---

UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





x           
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.





For
the quarterly period ended June 30, 2009





OR





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





For
the transition period from __________ to __________





Commission
File No. 333-124405





DIGITALPOST
INTERACTIVE, INC.


(Exact
Name of Registrant in its Charter)





Nevada
            26-1944595(State
      or Other Jurisdiction of
            (IRS
      EmployerIncorporation)
            Identification
      No.)





4040
Barranca Parkway, Suite 220, Irvine, CA 92602


(Address
of Principal Executive Offices) (Zip Code)





(949)
333-7500


Registrant’s
Telephone Number, Including Area Code








Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x   No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).


Yes x   No o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.





Large
accelerated filer  o                                                                                                                      Accelerated
filer  o





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





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





As of
August 14, 2009, there were 77,136,356 shares of the Registrant’s common stock
issued and outstanding.





INDEX





PART I
      - FINANCIAL INFORMATIONItem
      1.
              Financial
      StatementsCondensed
      Consolidated Balance Sheet at June 30, 2009 (unaudited) and December 31,
      2008
              1Condensed
      Consolidated Statements of Operations for the three and six months ended
      June 30, 2009 and 2008 (unaudited)
              2Condensed
      Consolidated Statements of Cash Flows for the six months ended June 30,
      2008 and 2007 (unaudited)
              3Notes
      to Condensed Consolidated Financial Statements (unaudited)
              4Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              18Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              24Item
      4T.
              Controls
      and Procedures
              24PART
      II - OTHER INFORMATIONItem
      1.
              Legal
      Proceedings
              25Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              25Item
      3.
              Defaults
      Upon Senior Securities
              25Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              25Item
      5.
              Other
      Information
              25Item
      6.
              Exhibits
              25Signatures
              26








Item
1. Financial Statements


DIGITALPOST
INTERACTIVE, INC.


CONDENSED
CONSOLIDATED


BALANCE
SHEETS





June
      30,
              
              December
      31,2009
              
              2008Assets
              
              (Unaudited)Current
      assetsCash
      and cash equivalents
              $
              2,800
              $
              67,700Accounts
      receivable and other current assets
              
              50,200
              
              22,200Total
      current assets
              
              53,000
              
              89,900Property
      and equipment, net
              
              36,600
              
              46,900Web
      site development costs, net
              
              166,900
              
              195,200Deferred
      financing costs
              
              
              53,800
              
              89,200Other
      assets
              
              
              1,500
              
              8,300Total
      assets
              
              $
              311,800
              $
              429,500Liabilities
      and Stockholders' DeficitCurrent
      liabilitiesAccounts
      payable
              
              $
              132,400
              $
              104,100Accrued
      expenses
              
              
              221,700
              
              94,600Deferred
      revenue
              
              
              68,200
              
              91,600Due
      to stockholder
              
              
              36,600
              
              36,600Convertible
      promissory notes, net – current (Note 6)
              
              
              1,696,400
              
              1,092,000Total
      current liabilities
              
              2,155,300
              
              1,418,900Convertible
      promissory notes, net (Note 6)
              
              221,200
              
              328,600Total
      liabilities
              
              2,376,500
              
              1,747,500Commitments
      and contingencies (Note 8)Stockholders’
      deficit (Note 7)Preferred
      Stock, $.001 par value; 20,000,000shares
      authorized; no sharesissued
      and outstanding
              
              -
              
              -Common
      Stock, $.001 par value; 480,000,000shares
      authorized; 76,836,356 and 72,005,906shares
      issued and outstanding
              
              76,800
              
              72,000Additional
      paid in capital
              
              5,946,500
              
              6,121,400Accumulated
      deficit
              
              
              (8,088,000)
              
              (7,511,400)Stockholders’
      deficit
              
              (2,064,700)
              
              (1,318,000)Total
      liabilities and stockholders’ deficit
              $
              311,800
              $
              429,500





The
accompanying notes to condensed unaudited consolidated financial statements
are


an
integral part of this balance sheet.


1


DIGITALPOST
INTERACTIVE, INC.


CONDENSED
CONSOLIDATED


STATEMENTS
OF OPERATIONS(UNAUDITED)





Three
      Months
              
              Three
      Months
              
              Six
      Months
              
              Six
      MonthsEnded
              
              Ended
              
              Ended
              
              EndedJune
      30, 2009
              
              June
      30, 2008
              
              June
      30, 2009
              
              June
      30, 2008Revenues:Subscriptions
              
              $
              183,900
              $
              59,100
              $
              390,600
              $
              110,400Professional
      services
              
              
              192,500
              
              85,100
              
              296,800
              
              85,100Total
      Revenue
              
              
              376,400
              
              144,200
              
              687,400
              
              195,500Cost
      of Revenues:Subscriptions
              
              
              85,000
              
              12,100
              
              179,600
              
              23,100Professional
      services
              
              
              
              103,000
              
              21,100
              
              149,900
              
              21,100Total
      Cost of Revenue
              
              188,000
              
              33,200
              
              329,500
              
              44,200Gross
      Profit
              
              
              
              188,400
              
              111,000
              
              357,900
              
              151,300Operating
      expenses:Research
      and development
              
              
              -
              
              180,400
              
              54,400
              
              239,100Sales
      and marketing
              
              
              30,000
              
              184,300
              
              45,900
              
              337,900General
      and administrative
              
              302,600
              
              1,092,600
              
              692,200
              
              1,791,600Total
      operating expenses
              332,600
              
              1,457,300
              
              792,500
              
              2,368,600Loss
      from operations
              
              (144,200)
              
              (1,346,300)
              
              (434,600)
              
              (2,217,300)Interest
      (expense)
              
              (280,000)
              
              (127,400)
              
              (498,100)
              
              (237,500)Net
      loss
              
              
              $
              (424,200)
              $
              (1,473,700)
              $
              (932,700)
              $
              (2,454,800)Weighted
      average outstanding shares
              75,531,372
              
              58,724,597
              
              74,280,906
              
              56,809,895Basic
      and diluted loss per share
              $
              (0.006)
              $
              (0.025)
              $
              (0.013)
              $
              (0.043)











The
accompanying notes to condensed unaudited consolidated financial statements
are


an
integral part of these statements.


2


DIGITALPOST
INTERACTIVE, INC.


CONDENSED
CONSOLIDATED


STATEMENTS
OF CASH FLOWS(UNAUDITED)





Six
      Months
                        
                        Six
      MonthsEnded
                        
                        EndedJune
      30, 2009
                        
                        June
      30, 2008Cash
      flows from operating activitiesNet
      loss
                        
                        
                        
                        
                        $
                        (932,700)
                        
                        $
                        (2,454,800)Adjustments
      to reconcile net loss to net cashused
      by operating activities:Depreciation
      and amortization
                        
                        
                        74,100
                        
                        
                        38,200Non-cash
      stock-based compensation
                        
                        
                        310,800
                        
                        
                        1,392,000Amortization
      of debt discount
                        
                        
                        309,700
                        
                        
                        181,600Beneficial
      conversion feature liability
                        
                        
                        62,400
                        
                        
                        -Changes
      in operating assets and liabilities:Accounts
      receivable and other assets
                        
                        
                        
                        (28,000)
                        
                        
                        (41,800)Other
      assets
                        
                        
                        
                        6,800
                        
                        
                        (42,600)Accounts
      payable
                        
                        
                        
                        28,300
                        
                        
                        (11,900)Accrued
      expenses
                        
                        
                        
                        127,100
                        
                        
                        32,100Deferred
      revenue
                        
                        
                        
                        (23,400)
                        
                        
                        34,200Net
      cash used by operating activities
                        
                        
                        (64,900)
                        
                        
                        (873,000)Cash
      flows from investing activitiesAcquisition
      of property and equipment
                        
                        
                        -
                        
                        
                        (3,300)Acquisition
      and development of software
                        
                        
                        -
                        
                        
                        (18,000)Net
      cash used by investing activities
                        
                        
                        -
                        
                        
                        (21,300)Cash
      flows from financing activitiesProceeds
      from the issuance of common stock
                        
                        
                        -
                        
                        
                        619,000Proceeds
      from short term loan
                        
                        
                        -
                        
                        
                        -Proceeds
      from convertible notes
                        
                        
                        -
                        
                        
                        500,000Payments
      made on shareholder loans
                        
                        
                        -
                        
                        
                        (14,400)Financing
      cost
                        
                        
                        -
                        
                        
                        (66,000)Net
      cash provided by financing activities
                        
                        
                        -
                        
                        
                        1,038,600Net
      (decrease) increase in cash and cash equivalents
                        
                        
                        (64,900)
                        
                        
                        144,300Cash
      and cash equivalents, beginning of period
                        
                        
                        67,700
                        
                        
                        88,400Cash
      and cash equivalents, end of period
                        
                        $
                        2,800
                        
                        $
                        232,700Supplemental
      disclosures:Cash
      paid for income taxes
                        
                        
                        $
                        -
                        
                        $
                        1,600Cash
      paid for interest
                        
                        
                        $
                        56,562
                        
                        $
                        2,900Supplemental
      disclosures of non cash activities:Common
      stock issued for interest
                        
                        
                        $
                        30,700
                        
                        $
                        30,700Common
      stock issued for professional services and fees
                        
                        
                        $
                        70,900
                        
                        $
                        -




















The
accompanying notes to condensed unaudited consolidated financial statements
are


an
integral part of these statements.


3


DIGITALPOST
INTERACTIVE, INC.


NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS








1.  BASIS
OF PRESENTATION, ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Organization
and Merger





Prior to
January 30, 2007, the Company was known as HomAssist Corporation, a Nevada
corporation (“HomAssist”).  On January 30, 2007, the Company acquired The
Family Post, Inc, a privately held California corporation (“TFP”). Immediately
following the acquisition of TFP, the Company changed its name to DigitalPost
Interactive, Inc. (“DPI”, “we” or the “Company”) and began operating TFP’s
business of internet content sharing as its operating subsidiary.





The
Company produces destination web sites that allow subscribers to securely share
digital media, including photos, videos, calendars, message boards, and history.
The Company’s proprietary web site administration system, Qwik-PostTM, and online
video uploading system, Video-PostSM, allow users of personal computers to
manage these “virtual family rooms,” and provide a destination to display photo
and video memories, discussions, and history. The Company also provides
professional services by generating and developing custom website
software.





Basis
of Presentation





The
accompanying condensed unaudited consolidated financial statements of the
Company have been prepared in accordance with accounting principles generally
accepted in the United States for the interim financial information and in
accordance with the instructions per Article 8-03 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements.





In the
opinion of management, all adjustments, including normal recurring adjustments,
considered necessary for a fair presentation have been included. The
accompanying condensed unaudited consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of the
Company included in the Company’s 2008 Form 10-K as filed with the U.S.
Securities and Exchange Commission (“SEC”) on March 31, 2009. Operating results
for the three and six month period ended June 30, 2009 is not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 2009.





The
Company has evaluated events or transactions that have occurred subsequent to
the balance sheet date of June 30, 2009 through August 14, 2009, which is the
date of issuance of the financial statements for the quarter ended June
30, 2009.





Basis
of Consolidation





The
accompanying consolidated financial statements include the accounts of DPI and
TFP (as defined below in Note 2) its wholly-owned subsidiary.





Cash
and Cash Equivalents





For
purposes of reporting within the statement of cash flows, the Company considers
all cash on hand, cash accounts not subject to withdrawal restrictions or
penalties, and all highly liquid debt instruments purchased with a maturity of
three months or less to be cash and cash equivalents.





Property
and Equipment





TheCompany’s property and
equipment are stated at cost. Depreciation and amortization are provided using
the straight-line method over estimated useful lives of three to five years.
Maintenance and repairs are charged to operations when incurred. Significant
betterments are capitalized and depreciated over the estimated useful life of
the related asset.


4











Web
Site Development Costs





Under
Emerging Issues TaskForce Statement 00-2, Accounting for Web Site Development
Costs(“EITF 00-2”), costs and expenses incurred during the planning and
operating stages of the Company’s web site are expensed as incurred. Under EITF
00-2, costs incurred in the web site application and infrastructure development
stages are capitalized by the Company and amortized to expense over the web
site’s estimated useful life or period of benefit.





The
Company also applies Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketedto costs incurred
internally in creating its software products.  Under SFAS No. 86,
costs are charged to research and development expense until technological
feasibility has been established for the related product.  Technical
feasibility is deemed to have been established upon completion of a detail
program design or completion of a working model.  Subsequent to
technological feasibility having been established, software production costs
shall be capitalized and reported at the lower of amortized cost or net
realizable value.





As of
June 30, 2009, and December 31, 2008 the Company capitalized $166,900 and
$195,200, respectively, net of accumulated amortization, related to its web site
and software development (Note 4).





Research
and Development Costs





The
Company expenses research and development costs as incurred.





Revenue
Recognition





The
Company’s subscription revenues are generated from monthly subscriptions for web
site hosting services. The typical subscription agreement includes the usage of
a personalized web site and hosting services. The individual deliverables are
not independent of each other and are not sold or priced on a standalone basis.
Costs to complete the web site and prepare it for the use of an end customer are
minimal, and are expensed to cost of revenues as incurred. Upon the completion
of a customer’s signup and initial hosting of the web site, the subscription is
offered free of charge for a two week trial period during which the
customer can cancel at anytime. In accordance with SAB No. 104, after the
two week trial period has ended, revenue is recognized when all of the
following conditions are satisfied: (1) there is persuasive evidence of an
arrangement; (2) the service has been provided to the customer;
(3) the amount of fees to be paid by the customer is fixed or determinable;
and (4) the collection of the Company’s fees is probable. These criteria
are met monthly as the Company’s service is provided on a month-to-month basis,
and collections are generally made in advance of the services. There is no
provision for refunds as of June 30, 2009, as the Company’s historical refund
experience has been minimal.





Customers
signup and agree to purchase the web site service on a monthly or annual basis,
at the customer’s option. The monthly customers pay monthly in advance of the
services, and as the services are performed, the Company recognizes subscription
revenue on a daily basis.





For
annual customers, upon payment of a full year’s subscription service, the
subscription revenue is recorded as deferred revenue in the accompanying balance
sheet. As services are performed, the Company recognizes subscription revenue
ratably on a daily basis.





During
the three and six months ended June 30, 2009, the Company also distributed its
web site through a marketing partnership and shared a portion of revenue
generated with the marketing partner. In accordance with Emerging Issue Task
Force No. 99-19, Reporting Revenue Gross as a
Principal Versus Net as an Agent, revenue is reported gross of the
payment received from its marketing partner because the Company acts as the
primary obligor and is responsible for the fulfillment of services. The Company
derived 33% and 39% of its total revenue from the marketing partner during the
three and six months ended June 30, 2009, respectively.  There was no
such revenue from the marketing partner during the three and six months ended
June 30, 2008, respectively.





Professional
services revenue is generated from custom website design services. The Company’s
professional services revenue from contracts for custom website design is
recorded using a proportional performance model based on labor hours incurred.


5


The
extent of progress toward completion is measured by the labor hours incurred as
a percentage of total estimated labor hours to complete. Labor hours are the
most appropriate measure to allocate revenue among reporting periods, as they
are the primary input to the provision of our professional services. The Company
derived 49% and 41% of its total revenue from a single customer during the three
and six months ended June 30, 2009, respectively.  There was no such
revenue from this same customer during the three and six months ended June 30,
2008, respectively.





Loss
per Common Share





Basic
loss per share is computed by dividing the net loss attributable to the common
stockholders by the weighted average number of shares of common stock
outstanding during the period. Fully diluted loss per share is computed similar
to basic loss per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive. Due to the anti-dilutive nature of the Company’s potential common
shares, there is no effect on the calculation of weighted average shares for
diluted net loss per common share. As a result, the basic and diluted net losses
attributable per common share amounts are identical.
48,772,309  shares of potentially dilutive securities have been
excluded for three and six month periods ended June 30, 2009, respectively,
because their effect was anti-dilutive. 48,383,736 shares of potentially
dilutive securities have been excluded for each of the three and six month
periods ended June 30, 2008, because their effect was
anti-dilutive.





Stock-Based
Compensation





In
December 2004, the Financial Accounting Standard Board (“FASB”) issued Statement
of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, which
addresses the accounting for employee stock options. SFAS No. 123R requires that
the cost of all employee stock options, as well as other equity-based
compensation arrangements, be reflected in the consolidated  financial
statements based on the estimated fair value of the awards. That cost will be
recognized over the period during which an employee is required to provide
service in exchange for the award—the requisite service period (usually the
vesting period). The Company also applies the measurement provisions of EITF
96-18 to awards granted to nonemployees.





The
Company adopted SFAS No. 123R on January 1, 2006, using the modified-prospective
transition method. Under the modified-prospective transition method, prior
periods of the Company’s financial statements are not restated for comparison
purposes. In addition, the measurement, recognition and attribution provisions
of SFAS No. 123R apply to new grants and grants outstanding on the adoption
date. Estimated compensation expense for outstanding grants at the adoption date
will be recognized over the remaining vesting period using the compensation
expense calculated for the pro forma disclosure purposes under SFAS No. 123,
Accounting for Stock-Based
Compensation. The Company’s 2009 calculations were made using the
Black-Scholes option-pricing model with the following weighted average
assumptions: expected life of 4.5 years; 192% stock price volatility; risk-free
interest rate of 2.8%; forfeitures rate of 8% and no dividends during the
expected term. During the three and six month period ended June 30, 2009, the
Company recognized stock option expense of $111,200 and $205,100, respectively.
During three and six month period ended June 30, 2008, the Company recognized
stock option expense of $312,800, and $429,100, respectively





Fair
Value of Financial Instruments





The
Company estimates the fair value of financial instruments using the available
market information and valuation methods. Considerable judgment is required in
estimating fair value. Accordingly, the estimates of fair value may not be
indicative of the amounts the Company could realize in a current market
exchange. As of June 30, 2009, the carrying value of accounts receivable and
payable, loans from stockholders and accrued liabilities approximated fair value
due to the short-term nature and maturity of these instruments.  The
fair value of the 2007 Convertible Promissory Notes and 2008 Convertible
Promissory Notes (See Note 6) have not been estimated since the cost of doing so
would be excessively prohibitive and not practicable.





Concentration
of Risk





As of
June 30, 2009, the Company maintained its cash account at one commercial bank.
The cash balance at June 30, 2009 does not exceed the FDIC coverage
limit.


6














Advertising





Advertising
and promotion costs are charged to operations when incurred. For the three and
six months ended June 30, 2009, advertising and promotion costs amounted to
$4,700 and $4,700 respectively. For the three and six months ended June 30,
2008, advertising and promotion costs amounted to $57,300 and $125,700
respectively.





Impairment
of Long-Lived Assets





The
Company evaluates the recoverability of long-lived assets and the related
estimated remaining lives when events or circumstances lead management to
believe that the carrying value of an asset may not be recoverable. For the
three and six months ended June 30, 2009 and 2008, no events or circumstances
occurred for which an evaluation of the recoverability of long-lived assets was
required.





Deferred
Finance Costs





The
Company defers as other assets the direct incremental costs of raising capital
until such time as the offering is completed. At the time of the completion of
the offering, the costs are charged against the capital raised. Should the
offering be terminated, deferred offering costs are charged to operations during
the period in which the offering is terminated.





Estimates





The
consolidated financial statements are prepared on the basis of accounting
principles generally accepted in the United States of America. The preparation
of consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of June 30, 2009, and
expenses for the three and six months ended June 30, 2009 and 2008. Actual
results could differ from those estimates made by management.





Reclassification





Certain
balances in the 2008 presentation periods have been reclassified to reflect the
classification used in the 2009 balances.





Income
Taxes





The
process of preparing the financial statements requires management estimates of
income taxes in each of the jurisdictions that the Company operates. This
process involves estimating current tax exposure together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in the balance sheet. Under the provisions of
SFAS No. 109, "Accounting
for Income Taxes", the Company utilizes an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Management must assess the
likelihood that the deferred tax assets or liabilities will be realized for
future periods, and to the extent management believes that realization is not
likely, must establish a valuation allowance. To the extent a valuation
allowance is created or adjusted in a period, the Company must include an
expense or benefit, within the tax provision in the statements of operations.
Significant management judgment is required in determining the provision for
income taxes, deferred tax asset and liabilities and any valuation allowance
recorded against net deferred tax assets. It is possible that different tax
models, and the selection of different input variables, could produce a
materially different estimate of the provision, asset, liability and valuation
allowance. The Company determined that it was unlikely to realize any future
benefit from the deferred tax asset in 2009 and 2008 and therefore booked a 100%
valuation allowance both years resulting in the elimination of the deferred tax
asset from the Company's balance sheet as of June 30, 2009 and
2008.






7


Change in Accounting
Principles




In June
2008, the FASB ratified EITF Issue No. 07-05, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock”, or EITF
07-05. Equity-linked instruments (or embedded features) that otherwise meet the
definition of a derivative as outlined in SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, or SFAS 133, are not accounted for
as derivatives if certain criteria are met, one of which is that the instrument
(or embedded feature) must be indexed to the entity’s own stock. EITF 07-05
provides guidance on how to determine if equity-linked instruments (or embedded
features) such as warrants to purchase our stock and convertible notes are
considered indexed to our stock. The Company adopted EITF 07-05, beginning
January 1, 2009, and applied its provisions to outstanding instruments as
of that date. The cumulative effect at January 1, 2009 was a reduction to
additional paid in capital of $480,800 to reclassify the beneficial conversion
feature embedded in the 2007 Convertible Notes (see Note 6 for further
discussion) from equity to a liability, a net decrease in accumulated deficit of
$356,100 to reflect the recording of the initial value and the change in the
value of the conversion feature between its issuance date and January
1, 2009, and the recognition of a conversion feature liability of $124,700 at
January 1, 2009. Under EITF 07-05 and SFAS 133, the conversion feature
will be carried at fair value and adjusted quarterly.





2.  GOING
CONCERN AND MANAGEMENT’S PLANS





The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate the continuation of the Company as a going concern. The
Company has not established sufficient sources of revenue to cover its operating
costs, and as such, has incurred an operating loss since inception. Further, as
of June 30, 2009, the cash resources of the Company are insufficient to meet its
current working capital needs and ongoing business plan. These and other factors
raise substantial doubt about the Company’s ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the possible inability of the Company to continue as a going
concern. During the three months ended June 30, 2009, the Company did not raise
additional working capital from private debt or equity
financings.  However, since inception through December 31, 2008, the
Company has raised an aggregate amount of approximately $4.8 million in private
debt and equity financing. The offer and sale of the securities above were
effected in reliance on the exemptions for sales of securities not involving a
public offering, as set forth in (i) Section 4(2) and Section 4(6) of the
Securities Act and/or Rule 506 of Regulation D promulgated thereunder or (ii)
Rule 501 of Regulation S.





Since the
cash resources of the Company as of June 30, 2009 are insufficient to meet its
current working capital needs and ongoing business plan, the Company is seeking
to raise additional funds either through additional debt or equity financings
during the remainder of 2009.  Also, the Company expects to
improve its cash flow from operating activities through continued cost
reductions and its continued implementation of a strategic marketing partnership
with Kiddie Kandids.





3.  PROPERTY
AND EQUIPMENT





Property
and equipment consisted of the following:





June
      30,2009
              
              
              December
      31, 2008Computer
      equipment and software
              $
              53,100
              
              $
              53,100Furniture
      and fixtures
              
              37,500
              
              
              37,500Less
      -accumulated depreciation and amortization
              
              (54,000)
              
              
              (43,700)$
              36,600
              
              $
              46,900





4.  WEB
SITE DEVELOPMENT COSTS





Web site
development costs consisted of the following:


June
      30,2009
              
              
              December
      31, 2008Web
      site development costs
              $
              323,800
              
              $
              323,800Less
      - accumulated amortization
              
              (156,900)
              
              
              (128,600)$
              166,900
              
              $
              195,200





8














5. DUE
TO STOCKHOLDER





As of
June 30, 2009 and December 31, 2008, $36,600 was due to an officer of the
Company, who is also a principal stockholder. The amount due to the officer does
not bear interest, is not collateralized and has no formal repayment
terms.  During the six months ended June 30, 2009 and 2008, no amounts
and $14,400 of the net amount owed was paid to the officer,
respectively.





6.  CONVERTIBLE
PROMISSORY NOTES





The
2007 Convertible Promissory Notes





During
October 2007, the Company commenced a private offering of its securities for the
purpose of raising capital whereby it entered into Convertible Notes with nine
accredited investors, one of which is the chief financial officer of the
Company. Pursuant to the terms of the offering, the investors purchased an
aggregate of $767,000 of 8% senior secured convertible notes and were issued
warrants to purchase shares of the Company’s common stock (the “2007 Convertible
Notes”). The


secured
convertible notes in the event of default become secured by the Company’s assets
and are due two years from the date of each note, but are subordinate to the AOI
Fund Convertible Promissory Notes discussed below.  Initially, each
secured convertible note holder had the right, at any time, to convert their
note into shares of the Company’s common stock at a conversion ratio of one
share of common stock for each $0.40 of principal amount of their note for a
maximum potential aggregate of 1,917,500 shares of common stock; in addition,
the investors were issued warrants to purchase an aggregate of 1,917,500 shares
of common stock at an exercise price of $0.50 per share that expire five years
from the date of issuance.  Half of these warrants are exercisable
immediately and the remaining half are exercisable upon the conversion of the
related notes payable. Initially, for a period of twelve months after the
effective date, if the Company sells common stock at a price per share below the
conversion price of $0.40 per share, the conversion price will adjust
accordingly downward to the new lower sales price per share.  Since
then, the Company has sold securities at a lower price of $0.123 per share, as a
result the Company is obligated to lower the conversion price from $0.40 per
share to the same $0.123 per share price which gives each investor the right, at
any time, to convert their note into shares of the Company’s common stock at a
conversion ratio of one share of common stock for each $0.123 of principal
amount of their note for a maximum potential aggregate of 6,235,772 shares of
common stock.  In connection with this financing, a form of the
convertible notes agreement was filed with the Securities and Exchange
Commission on Form 8-K, dated October 4, 2007. The offer and sale of the
securities underlying the convertible notes were effected in reliance on the
exemptions for sales of securities not involving a public offering, as set forth
in Sections 4(2) and Section 4(6) of the Securities Act of 1933 and/or Rule 506
of Regulation D adopted thereunder.





One of
the five investors who entered into the 2007 Convertible Notes is the chief
financial officer of the Company.  The Company owed the chief
financial officer $92,300 at the time of the offering, of which, the chief
financial officer exchanged $45,000 of the $92,300 due for $45,000 of
convertible notes. As a result, $45,000 of the $767,000 notes issued were
purchased by the chief financial officer and, in 2007, the Company received
$722,000 net cash proceeds from the $767,000 the convertible note
financing.





Initially,
the Company determined that the embedded conversion option in the 2007
Convertible Notes qualifies for equity classification under EITF 00-19,
qualifies for the scope exception of paragraph 11(a) of SFAS 133, and is not
bifurcated from the host contract. The Company also determined that the warrants
issued to the note holders qualify for equity classification under the
provisions of SFAS 133 and EITF 00-19. In accordance with the provisions of
Accounting Principles Board Opinion No. 14, the Company allocated the net
proceeds received in this transaction to each of the convertible notes and
common stock purchase warrants based on their relative estimated fair values. As
a result, the Company allocated $480,800 to the convertible notes and $143,200
to the vested portion of the common stock purchase warrants, which was recorded
in additional paid-in-capital. In accordance with the consensus of EITF issues
98-5 and 00-27, management determined that the convertible notes contained a
beneficial conversion feature based on the effective conversion price after
allocating proceeds of the convertible notes to the vested portion of the common
stock purchase warrants. The amounts recorded for the common stock purchase
warrants are amortized as interest expense over the term of the convertible
notes.  If there are conversions of the convertible notes, then the
Company will recognize the relative fair value of the warrants that vest upon
such conversion in the amount of $143,200.


9





In
September 2008, the Company entered into waiver agreements with the holders of
the 2007 Convertible Notes whereby the holders waived once the provision to
adjust the conversion price of $0.123 per share downward the new lower sales
price of a financing made by the Company in September 2008.  As
consideration, the Company provided the holders with warrants to purchase an
aggregate of 500,000 shares of the Company's common stock at an exercise price
of $0.07 per share and provided a new provision for a period of twelve months
after the effective date, that if the Company sells common stock for an
aggregate amount in excess of $750,000 in such offering, the conversion
price will adjust accordingly downward to the higher of $0.03 per share or the
new lower sales price per share.





Upon
issuance in 2007, the beneficial conversion feature qualified, under EITF 00-19,
for classification as equity and $480,800 was recorded as additional paid in
capital and discount on debt to be amortized over the term of 2007 Convertible
Notes. Since the intrinsic value of the conversion feature was greater than
the proceeds allocated to the convertible notes and as a result under EITF 98-5
that the amount of the discount assigned to the conversion feature is
limited to the amount of the proceeds allocated to the convertible
notes.  On January 1, 2009, the conversion feature, under
EITF 07-05, was reclassified from equity to liabilities and marked to market.
The value of the conversion feature decreased by $883,100 from the date of
issuance to January 1, 2009.  The cumulative effect at January 1, 2009 was
a reduction to additional paid in capital of $480,800 to reclassify
the conversion feature embedded in the 2007 Convertible Notes from
equity to a liability, a net decrease in accumulated deficit of $356,100 to
reflect the recording of the initial value and the change in the value of
the conversion feature between its issuance date and January 1, 2009,
and the recognition of a conversion feature liability of $124,700. Under
EITF 07-05 and SFAS 133, the conversion feature will be carried at fair
value and adjusted quarterly.  For the three and six months ended June 30,
2009, $62,400 was incurred in valuation expense to mark the conversion
feature to its market value of $187,200 as of June 30, 2009.  The
change in the valuation of the conversion feature was primarily driven by a
slight increase in the Company’s stock price including minor changes in the
related volatility during the quarter ended June 30, 2009. If the stock
price and volatility continues to change from the quarter ended June 30, 2009,
the Company may have to record additional adjustments to the valuation of
its conversion feature. Also see Changes in Accounting Principles
above.





Interest
charges associated with the convertible notes, including amortization of the
discounts associated with the conversion feature and the vested warrants,
totaled $93,300 and $186,600 for the three and six months ended June 30,
2009.  Interest charges associated with the convertible notes,
including amortization of the discounts associated with the beneficial
conversion feature and the vested warrants, totaled $98,300 and $191,700 for the
three and six months ended June 30, 2008.





The
2008 Convertible Promissory Notes





In May
2008, four individual investors purchased an aggregate of $100,000 of 12%
secured convertible notes and were issued warrants to purchase shares of the
Company’s common stock (the “2008 Convertible Notes”). Each convertible note
holder has the right, at any time, to convert their note into shares of the
Company’s common stock at a conversion ratio of one share of common stock for
each $0.14 of principal amount of their note for a maximum potential aggregate
of 714,285 shares of common stock; in addition, the investors were issued
warrants to purchase an aggregate of 357,143 shares of common stock at an
exercise price of $0.14 per share that expire five years from the date of
issuance.  Additionally, the convertible notes are secured by
approximately 1.4 million restricted shares of the Company’s common
stock.  In December 2008, the maturity date of these notes was
extended to December 2009.  The offer and sale of the securities
underlying the convertible notes were effected in reliance on the exemptions for
sales of securities not involving a public offering, as set forth in Sections
4(2) and Section 4(6) of the Securities Act of 1933 and/or Rule 506 of
Regulation D adopted thereunder.





The
Company determined that the embedded conversion option in the 2008 Convertible
Notes qualifies for equity classification under EITF 00-19, qualifies for the
scope exception of paragraph 11(a) of SFAS 133, and is not bifurcated from the
host contract. The Company also determined that the warrants issued to the note
holders qualify for equity classification under the provisions of SFAS 133 and
EITF 00-19. In accordance with the provisions of Accounting Principles Board
Opinion No. 14, the Company allocated the net proceeds received in this
transaction to each of the convertible notes and common stock purchase warrants
based on their relative estimated fair values. As a result, the Company
allocated $53,700 to the convertible notes and $46,300 to the vested portion of
the common stock purchase warrants, which was recorded in additional
paid-in-capital. In accordance with the consensus of EITF issues 98-5 and 00-27,
management determined that the convertible notes contained a beneficial
conversion feature based on the effective conversion price after allocating
proceeds of the convertible notes to the vested portion of the common stock
purchase warrants. The amounts recorded for the common stock purchase warrants
and beneficial conversion feature are amortized as interest expense over
the term of the convertible notes.


10




Interest
charges associated with the convertible notes, including amortization of the
discounts associated with the beneficial conversion feature and the vested
warrants, totaled $3,000 and $23,100 for the three months ended June 30, 2009,
and 2008, respectively.  Interest charges associated with the
convertible notes, including amortization of the discounts associated with the
beneficial conversion feature and the vested warrants, totaled $6,000 and
$23,100 for the six month periods ended June 30, 2009 and 2008,
respectively.





The
AOI Fund Convertible Promissory Notes





In May
2008, an investor purchased $242,400 of 15% secured convertible notes and was
issued warrants to purchase shares of our common stock (the “AOI Convertible
Notes”). The convertible note holder has the right, at any time, to convert
their note into shares of our common stock at a conversion ratio of one share of
common stock for each $0.25 of principal amount of their note for a maximum
potential aggregate of 969,696 shares of common stock; in addition, the
investors were issued “Series A Warrants" to purchase 96,969 shares of common
stock at an exercise price of $0.25 per share that expire five years from the
date of issuance and “Series B Warrants” to purchase 96,969 shares of common
stock at an exercise price of $0.30 per share that expire five years from the
date of issuance.  The Series A Warrants also have a put option in the
amount of $60,000 which can only be exercised after the two year anniversary
date of the convertible note.  The Series B Warrants have no put
option.  The convertible notes included an original issue discount of
$42,400.  Additionally, the convertible notes are secured by a
security interest in all assets of the Company. The offer and sale of the
securities underlying these convertible notes were effected in reliance on the
exemptions for sales of securities not involving a public offering, as set forth
in Sections 4(2) and Section 4(6) of the Securities Act of 1933 and/or Rule 506
of Regulation D adopted thereunder.





The
Company determined that the embedded conversion option in the AOI Convertible
Notes qualifies for equity classification under EITF 00-19, qualifies for the
scope exception of paragraph 11(a) of SFAS 133, and is not bifurcated from the
host contract. The Company also determined that the warrants issued to the note
holders qualify for equity classification under the provisions of SFAS 133 and
EITF 00-19. In accordance with the provisions of Accounting Principles Board
Opinion No. 14, the Company allocated the net proceeds received in this
transaction to each of the convertible notes and common stock purchase warrants
based on their relative estimated fair values. As a result, the Company
allocated $182,600 to the convertible notes and $17,400 to the common stock
purchase warrants, which was recorded in additional paid-in-capital. In
accordance with the consensus of EITF issues 98-5 and 00-27, management
determined that the convertible notes did not contain a beneficial conversion
feature based on the effective conversion price after allocating proceeds of the
convertible notes to the common stock purchase warrants. The amounts recorded
for the common stock purchase warrants are amortized as interest expense over
the term of the convertible notes.  Interest charges associated with
the convertible notes, including amortization of the discounts associated with
the original issue discount, put option and the vested warrants, totaled
$15,000 and $12,300 for the three months ended June 30, 2009, and 2008,
respectively.   Interest charges associated with the convertible
notes, including amortization of the discounts associated with the original
issue discount, put option and the vested warrants, totaled $41,200 and $12,300
for the six months ended June 30, 2009, and 2008, respectively.




In June
2008, the same investor purchased for a second investment, $242,400 of the
AOI Convertible Notes (15% secured convertible notes) and were issued warrants
to purchase shares of our common stock. The convertible note holder has the
right, at any time, to convert their note into shares of our common stock at a
conversion ratio of one share of common stock for each $0.25 of principal amount
of their note for a maximum potential aggregate of 969,696 shares of common
stock; in addition, the investors were issued “Series A Warrants" to purchase
96,969 shares of common stock at an exercise price of $0.25 per share that
expire five years from the date of issuance and “Series B Warrants” to purchase
96,969 shares of common stock at an exercise price of $0.30 per share that
expire five years from the date of issuance.  The Series A Warrants also
have a put option in the amount of $60,000 which can only be exercised after the
two year anniversary date of the convertible note.  The Series B
Warrants have no put option.  The convertible note included an
original issue discount of $42,400.  Additionally, the convertible
notes are secured by a security interest in all assets of the Company. The
offer and sale of the securities underlying these convertible notes were
effected in reliance on the exemptions for sales of securities not involving a
public offering, as set forth in Sections 4(2) and Section 4(6) of the
Securities Act of 1933 and/or Rule 506 of Regulation D adopted
thereunder.





The
Company determined that the embedded conversion option in the AOI Convertible
Notes qualifies for equity classification under EITF 00-19, qualifies for the
scope exception of paragraph 11(a) of SFAS 133, and is not bifurcated from the
host contract. The Company also determined that the warrants issued to the note
holders qualify for equity classification under the provisions of SFAS 133 and
EITF 00-19. In accordance with the provisions of Accounting Principles Board
Opinion No. 14, the Company allocated the net proceeds received in this
transaction to each of the convertible notes and common stock purchase warrants
based


11


on their
relative estimated fair values. As a result, the Company allocated $185,500
to the convertible notes and $14,500 to the common stock purchase warrants,
which was recorded in additional paid-in-capital. In accordance with the
consensus of EITF issues 98-5 and 00-27, management determined that the
convertible notes did not contain a beneficial conversion feature based on the
effective conversion price after allocating proceeds of the convertible notes to
the common stock purchase warrants. The amounts recorded for the common stock
purchase warrants and beneficial conversion feature are amortized as
interest expense over the term of the convertible
notes.    Interest charges associated with the convertible
notes, including amortization of the discounts associated with the original
issue discount, put option and the vested warrants, totaled $14,600 and $200 for
the three months ended June, 30 2009, and 2008,
respectively.   Interest charges associated with the convertible
notes, including amortization of the discounts associated with the original
issue discount, put option and the vested warrants, totaled $29,200 and $200 for
the six months ended June 30, 2009, and 2008, respectively.





In July
2008, the same investor purchased for a third investment, $242,400 of the
AOI Convertible Notes (15% secured convertible notes) and were issued warrants
to purchase shares of our common stock. The convertible note holder has the
right, at any time, to convert their note into shares of our common stock at a
conversion ratio of one share of common stock for each $0.25 of principal amount
of their note for a maximum potential aggregate of 969,696 shares of common
stock; in addition, the investors were issued “Series A Warrants" to purchase
96,969 shares of common stock at an exercise price of $0.25 per share that
expire five years from the date of issuance and “Series B Warrants” to purchase
96,969 shares of common stock at an exercise price of $0.30 per share that
expire five years from the date of issuance.  The Series A Warrants also
have a put option in the amount of $60,000 which can only be exercised after the
two year anniversary date of the convertible note.  The Series B
Warrants have no put option.  The convertible note included an
original issue discount of $42,400.  Additionally, the convertible
notes are secured by a security interest in all assets of the Company. The
offer and sale of the securities underlying these convertible notes were
effected in reliance on the exemptions for sales of securities not involving a
public offering, as set forth in Sections 4(2) and Section 4(6) of the
Securities Act of 1933 and/or Rule 506 of Regulation D adopted
thereunder.





The
Company determined that the embedded conversion option in the AOI Convertible
Notes qualifies for equity classification under EITF 00-19, qualifies for the
scope exception of paragraph 11(a) of SFAS 133, and is not bifurcated from the
host contract. The Company also determined that the warrants issued to the note
holders qualify for equity classification under the provisions of SFAS 133 and
EITF 00-19. In accordance with the provisions of Accounting Principles Board
Opinion No. 14, the Company allocated the net proceeds received in this
transaction to each of the convertible notes and common stock purchase warrants
based on their relative estimated fair values. As a result, the Company
allocated $185,500 to the convertible notes and $14,500 to the common stock
purchase warrants, which was recorded in additional paid-in-capital. In
accordance with the consensus of EITF issues 98-5 and 00-27, management
determined that the convertible notes did not contain a beneficial conversion
feature based on the effective conversion price after allocating proceeds of the
convertible notes to the common stock purchase warrants. The amounts recorded
for the common stock purchase warrants are amortized as interest expense
over the term of the convertible notes.   Interest charges
associated with the convertible notes, including amortization of the discounts
associated with the original issue discount, put option and the vested
warrants, totaled $14,200 and $200 for the three months ended June 30, 2009, and
2008, respectively.   Interest charges associated with the
convertible notes, including amortization of the discounts associated with
the original issue discount, put option and the vested warrants, totaled
$28,400 and $200 for the six months ended June 30, 2009, and 2008,
respectively.





In
September 2008, the same investor purchased for a fourth investment,
$180,000 of the AOI Convertible Notes (15% secured convertible notes) and were
issued warrants to purchase shares of our common stock. The convertible note
holder has the right, at any time, to convert their note into shares of our
common stock at a conversion ratio of one share of common stock for each $0.123
of principal amount of their note for a maximum potential aggregate of 1,463,414
shares of common stock; in addition, the investors were issued “Series C
Warrants" to purchase 750,000 shares of common stock at an exercise price of
$0.123 per share that expire five years from the date of issuance and “Series D
Warrants” to purchase 750,000 shares of common stock at an exercise price of
$.15 per share that expire five years from the date of issuance.  The
Series D Warrants also have a put option in the amount of $45,000 which can only
be exercised after the one year anniversary date of the convertible
note.  The Series C Warrants have no put option.  The
convertible note included an original issue discount of
$30,000.  Additionally, the convertible notes are secured by a
security interest in all assets of the Company. The offer and sale of the
securities underlying these convertible notes were effected in reliance on the
exemptions for sales of securities not involving a public offering, as set forth
in Sections 4(2) and Section 4(6) of the Securities Act of 1933 and/or Rule 506
of Regulation D adopted thereunder.


12


The
Company determined that the embedded conversion option in the AOI Convertible
Notes qualifies for equity classification under EITF 00-19, qualifies for the
scope exception of paragraph 11(a) of SFAS 133, and is not bifurcated from the
host contract. The Company also determined that the warrants issued to the note
holders qualify for equity classification under the provisions of SFAS 133 and
EITF 00-19. In accordance with the provisions of Accounting Principles Board
Opinion No. 14, the Company allocated the net proceeds received in this
transaction to each of the convertible notes and common stock purchase warrants
based on their relative estimated fair values. As a result, the Company
allocated $105,000 to the convertible notes and $45,000 to the common stock
purchase warrants, which was recorded in additional paid-in-capital. In
accordance with the consensus of EITF issues 98-5 and 00-27, management
determined that the convertible notes did not contain a beneficial conversion
feature based on the effective conversion price after allocating proceeds of the
convertible notes to the common stock purchase warrants. The amounts recorded
for the common stock purchase warrants are amortized as interest expense over
the term of the convertible notes.  Interest charges associated with
the convertible notes, including amortization of the discounts associated with
the original issue discount, put option and the vested warrants, totaled
$31,900 and none for the three months ended June 30,2009, and 2008,
respectively.   Interest charges associated with the convertible
notes, including amortization of the discounts associated with the original
issue discount, put option and the vested warrants, totaled $61,800 and $200 for
the six months ended June 30, 2009, and 2008, respectively.







June
      30,2009
              
              
              December
      31, 2008The
      2007 Convertible Promissory Notes
              $
              767,000
              
              $
              767,000The
      2008 Convertible Promissory Notes
              
              114,000
              
              
              108,000The
      AOI Fund Promissory Notes
              
              907,300
              
              
              907,300The
      AOI Fund Promissory Notes Put Option
              
              214,600
              
              
              192,500Conversion
      Feature Liability
              
              187,200
              
              
              -Total
      borrowings
              
              2,190,100
              
              
              1,974,800Debt
      discount
              
              (272,500
              )
              
              (554,200
              )Total
      borrowings less debt discount
              
              1,917,600
              
              
              1,420,600Less
      current portion
              
              1,696,400
              
              
              1,092,000Noncurrent
      portion
              $
              221,200
              
              $
              328,600










7.  STOCKHOLDERS’
DEFICIT





Authorized
Capital Stock





The
Company is authorized to issue 480,000,000 shares of common stock, par value
$0.001 per share, and 20,000,000 shares of preferred stock, par value $0.001 per
share.





Common
Stock





The
common stock holders are entitled to one vote per share held and have the sole
right and power to vote on all matters on which a vote of stockholders is taken.
Voting rights are non-cumulative. Common stock holders are entitled to receive
dividends when, as, and if declared by the Board of Directors, out of funds
legally available therefore and to share pro rata in any distribution to
stockholders. Upon liquidation, dissolution, or the winding up of the Company,
common stock holders are entitled to receive the net assets of the Company in
proportion to the respective number of shares held by them after payment of
liabilities which may be outstanding. Common stock holders do not have any
preemptive right to subscribe for or purchase any shares of any class of stock
of the Company. The outstanding shares of common stock will not be subject to
further call or redemption and are fully paid and non-assessable. To the extent
that additional stock is issued, the relative interest of existing stockholders
will likely be diluted.









13





Shares Issued




In
February 2009, the Company issued 600,000 shares of common stock to
non-executive employees as retention compensation.  As a result, the
Company recorded $6,000 as non-cash stock compensation expense during the six
months ended June 30, 2009.





In
February 2009, the Company issued 1,534,000 shares of common stock for $15,340
of interest due on the 2007 Convertible Promissory Notes.





In May
2009, the Company issued 1,534,000 shares of common stock for $15,340 of
interest due on the 2007 Convertible Promissory Notes.





During
the three months ended June 30, 2009, the Company issued 1,162,500 shares of
common stock for $23,250 of professional services.








Options





Summary
of the 2007 Option Plan





On
January 30, 2007, the board of directors approved and a majority of the
Company’s stockholders ratified by consent the Company’s 2007 incentive and
nonstatutory stock option plan (“Plan”). The Plan is intended to further the
growth and financial success of the Company by providing additional incentives
to selected employees, directors, and consultants to the Company and its
subsidiary corporations, as those terms are defined in Sections 424(e) and
424(f) of the Internal Revenue Code of 1986, as amended (“Code”) (such
subsidiary corporations hereinafter collectively referred to as “Affiliates”) so
that such employees and consultants may acquire or increase their proprietary
interest in the Company. Stock options granted under the Plan (hereinafter the
“Options”) may be either “Incentive Stock Options,” as defined in Section 422A
of the Code and any regulations promulgated under said Section, or “Nonstatutory
Options” at the discretion of the Board of Directors of the Company (the
“Board”) and as reflected in the respective written stock option agreements
granted pursuant hereto.




The Plan
reserves thirty five million (35,000,000) shares of the Company's common stock
for issuance.





Stock
options granted under those certain stock option agreements were granted at
prices no less than the estimated fair value of the shares on the date of grant
as determined by the board of directors, provided, however, that (i) the
exercise price of an incentive stock option (“ISO”) shall not be less than 100%
of the estimated fair value of the shares on the date of grant, respectively;
and (ii) the exercise price of an ISO granted to a 10% stockholder shall not be
less than 110% of the estimated fair value of the shares on the date of grant,
respectively. ISO and nonstatutory stock options (“NSO”) stock options generally
vest every nine months, over a three year period.





In
accordance with the provisions of SFAS 123R, and for nonemployees, the
measurement criteria of EITF 96-18, the Company recognized stock-based
compensation expense of $175,800 and $312,800 for the six months ended June 30,
2009, and 2008, respectively. The fair value of each option granted was
estimated on the date of grant using the Black-Scholes option-pricing model.
Until the quarterly period ended March 31, 2008, the expected volatility is
based on industry comparables as the Company recently became a publicly held
company and trading volumes have been low.  The risk-free rate is
based on the U.S. Treasury yield curve in effect at the time of grant. The
expected term of options granted is based on the remaining expected life of the
option. The following weighted average assumptions were used for the
options granted during the six months ended June 30, 2009 and 2008:








Six
      MonthsEndedJune
      30,2009
                              
                              2008Expected
      volatility
                              
                              
                              442.0
                              %
                              
                              
                              280.0
                              %Risk-free
      rate
                              
                              
                              2.9
                              %
                              
                              
                              3.1
                              %Expected
      Term
                              
                              4.5
      years
                              
                              
                              3.5
      years





14











A summary
of stock option activity for the six months ended June 30, 2009, is as
follows:




Number of
              Shares
            
            Weighted-
              Average
              Exercise
              Price
            
            Weighted-
              Average
              Remaining
              Contractual
              Term
            
            Aggregate
              Intrinsic
              ValueOutstanding
      as of December 31, 2008
            
            
            27,399,032
            
            $
            .09Granted
            
            
            -
            
            $
            -Cancelled
            
            
            (1,276,183)
            
            $
            .11Outstanding
      as of June 30, 2009
            
            
            26,122,849
            
            $
            .09
            
            
            3.4
            
            $
            -





A summary
of the status of the nonvested options for the six months ended June 30, 2009 is
presented below:





Number of
                    Shares
                  
                  Weighted-
                    Average
                    Grant
      Date
                    Fair
      ValueNonvested
      as of December 31, 2008
                  
                  
                  10,182,439
                  
                  $
                  .09Granted
                  
                  
                  -
                  
                  $
                  -Vested
                  
                  
                  (849,342)
                  
                  $
                  .08Cancelled
                  
                  
                  (437,500)
                  
                  $
                  .20Nonvested
      as of June 30, 2009
                  
                  
                  8,895,597
                  
                  $
                  .09





Information
regarding the weighted-average remaining contractual life and weighted-average
exercise price of options outstanding and options exercisable at June 30, 2009,
for selected price ranges is as follows:





Options
      Outstanding
                    
                    Options
      ExercisableExercise
                      Prices
                    
                    
                    Number
                      Outstanding
                    
                    
                    Weighted
                      Average
                      Remaining
                      Contractual
                      Life(in
      Years)
                    
                    
                    Weighted
      Average
                      Exercise
                      Price
                      per
      Share
                    
                    
                    Number
                      Exercisable
                    
                    
                    Weighted
      Average
                      Exercise
                      Price
                      per
      Share$
      .04 - .18
                    
                    
                    23,227,849
                    
                    
                    3.2
                    
                    
                    $  
      .05
                    
                    
                    15,977,252
                    
                    
                    $  
      .07$
      .18 - .27
                    
                    
                    2,895,000
                    
                    
                    3.3
                    
                    
                    $  
      .27
                    
                    
                    1,250,000
                    
                    
                    $    .2726,122,849
                    
                    
                    
                    
                    
                    
                    
                    
                    17,227,252





As
disclosed in Note 1, the Company applies SFAS No. 123R in accounting for its
stock-based awards.





Warrants





In
conjunction with issuance of the Convertible Notes in October 2007, the 2008
Convertible Promissory Notes, the AOI Fund Convertible Promissory Notes (see
Note 6 for further discussion of these issuances) and various consulting
arrangements entered into since inception, as of June 30, 2009, the Company has
issued warrants to purchase an aggregate of 11,326,896 shares of common stock of
the Company at exercise prices ranging from of $0.01 to $0.50 per share that
expire five years from the date of issuance.





15

















A summary
of warrant activity for the six months ended June 30, 2009, is as
follows:





Number of
              Shares
            
            Weighted-
              Average
              Exercise
              Price
            
            Weighted-
              Average
              Remaining
              Contractual
              Term
            
            Aggregate
              Intrinsic
              ValueOutstanding
      as of December 31, 2008
            
            
            9,326,896
            
            $
            .22
            
            
            2.5
            
            $
            -Granted
            
            
            2,000,000
            
            
            .01Cancelled
            
            
            -Outstanding
      as of June 30, 2009
            
            
            11,326,896
            
            $
            .18
            
            
            4.0
            
            $
            -








A summary
of the status of the non-vested warrants for the six months ended June 30, 2009
is presented below:





Number of
                      Shares
                    
                    Weighted-
                      Average
                      Grant
      Date
                      Fair
      ValueNon-vested
      as of December 31, 2008
                    
                    
                    4,038,750
                    
                    $
                    .29Granted
                    
                    
                    2,000,000
                    
                    $
                    .02Vested
                    
                    
                    (1,100,000)
                    
                    $
                    .02Cancelled
                    
                    
                    -
                    
                    $
                    -Non-vested
      as of June 30, 2009
                    
                    
                    4,983,750
                    
                    $
                    .22








8. COMMITMENTS





During
February 2009, the Company entered into a new two year lease for its new
principal offices which the monthly rent is $3,300.  Rent expense incurred
under this lease during the three and six months ended June 30, 2009 was $9,900
and $13,200, respectively. Total payments of $19,800, $42,000, and $7,000
are due through the December 31, 2009, 2010 and 2011, respectively.





In
February 2007, the Company entered into a two year lease for its principal
offices. Monthly rent was $8,400 under this lease. Rent expense incurred under
this lease during the three and six months ended June 30, 2009 was none and
$16,800, respectively. Rent expense during the three and six months ended June
30, 2008 was $25,200 and $50,400, respectively.








9.  RECENT
ACCOUNTING PRONOUNCEMENTS





In June
2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168,
“The FASB Accounting Standards Codification and Hierarchy of Generally Accepted
Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”).
SFAS 168 establishes the FASB Standards Accounting Codification (“Codification”)
as the source of authoritative U.S. generally accepted accounting principles
(“GAAP”) recognized by the FASB to be applied to nongovernmental entities and
rules and interpretive releases of the SEC as authoritative GAAP for SEC
registrants. The Codification will supersede all the existing non-SEC accounting
and reporting standards upon its effective date and subsequently, the FASB will
not issue new standards in the form of Statements, FASB Staff Positions or
Emerging Issues Task Force Abstracts. SFAS 168 also replaces FASB Statement No.
162, “The Hierarchy of Generally Accepted Accounting Principles” given that once
in effect, the Codification will carry the same level of authority. The Company
does not anticipate that the
adoption of this statement will have a material impact on its consolidated
financial statement footnote disclosures.


16





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165
establishes general standards for accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are available
to be issued (“subsequent events”). More specifically, SFAS 165 sets forth the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition in the financial statements, identifies the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements and the disclosures that should
be made about events or transactions that occur after the balance sheet date.
SFAS 165 provides largely the same guidance on subsequent events which
previously existed only in auditing literature. SFAS 165 is effective for
financial statements issued for interim periods ending after June 15, 2009, and
the adoption of this statement did not have a material impact on the
consolidated financial statements.











10.  SUBSEQUENT
EVENTS





The
Company filed on Form 8-K on July 22, 2009, its agreement with a leading
internet company to further provide professional and
consulting services to design, develop and deliver software for a
total fee of $50,000 expected to be completed in the second and third
quarters.


17


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





The
statements, other than statements of historical fact, included in this report
are forward-looking statements. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as “may,” “will,”
“expect,” “intend,” “estimate,” “anticipate,” “plan,” “seek,” or “believe.” We
believe that the expectations reflected in such forward-looking statements are
accurate. However, we cannot assure you that such expectations will occur. Our
actual future performance could differ materially from such statements. You
should not unduly rely on these forward-looking statements, which speak only as
of the date of this report. Except as required by law, we are not obligated to
release publicly any revisions to these forward-looking statements to reflect
events or circumstances occurring after the date of this report or to reflect
the occurrence of unanticipated events.





This
section should be read in conjunction with our condensed unaudited consolidated
financial statements and the related notes thereto as of June 30, 2009 and for
the three and six months then ended, which are included elsewhere in this
report, with the audited consolidated financial statements and related notes
thereto as of December 31, 2008 and for the year then ended, included in our
Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 31,
2009 and with other company filings made with the SEC.





Business
Overview





We are a
SaaS (Software as a Service) and application provider that delivers digital
media sharing solutions.  We produce destination websites that allow
subscribers and other users to securely share digital media, including photos,
calendars, videos, message boards and history. Our proprietary website
administration system, Qwik-PostTM, and online video uploading system,
Video-PostSMallow
PC users to manage these “virtual family rooms” and provides a destination to
display photo and video memories, discussions, and history.





We earn
revenue from subscriptions generated from monthly subscriptions for website
hosting services. The typical subscription agreement includes the usage of a
personalized website and hosting services.  As of August 14, 2009, we
have generated 28,502 subscribers, 15,832 recurring subscribers, 37,096 users,
and have transferred more than 5,269  gigabytes of consumer digital
media across our systems.  We also earn revenue from providing professional
software development services in addition to our subscription based business
model.  During the three and six months ended June 30, 2009, our
revenues were $376,400 and $687,400, respectively, an increase from $144,200 and
$195,500 of revenues during the same period last year, respectively. 
However, our revenues are not sufficient to cover our operating costs and
expenses. We are in the early phases of revenue generating activities and we
intend to continue marketing our product more aggressively upon the
implementation of business arrangements we’ve recently entered into with
marketing partners and the completion of additional debt or equity
financing.





Current
Conditions





Historically
we have incurred significant losses and we continue to incur additional losses
during the three and six months ended June 30, 2009.  Our net losses were
$424,200 and $932,700 for the three and six months ended June 30, 2009,
respectively, which is an improvement from net losses of $1,473,700 and
$2,454,800, for the same periods last year, respectively. Our cash used in
operations was $2,700 and $64,900 for the three and six months ended June 30,
2009, respectively, which is also an improvement from cash used in operations of
$460,800 and $873,000 for the same periods last year, respectively. We expect
our improvements in operating losses and negative cash flow to continue for the
foreseeable future, although we have no assurance such positive trend shall
continue.  We expect that our losses may decrease as a result of generating
new revenues driven from the implementation of our business arrangements we’ve
entered into with our marketing partners, however, there is no assurance that
the implementations will produce sufficient revenues to cover our costs and
expenses.  Our ability to become profitable depends on our ability to
generate new revenue and sustain substantially higher revenue while maintaining
reasonable expense levels.  In particular, although we intend to increase
significantly our spending on marketing and promotional activities, these
efforts may not be effective in growing our brand, increasing our subscriber
base or generating new revenues.  If we do not achieve profitability, we
may not be able to continue our operations.





Historically,
we have relied upon private debt and equity financings as our primary source of
cash and we have relied on these financings to meet our working capital needs.
During the three months ended June 30, 2009, we have been able to rely primarily
upon cash generated from our subscription and professional services
revenues.  We expect this positive trend to continue, but provide no
assurance such trend shall continue and still remain in a negative working
capital position as of June 30, 2009.


18


Moreover,
we have portions of our convertible promissory notes maturing in September and
October 2009.  As of June 30, 2009, the current portion of our
convertible promissory notes is $1,696,400, net of related
discounts.  If those maturities are not satisfied through conversions
of their principal balances into common stock, or if we are unable to
successfully renegotiate the maturity dates of these notes, then we will need to
rely upon additional debt or equity financing to satisfy those upcoming
maturities.  As a result, we plan to continue to seek out and raise
capital by sales of additional private placement equity or debt offerings during
the remainder of 2009, although we have no assurance that such financings will
be completed.





During
the fourth quarter of 2008, we launched a strategic marketing partnership with
Kiddie Kandids, America’s largest children’s photography studio chain with 185
retail locations nationwide.  We derived 33% of our total 2009 second
quarter revenue from this marketing partnership and we expect this trend to
continue through the foreseeable future.  It is our expectation that
the growth from this strategic marketing partnership may assist us in becoming
less reliant upon sourcing cash from debt and equity financings, however, we
have no assurance that such growth shall continue.





Going
Concern





We have
not established sufficient sources of revenue to cover our operating costs and,
as such, we have incurred operating losses since inception. Further, as of June
30, 2009, our cash resources were insufficient to meet our current working
capital needs and on-going business plan. These and other factors raise
substantial doubt about our ability to continue as a going concern. The report
of the independent registered public accounting firm accompanying our financial
statements for the year ended December 31, 2008, included in our Form 10-K filed
with the SEC on March 31, 2009, contains an explanatory paragraph expressing
substantial doubt about our ability to continue as a going concern because of
our operating losses and our need for additional capital.  Such doubt could
make it more difficult for us to raise additional capital and may materially and
adversely affect the terms of any financing that we may obtain. The accompanying
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the possible
inability of us to continue as a going concern.





Results
of Operations





The
Three Months Ended June 30, 2009 Compared to the Three Months Ended June 30,
2008





Total
revenue was $376,400 and $144,200 for the three months ended June 30, 2009 and
2008, respectively, representing an increase of $232,200. The increase was due
to an increase in subscription revenues of $124,800 during the three months
ended June 30, 2009 as compared to the same period last year and an increase in
professional services of $107,400 during the three months ended June 30, 2009 as
compared to the same period last year.





Subscription
revenues for the three months ended June 30, 2009 was $183,900 as compared to
$59,100 during the same period last year. Subscription revenue increased
$124,800 due to an increase in our customers to 15,288 recurring subscribers as
of June 30, 2009 from 4,541 subscribers as of June 30, 2008. The increase in
subscriptions was due to additional sales and marketing activities performed
through a marketing partnership with Kiddie Kandids launched in the fourth
quarter of 2008.  As we continue marketing activities and promotions,
subscription revenues continued to increase as compared to the same period last
year.   Digital media sharing products and services are
relatively new, and as a result, it is difficult to determine our current market
share or predict our future market share.  We believe that the market
for digital media sharing products and services is growing and that related
market opportunities are also expected to grow. Our revenue, profitability and
future growth depend not only on the anticipated market growth, but also our
ability to execute our business plan and ultimate customer acceptance of our
products and services and the success or failure of our
competitors.  As a result, we expect the trend of our revenues to be
positive, however, provide no assurance that such will occur.




Professional
services revenues for the three months ended June 30, 2009 was $192,500 as
compared to $85,100 during the same period last year. The increase was due to us
providing custom website design services under software development contracts
entered into during the first and second quarter of 2009.  Our
contracts during the period this year were for increased amount of professional
services as compared to the size of our contracts the same period last
year.   From time to time, we may enter into professional
services agreements resulting from our strategic partnership marketing
activities and as a result, revenues from professional services may recur in
future periods. On April 22, 2009, we entered into a professional services
agreement for an aggregate amount of $340,000 and on July 16, 2009, we
entered into another agreement for additional professional services for an
aggregate amount of $50,000 with the same customer.


19


As a
result, we expect the trend of our revenues to be positive, however, provide no
assurance that such will occur.   The Company derived 49% of its
total revenue from a single customer during the three months ended June 30,
2009, respectively.  There was no such revenue from this same customer
during the three months ended June 30, 2008, respectively.





Total
cost of revenue was $188,000 and $33,200 for the three months ended June 30,
2009 and 2008, respectively, representing an increase of $154,800. The increase
was due to an increase in subscription cost of revenues of $72,900 and increased
cost of professional services revenue of $81,900 during the three months ended
June 30, 2009, respectively.





The
increase in cost of subscription revenues for the three months ended June 30,
2009 as compared to the same period last year is due to primarily having an
increase in subscription sales. Cost of subscription revenues for the three
months ended June 30, 2009 were mostly derived from our marketing partnerships,
hosting and setup services incurred from website services provided to our
subscribers.





The
increase in cost of professional services revenues for the three months ended
June 30, 2009 as compared to the same period last year is due to having provided
increased professional services, primarily labor related costs, during the three
months ended June 30, 2009 whereas there were fewer such services provided
during the same period last year.





Research
and development expense was none and $180,400 for the three months ended June
30, 2009 and 2008, respectively, representing a decrease of
$180,400.  We significantly reduced our research and development
activities including lowering development personnel and consultants which
was part of a company-wide cost reduction that continued through the second
quarter of 2009 as compared to the same period last year.  Moreover,
our developers were primarily focused on completing our professional services
agreements which lead to much less research and development activity during the
second quarter of 2009 as compared to the same period last year.





Sales and
marketing expense was $30,000 and $184,300 for the three months ended June 30,
2009 and 2008, respectively, representing a decrease of $154,300. The decrease
was primarily due to lower amounts of sales and marketing activities and
promotions during the three months ended June 30, 2009, including a decrease in
marketing salaries of $63,200, media advertising of $51,100, which both
reductions are due in part by a company-wide cost reduction that continued
through the second quarter of 2009 as compared to the same period last
year.  Also, the overall decrease in sales and marketing expense was
due to non-cash stock based compensation expense decrease of $40,400 resulting
from fewer stock options outstanding.





General
and administrative expense was $302,600 and $1,092,600 for the three months
ended June 30, 2009 and 2008, respectively, representing a decrease of $790,000.
The decrease was primarily due to a decrease in salaries of $70,300 due to a
company-wide cost reduction that continued through the second quarter of
2009 as compared to the same period last year. Also contributing to the
decrease was a decrease in non-cash warrant expense of $611,100 a majority of
which relates to warrants granted to an investor relations firm which expired
unexercised in July 2008.  There were no such similar warrants granted
or outstanding to our investor relations firm during the same period this year.
Also, the overall decrease in general and administrative expense was due to
non-cash stock based compensation expense decrease of $66,500 resulting from
fewer stock options outstanding.





Interest
expense was $280,000 and $127,400 for the three months ended June 30, 2009 and
2008, respectively, representing an increase of $152,600.  The
increase was attributable to interest and debt discount amortization expense of
$280,000 during the three months ended June 30, 2009, which was primarily
related to additional borrowings of $422,000 which were not outstanding during
the second quarter last year.








The
Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30,
2008





Total
revenue was $687,400 and $195,500 for the six months ended June 30, 2009 and
2008, respectively, representing an increase of $491,900. The increase was due
to an increase in subscription revenues of $280,200 during the six months ended
June 30, 2009 as compared to the same period last year and an increase in
professional services of $211,700 during the six months ended June 30, 2009 as
compared to the same period last year.





Subscription
revenues for the six months ended June 30, 2009 was $390,600 as compared to
$110,400 during the same period last year. Subscription revenue increased
$280,200 due to an increase in our customers to 15,288 recurring subscribers as
of June 30, 2009 from 4,541 subscribers as of June 30, 2008. The increase in
subscriptions was due to additional sales and marketing activities performed
through a marketing partnership with Kiddie Kandids launched in the fourth
quarter of 2008.


20


As we
continue marketing activities and promotions, subscription revenues continued to
increase as compared to the same period last year.   Digital
media sharing products and services are relatively new, and as a result, it is
difficult to determine our current market share or predict our future market
share.  We believe that the market for digital media sharing products
and services is growing and that related market opportunities are also expected
to grow. Our revenue, profitability and future growth depend not only on the
anticipated market growth, but also our ability to execute our business plan and
ultimate customer acceptance of our products and services and the success or
failure of our competitors.  As a result, we expect the trend of our
revenues to be positive, however, provide no assurance that such will
occur.




Professional
services revenues for the six months ended June 30, 2009 was $296,800 as
compared to $85,100 during the same period last year. The increase was due to us
providing custom website design services under software development contracts
entered into during the first and second quarter of 2009.  Our
contracts during the period this year were for increased amount of professional
services as compared to the size of our contracts the same period last
year.  From time to time, we may enter into professional services
agreements resulting from our strategic partnership marketing activities and as
a result, revenues from professional services may recur in future
periods. On April 22, 2009, we entered into a professional services
agreement for an aggregate amount of $340,000 and on July 16, 2009, we
entered into another agreement for additional professional services for an
aggregate amount of $50,000 with the same customer. As a result, we expect the
trend of our revenues to be positive, however, provide no assurance that such
will occur. The Company derived 41% of its total revenue from a single customer
during the six months ended June 30, 2009, respectively.  There was no
such revenue from this same customer during the six months ended June 30, 2008,
respectively.





Total
cost of revenue was $329,500 and $44,200 for the six months ended June 30, 2009
and 2008, respectively, representing an increase of $285,300. The increase was
due to an increase in subscription cost of revenues of $156,500 and increased
cost of professional services revenue of $128,800 during the six months ended
June 30, 2009, respectively.





The
increase in cost of subscription revenues for the six months ended June 30, 2009
as compared to the same period last year is due to primarily having an increase
in subscription sales. Cost of subscription revenues for the six months ended
June 30, 2009 were mostly derived from our marketing partnerships, hosting and
setup services incurred from website services provided to our
subscribers.





The
increase in cost of professional services revenues for the six months ended June
30, 2009 as compared to the same period last year is due to having provided
increased professional services, primarily labor related costs, during the six
months ended June 30, 2009 whereas there were fewer such services provided
during the same period last year.





Research
and development expense was $54,400 and $239,100 for the six months ended June
30, 2009 and 2008, respectively, representing a decrease of
$184,700.  We significantly reduced our research and development
activities including lowering development personnel and consultants which
was part of a company-wide cost reduction that continued through the second
quarter of 2009 as compared to the same period last year.  Moreover,
our developers were primarily focused on completing our professional services
agreements which lead to much less research and development activity during the
second quarter of 2009 as compared to the same period last year.





Sales and
marketing expense was $45,900 and $337,900 for the six months ended June 30,
2009 and 2008, respectively, representing a decrease of $292,000. The decrease
was primarily due to lower amounts of sales and marketing activities and
promotions during the six months ended June 30, 2009, including a decrease in
marketing salaries of $123,300, media advertising of $109,800, which both
reductions are due in part by a company-wide cost reduction that continued
through the second quarter of 2009 as compared to the same period last
year.  Also, the overall decrease in sales and marketing expense was
due to non-cash stock based compensation expense decrease of $58,900 resulting
from fewer stock options outstanding.





General
and administrative expense was $692,200 and $1,791,600 for the six months ended
June 30, 2009 and 2008, respectively, representing a decrease of $1,099,400. The
decrease was primarily due to a decrease in salaries of $83,400 due to a
company-wide cost reduction that continued through the second quarter of
2009 as compared to the same period last year. Also contributing to the
decrease was a decrease in non-cash warrant expense of $846,200 a majority of
which relates to warrants granted to an investor relations firm which expired
unexercised in July 2008.  There were no such similar warrants granted
or outstanding to our investor relations firm during the same period this year.
Also, the overall decrease in general and administrative expense was due to
non-cash stock based compensation expense decrease of $78,900 resulting from
fewer stock options outstanding.


21


Interest
expense was $498,100 and $237,500 for the six months ended June 30, 2009 and
2008, respectively, representing an increase of $260,600.  The
increase was attributable to interest and debt discount amortization expense of
$498,100 during the six months ended June 30, 2009, which was primarily related
to additional borrowings of $422,000 which were not outstanding during the
second quarter last year.







Change
in Accounting Principles




The Company adopted EITF 07-05,
beginning January 1, 2009, and applied its provisions to outstanding
instruments as of that date. The cumulative effect at January 1, 2009 was a
reduction to additional paid in capital of $480,800 to reclassify the beneficial
conversion feature embedded in the 2007 Convertible Notes (see Note 6 to the
condensed consolidated financial statements for further discussion) from equity
to a liability, a net decrease in accumulated deficit of $356,100 to reflect the
recording of the initial value and the change in the value of
the conversion feature between its issuance date and January 1, 2009,
and the recognition of a conversion feature liability of $124,700 at January 1,
2009.  Under
EITF 07-05, the beneficial conversion feature is carried at fair value and
adjusted quarterly.





Liquidity
and Capital Resources





Cash
Flows





At June
30, 2009, our cash and cash equivalents were $2,800, a decrease of $64,900 from
$67,700 as of December 31, 2008.  The decrease was due to cash used in
operating activities of $64,900.  We had no cash flows from investing
or financing activities during the six months ended June 30, 2009.





Historically,
we have incurred losses and have had capital and stockholders’ deficits and
limited cash to fund our operations.  During the six months ended June 30,
2009, we have been able to rely primarily upon cash generated from our
subscription and professional services revenues. We expect this positive trend
to continue, but provide no assurance such trend shall continue and still remain
in a negative working capital position as of June 30, 2009. Moreover, we have
portions of our convertible promissory notes maturing in September and October
2009.  As of June 30, 2009, the current portion our convertible
promissory notes is $1,696,400.  If those maturities are not satisfied
through conversions of their principal balances into common stock, or if we are
unable to successfully renegotiate the maturity dates of these notes, then we
will need to rely upon additional debt or equity financing to satisfy those
upcoming maturities.  As a result, we plan to continue to seek out and
raise capital by sales of additional private placement equity or debt offerings
during the remainder of 2009, although we have no assurance that such financings
will be completed.





Additionally,
we cannot be certain that such capital will be available to us or whether such
capital will be available on terms that are acceptable to us.  Such
financing likely would be dilutive to existing stockholders and could result in
significant financial and operating covenants that would negatively impact our
business.  If we are unable to complete additional financings or to raise
sufficient additional capital on acceptable terms, we will have insufficient
funds to operate our business or pursue our planned growth.





Off-Balance
Sheet Arrangements





As of
June 30, 2009, we had no off-balance sheet arrangements.





Related
Party Transactions





As of
June 30, 2008, we owed an executive officer $36,600 (see further discussion in
Note 5 to the condensed unaudited consolidated financial
statements).





Critical
Accounting Policies and Estimates





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


22





Web Site and Software Development
Costs—Under Emerging Issues Taskforce Statement 00-2, Accounting for Web Site Development
Costs (“EITF 00-2”), costs and expenses incurred during the planning and
operating stages of the Company’s web site are expensed as incurred. Under EITF
00-2, costs incurred in the web site application and infrastructure development
stages are capitalized by the Company and amortized to expense over the web
site’s estimated useful life or period of benefit.





The
Company also applies Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketedto costs incurred
internally in creating its software products.  Under SFAS No. 86,
costs are charged to research and development expense until technological
feasibility has been established for the related product.  Technical
feasibility is deemed to have been established upon completion of a detail
program design or completion of a working model.  Subsequent to
technological feasibility having been established, software production costs
shall be capitalized and reported at the lower of amortized cost or net
realizable value.





Revenue Recognition— Our
subscription revenue is generated from monthly subscriptions for Website hosting
services. The typical subscription agreement includes the usage of a
personalized website and hosting services. The individual deliverables are not
independent of each other and are not sold or priced on a standalone basis.
Costs to complete the Website and ready it for the end customer are minimal and
are expensed to cost of revenue as incurred. Upon the completion of a customer’s
signup and initial hosting of the Website, the subscription is offered free of
charge for a two week trial period during which the customer can cancel at
anytime. In accordance with Staff Accounting Bulletin (SAB) No. 104, after
the two week trial period has ended, revenue is recognized when all of the
following conditions are satisfied: (1) there is persuasive evidence of an
arrangement; (2) the service has been provided to the customer;
(3) the amount of fees to be paid by the customer is fixed or determinable;
and (4) the collection of our fees is probable. These criteria are met
monthly as our service is provided on a month-to-month basis and collections are
generally made in advance of the services. There is no provision for refunds as
June 30, 2009, as the Company’s historical refund experience has been
minimal.  Customers signup and agree to purchase the website service
on a monthly or annual basis, at the customer’s option. The monthly customers
pay monthly in advance of the services, and as the services are performed, the
Company recognizes subscription revenue on a daily basis.





For
annual customers, upon payment of a full year’s subscription service, the
subscription revenue is recorded as deferred revenue in the accompanying balance
sheet. As services are performed, the Company recognizes subscription revenue
ratably on a daily basis.





During
the six months ended June 30, 2009, the Company also distributed its website
service through a marketing partnership and shared a portion of revenue
generated with the marketing partner. In accordance with Emerging Issue Task
Force No. 99-19, Reporting Revenue Gross as a
Principal Versus Net as an Agent, revenue is reported gross of the
payment received from its marketing partner because the Company acts as the
primary obligor and is responsible for the fulfillment of services.





Professional
services revenue is generated from custom website design services. Our
professional services revenue from contracts for custom website design is
recorded using a proportional performance model based on labor hours incurred.
The extent of progress toward completion is measured by the labor hours incurred
as a percentage of total estimated labor hours to complete. Labor hours are the
most appropriate measure to allocate revenue among reporting periods, as they
are the primary input to the provision of our professional
services.





Stock-Based
Compensation—Accounting for stock options issued to employees follows the
provisions of SFAS No. 123R, Share-Based Payment. 
This statement requires an entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award.  That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award. We use the Black-Scholes option pricing model to measure the fair value
of options granted to employees. This model requires significant estimates
related to the award’s expected life and future stock price
volatility.




Derivatives -We may issue
notes payable to investors that contain rights to covert the note payable into
shares of our common stock.  We may also issue warrants to investors
and to others for services rendered.  When we issue such instruments,
we are required to determine whether such instruments are required to be
accounted for as equity or debt instruments under Statement of Financial
Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities(and its corresponding amendments) and
EITF 00-19, Accounting for
Derivative Financial
Instruments Indexed To, and Potentially Settled In a Company’s Own Stock,
as well as other applicable guidance.  Related analyses vary based on
the specific terms of each consummated transaction and the application of U.S.
Generally Accepted Accounting Principles in this area can be
complex.


23







Recently
Issued Accounting Standards





In June
2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168,
“The FASB Accounting Standards Codification and Hierarchy of Generally Accepted
Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”).
SFAS 168 establishes the FASB Standards Accounting Codification (“Codification”)
as the source of authoritative U.S. generally accepted accounting principles
(“GAAP”) recognized by the FASB to be applied to nongovernmental entities and
rules and interpretive releases of the SEC as authoritative GAAP for SEC
registrants. The Codification will supersede all the existing non-SEC accounting
and reporting standards upon its effective date and subsequently, the FASB will
not issue new standards in the form of Statements, FASB Staff Positions or
Emerging Issues Task Force Abstracts. SFAS 168 also replaces FASB Statement No.
162, “The Hierarchy of Generally Accepted Accounting Principles” given that once
in effect, the Codification will carry the same level of authority. The Company
does not anticipate that the adoption of this statement will have a material
impact on its consolidated financial statement footnote
disclosures.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165
establishes general standards for accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are available
to be issued (“subsequent events”). More specifically, SFAS 165 sets forth the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition in the financial statements, identifies the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements and the disclosures that should
be made about events or transactions that occur after the balance sheet date.
SFAS 165 provides largely the same guidance on subsequent events which
previously existed only in auditing literature. SFAS 165 is effective for
financial statements issued for interim periods ending after June 15, 2009, and
the adoption of this statement did not have a material impact on the
consolidated financial statements.








Item
3.  Quantitative and Qualitative Disclosures About Market Risk –
N/A






Item
4T. Controls and Procedures


Disclosure
Controls And Procedures





As
required by SEC Rule 13a-15 or Rule 15d-15, our Chief Executive and Chief
Financial Officers carried out an evaluation under the supervision and with the
participation of our management, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this report. Based on the foregoing evaluation, we have concluded
that our disclosure controls and procedures are not effective as of June 30,
2009 and that they do not allow for information required to be disclosed by us
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms;  specifically, we had  material
weaknesses in our internal control over financial reporting as described in Item
9A and 9A(T) in our Annual Report on Form 10-K filed with the SEC on March 31,
2009 and those deficiencies have not yet been remediated by us. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive and Chief
Financial Officers as appropriate to allow timely decisions regarding required
disclosure.





Internal
Control Over Financial Reporting




Pursuant
to Rule 13a-15(d) or Rule 15d-15(d) of the Exchange Act, our management, with
participation with the Company’s Chief Executive and Chief Financial Officers,
is responsible for evaluating any change in the Company's internal control over
financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) under the
Exchange Act), that occurred during each of the Company’s fiscal quarters that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.





Based on
the foregoing evaluation, we have concluded that there was no change in our
internal control over financial reporting that occurred during the fiscal
quarter ended June 30, 2009, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.  We continue to have  material weaknesses in our
internal control
over financial reporting as described in Item 9A and 9A(T) in our Annual Report
on Form 10-K filed with the SEC on March 31, 2009 and those deficiencies have
not yet been remediated by us.




24


PART
II - OTHER INFORMATION





Item
1.  Legal Proceedings - None





Item
2.   Unregistered Sales of Equity Securities and Use of
Proceeds





In
February 2009, the Company issued 600,000 shares of common stock to
non-executive employees as retention compensation.  As a result, the
Company recorded $6,000 as non-cash stock compensation expense during the three
months ended March 31, 2009.  In February 2009, the Company issued
1,534,000 shares of common stock for $15,340 of interest due on the 2007
Convertible Promissory Notes.   In May 2009, the Company issued
1,534,000 shares of common stock for $15,340 of interest due on the 2007
Convertible Promissory Notes.   During the three months ended
June 30, 2009, the Company issued 1,162,500 shares of common stock for $23,250
of professional services.    In July 2009, we entered into a
cash loan with unrelated parties for an amount of $50,000.  The loan
is scheduled to be repaid in August 2009 and in conjunction with the loan, we
issued 300,000 restricted common shares for a service fee related to the
loan.  The offer and sale of the securities above were effected in
reliance on the exemptions for sales of securities not involving a public
offering, as set forth in Section 4(2) and Section 4(6) of the Securities Act
and/or Rule 506 of Regulation D adopted thereunder.








Item
3.  Defaults Upon Senior Securities – None





Item
4.  Submission of Matters to a Vote of Security Holders –
None





Item
5.  Other Information - None





Item
6.   Exhibits





Exhibit
      No.
              
              Description2.1
              
              Merger
      Agreement, dated January 16, 2007, between HomAssist Corporation and The
      Family Post, Inc. as filed on Form 8-K, filed on February 1, 2007 with the
      SEC, incorporated by reference3.1
              
              Articles
      of Incorporation as filed on Form SB-2, filed April 28, 2005 with the SEC,
      incorporated by reference3.2
              
              Bylaws
      as filed on Form SB-2, filed on April 28, 2005 with the SEC, incorporated
      by reference3.3
              
              Amendment
      to Bylaws as filed on Form 8-K, filed on January with the SEC 17, 2007,
      incorporated by reference3.4
              
              Certificate
      of Amendment to Articles of Incorporation as filed on Form 8-K, filed on
      January 25, 2007 with the SEC, incorporated by
reference10.1
              
              2007
      Incentive and Non Statutory Stock Option Plan as filed on Form 8-K, filed
      on February 1, 2007 with the SEC, incorporated by
  reference10.2
              
              Independent
      Consultant Stock Option Agreement dated as of July 1, 2005 between The
      Family Post and William Sawtell as filed on Form 8-K, filed on February 1,
      2007 with the SEC, incorporated by reference10.3
              
              Employment
      Agreement and Stock Option Agreement dated as of March 15, 2006 between
      The Family Post and Samir Patel as filed on Form 8-K, filed on February 1,
      2007 with the SEC, incorporated by reference10.4
              
              Executive
      Employment and Indemnification Agreement dated as of January 30, 2007,
      between us and Michael Sawtell as filed on Form 8-K, filed on February 1,
      2007 with the SEC, incorporated by reference10.5
              
              Executive
      Employment and Indemnification Agreement dated as of January 30, 2007,
      between us and Steven Dong as filed on Form 8-K, filed on February 1, 2007
      with the SEC, incorporated by reference10.6
              
              Form
      Stock Subscription Agreement, Form Stock Option Agreement, Form Amended
      Stock Subscription Agreement as filed on Form 8-K, filed on February 1,
      2007 with the SEC, incorporated by reference10.7
              
              Form
      of Stock Subscription Agreement, incorporated by reference from the
      Registrant’s Form 10-QSB, filed with the Securities and Exchange
      Commission on May 15, 2007.10.8
              
              Form
      of Convertible Note and Warrant Agreement, incorporated by reference from
      the Registrant’s Current Report on Form 8-K, filed with the Securities and
      Exchange Commission on October 9, 2007.10.9
              
              Form
      of Regulation-S Stock Purchase Agreement between the Registrant and Imini
      Enterprises Corporation, dated January 8, 200810.10
              
              Form
      of Stock Subscription Agreement between the Registrant and Step Management
      Limited dated April 20, 2007.10.11
              
              Financial
      Advisory Agreement between the Registrant and Norm Farra dated September
      29, 2007.10.12
              
              Investor
      Relations Agreement between the Registrant and Crown  Financial
      dated November 13, 200710.13
              
              Amendment
      to Investor Relations Agreement between the Registrant and
      Crown  Financial dated February 12, 200810.14
              
              Partner
      Agreement between DigitalPost Interactive, Inc and BowTie, Inc. dated
      October 26, 2007 incorporated by reference from the Registrant’s Form 8-K
      filed with the SEC on November 1, 2007.10.15
              
              Agreement
      between DigitalPost Interactive, Inc and Upromise, Inc. dated November 9,
      2007 incorporated by reference from the Registrant’s Form 8-K filed with
      the SEC on November 9, 2007.10.16
              
              Agreement
      between DigitalPost Interactive, Inc and Upromise, Inc. dated November 9,
      2007 incorporated by reference from the Registrant’s Form 8-K filed with
      the SEC on November 9, 2007.10.17
              
              Agreement
      between DigitalPost Interactive, Inc and Pictage, Inc. dated November 27,
      2007 incorporated by reference from the Registrant’s Form 8-K filed with
      the SEC on November 28, 2007.10.18
              
              Agreement
      between DigitalPost Interactive, Inc. and Mitsubishi Digital Electronics
      America, Inc. dated January 8, 2008, incorporated by reference from the
      Registrant’s Form 8-K filed with the SEC on January 9,
    2008.10.19
              
              Agreement
      between DigitalPost Interactive, Inc. and Onscribe, Inc. dated February
      12, 2008, incorporated by reference from the Registrant’s Form 8-K filed
      with the SEC on February 15, 2008.10.20
              
              Agreement
      between DigitalPost Interactive, Inc. and Disneyland® Resort, A
      Division of Walt Disney World Co. dated March 21, 2008, incorporated by
      reference from the Registrant’s Form 8-K filed with the SEC on March 21,
      2008.10.21
              
              Agreement
      between DigitalPost Interactive, Inc. and Disneyland® Resort, A
      Division of Walt Disney World Co. and Taylor Morrison, Inc. dated March
      21, 2008, incorporated by reference from the Registrant’s Form 8-K filed
      with the SEC on March 21, 2008.10.22
              
              Agreement
      between DigitalPost Interactive, Inc. and Local.com Corporation, dated
      February 19, 2009, incorporated by reference from the Registrant’s Form
      8-K filed with the SEC on February 25, 2009 (Portions of the exhibit
      included in this filing have been omitted pursuant to the Company’s
      request for confidential treatment under Rule 24b-2 of the Securities
      Exchange Act of 1934, as amended, and the omitted material has been
      separately filed with the SEC).10.23
              
              Agreement
      between DigitalPost Interactive, Inc. and Local.com Corporation, dated
      April 22, 2009, incorporated by reference from the Registrant’s Form 8-K
      filed with the SEC on April 28, 2009.10.24
              
              Agreement
      between DigitalPost Interactive, Inc. and Local.com Corporation, dated
      July 16, 2009, incorporated by reference from the Registrant’s Form 8-K
      filed with the SEC on July 22, 2009.14.1
              
              Code
      of Business Conduct and Ethics as filed on form 8-K, filed January 30,
      2007with the SEC, as filed on form 8k, filed February 1, 2007,
      incorporated by reference21.1
              
              List
      of Subsidiaries of the Company as filed on form 8-K, filed January 30,
      2007 with the SEC, as filed on form 8k, filed February 1, 2007,
      incorporated by reference31.1
              
              Rule
      13a-14(a)/ 15d-14(a) Certification of Michael Sawtell31.2
              
              Rule
      13a-14(a)/ 15d-14(a) Certification of Steven Dong32.1
              
              Certification
      Pursuant to 18 U.S.C. section 1350 of Michael Sawtell32.2
              
              Certification
      Pursuant to 18 U.S.C. section 1350 of Steven
  Dong








25


SIGNATURES





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




DIGITALPOST
      INTERACTIVE, INC. (Registrant)August
      14, 2009
                  /s/
      Michael SawtellMichael
      SawtellChief
      Executive Officer, President, and Sole DirectorAugust
      14, 2009
                  /s/
      Steven DongSteven
      DongChief
      Financial Officer





26