. In the fourth quarter of 2006, since the Company's revenues
exceeded $750,000, the base salary of the Company's Chief
Executive Officer has increased to $15,000 a month effective
February 1, 2004 as agreed in the employment agreement signed
with the Chief Executive Officer. As a result, the Company has
recorded an allowance on behalf of this liability in the
amount of $305,727.

NOTE 11: - INCOME TAXES

a. Measurement of taxable income under the Income Tax Law
(Inflationary Adjustments), 1985:

Results for tax purposes of the Israeli subsidiaries are
measured in terms of earnings in NIS, after certain
adjustments for increases in the Israeli Consumer Price Index
("CPI"). As explained in Note 2b, the financial statements are
measured in U.S. dollars. The difference between the annual
change in the Israeli CPI and in the NIS/dollar exchange rate
causes a further difference between taxable income and the
income before taxes shown in the financial statements. In
accordance with paragraph 9(f) of SFAS No. 109, the Israeli
subsidiaries have not provided deferred income taxes on the
difference between the functional currency and the tax bases
of assets and liabilities.

F - 29

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 11: - INCOME TAXES (CONT.)

Israeli tax reform:

On January 1, 2003, a comprehensive tax reform took effect in
Israel. Pursuant to the reform, resident companies are subject
to Israeli tax on income accrued or derived in Israel or
abroad. In addition, the concept of "controlled foreign
corporation" was introduced, according to which an Israeli
company may become subject to Israeli taxes on certain income
of a non-Israeli subsidiary if the subsidiary's primary source
of income is passive income (such as interest, dividends,
royalties, rental income or capital gains). The tax reform
also substantially changed the system of taxation of capital
gains.

b. loss before taxes on income:

YEAR ENDED DECEMBER 31,
---------------------------------------
2006 2005 2004
----------- ----------- -----------

Domestic $ 2,498,758 $ 3,267,999 $ 1,759,724
Foreign 3,901,819 695,476 161,153
----------- ----------- -----------

$ 6,400,577 $ 3,963,475 $ 1,920,877
=========== =========== ===========

c. Taxes on income:

Taxes on income consist of the following:

Current:
Domestic $ - $ - $ -
Foreign - 1,900 -
----------- ----------- -----------

Taxes on income $ - $ 1,900 $ -
=========== =========== ===========

d. Deferred income taxes:

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 and its subsidiaries' deferred tax assets are as
follows:

YEAR ENDED DECEMBER 31,
-----------------------------------------
2006 2005 2004
------------ ------------ -----------

Operating loss carryforward $ 3,360,291 $ 2,226,194 $ 985,723
Tax withholding 10,255 -
Foreign 76,062 22,629 33,628
------------ ------------ -----------

Deferred tax asset before valuation
allowance 3,436,353 2,259,078 1,019,351
Valuation allowance (3,436,353) (2,259,078) (1,019,351)
------------ ------------ -----------

Net deferred tax asset $ - $ - $ -
============ ============ ===========

F - 30

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 11: - INCOME TAXES (CONT.)

On December 31, 2006, the Company and its subsidiaries have
provided valuation allowances of $ 3,367,733 in respect of
deferred tax assets resulting from tax loss carryforwards and
other temporary differences. Management currently believes
that since the Company and its subsidiaries have a history of
losses it is more likely than not that the deferred tax
regarding the loss carryforwards and other temporary
differences will not be realized in the foreseeable future.
The change in valuation allowance was $ 1,108,555.

e. Net operating losses carryforwards:

The US subsidiaries have accumulated losses for tax purposes
as of December 31, 2006, in the amount of $ 8,390,654 which
may be carried forward and offset against taxable income, and
which expires during the years 2022 through 2025.

Utilization of U.S. net operating losses may be subject to
substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar
state provisions. The annual limitation may result in the
expiration of net operating losses before utilization.

Zone4Play (Israel) Ltd., has accumulated losses for tax
purposes as of December 31, 2006, in the amount of
approximately $ 231,666 which may be carried forward and
offset against taxable income in the future, for an indefinite
period.

MIX TV Ltd an Israeli subsidiary of the Company has
accumulated losses for tax purposes as of December 31, 2006,
in the amount of approximately $ 682,789 which may be carried
forward and offset against taxable income in the future, for
an indefinite period.

Gaming, an Isle of Man subsidiary of the Company has
accumulated losses for tax purposes as of December 31, 2006,
in the amount of approximately $ 233,355 which may be carried
forward and offset against taxable income in the future, for
an indefinite period.

Get21 an Isle of Man subsidiary of the Company has accumulated
losses for tax purposes as of December 31, 2006, in the amount
of approximately $ 864,616 which may be carried forward and
offset against taxable income in the future, for an indefinite
period.

f. The main reconciling items between the statutory tax rate of
the Company and the effective tax rate are the non-recognition
of the benefits from accumulated net operating losses carry
forward among the various subsidiaries worldwide due to the
uncertainty of the realization of such tax benefits.

g. Tax rates:

Taxable income of Israeli subsidiaries is subject to tax at
the rate of 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009
and 25% in 2010 and thereafter.

F - 31

ZONE 4 PLAY, INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS, EXCEPT SHARE DATA

NOTE 11: - INCOME TAXES (CONT.)

h. Income taxes on non-Israeli subsidiaries:

Non-Israeli subsidiaries are taxed according to the tax laws
in their respective country of residence.

Israeli income taxes and foreign withholding taxes were not
provided for on undistributed earnings of the Company's
foreign subsidiaries. The Company intends to reinvest these
earnings indefinitely in its foreign subsidiaries. If these
earnings were distributed to Israel in the form of dividends
or otherwise, the Company would be subject to additional
Israeli income taxes (subject to an adjustment for foreign tax
credits) and foreign withholding taxes.

NOTE 12: - FINANCIAL EXPENSES

YEAR ENDED DECEMBER 31,
---------------------------------
2006 2005 2004
--------- --------- ---------

Financial (Income) expenses:
Interest, bank charges and fees, net $ (67,836) $ (14,238) $ 18,067
Foreign currency translation differences 58,655 14,332 22,829
--------- --------- ---------

$ (9,181) $ 94 $ 40,896
========= ========= =========

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F - 32