Table of Contents


UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-QSB
 
 [X]
      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934
 For
      the period ended December 31,
2007
 [ 
       ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
 For
      the transition period from _______ to
_______
 
 Commission File No.
000-50560
 
 UPSNAP,
INC.
 (Exact
name of small business issuer as specified in its charter)
 
 
 Nevada
                (State
      or other jurisdiction of
                incorporation
      or organization)
              20-0118697
                (IRS
      Employer identification No.)
 
 
 134
Jackson Street, Suite 203, P.O. Box 2399, Davidson, North Carolina 20836
 (Address
of Principal Executive Offices)
 
 (704)
895-4121
 (Issuer’s
Telephone Number)
 
 
 Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.  Yes [X] No
[  ]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)  Yes [  ] No [X]
 
 State the
number of shares outstanding of each of the issuers’ classes of common equity,
as of the latest practicable date:
 
 Class of
      Stock
              Outstanding February
      9, 2008Common
      Stock ($.001 par value)
              23,370,324
 
 
 Transitional
Small Business Disclosure Format (Check one):  Yes [  ] No
[X]
  Table of Contents
  UPSNAP,
INC.
 FORM
10-QSB
 
 For the
Quarter ended December 31, 2007
 
 TABLEOF CONTENTS
 
 Page
 PART I – FINANCIAL INFORMATIONITEM
      1.
              Selected Financial StatementsConsolidated Balance Sheets – December 31, 2007 and
      2006 (unaudited)
              2Statements of Operations – Three Months
      Ended December 31, 2007 and
2006  (unaudited)
              3Statements of Stockholders’ Equity -
      (unaudited)
              4Statements of Cash Flows – Three months Ended
      December 31, 2007 and 2006 (unaudited)
              5Notes to Financial Statements
(unaudited)
              6ITEM
      2.
              Management’s Discussion and Analysis
              17ITEM
      3.
              Controls and Procedures
              31PART II – OTHER INFORMATIONITEM
      6.
              Exhibits
              32Signatures
  1
 Table of Contents
 PARTI – FINANCIAL INFORMATION
 ITEM1.  FINANCIAL STATEMENTS
 
 UPSNAP, Inc.CONSOLIDATED
      BALANCE SHEETSAS
      OF DECEMBER 31, 2007 AND 2006UNAUDITED
  December
      31,2007
                
                
                2006ASSETSCurrent
      AssetsCash
                
                $
                15,672
                
                $
                187,791Accounts
      receivable
                
                
                179,235
                
                
                100,089Other
      current assets
                
                
                6,764
                
                
                19,078TOTAL
      CURRENT ASSETS
                
                
                201,671
                
                
                306,958PROPERTY
      & EQUIPMENT (Note F)Computer
      and office equipment
                
                
                173,742
                
                
                171,565Accumulated
      depreciation
                
                
                (100,235
                )
                
                (54,921
                )NET
      PROPERTY & EQUIPMENT
                
                
                73,507
                
                
                116,644OTHER
      ASSETSOther
      intangibles (Note K)
                
                
                672,520
                
                
                1,008,779Pre-Merger
      costs (Note I)
                
                
                307,215
                
                
                -Goodwill
      (Note K)
                
                
                4,677,862
                
                
                4,677,862Security
      deposits
                
                
                1,114
                
                
                1,115TOTAL
      ASSETS
                
                $
                5,933,889
                
                $
                6,111,358LIABILITIES
      & STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                
                $
                273,503
                
                $
                77,108Other
      current liabilities
                
                
                11,201
                
                
                40,378TOTAL
      CURRENT LIABILITIES
                
                
                284,704
                
                
                117,486Commitments
      (Note G)STOCKHOLDERS'
      EQUITY (Note C and D)Common
      stock, par value $0.001, 97,500,000 authorized, issued
      and outstanding
                  23,370,324
      shares at December 31, 2007 and 21,151,324 shares at December 31,
      2006
                
                
                22,720
                
                
                21,151Additional
      paid-in capital
                
                
                8,783,231
                
                
                8,249,370Accumulated
      deficit
                
                
                (3,156,766
                )
                
                (2,390,149
                )TOTAL
      STOCKHOLDERS' EQUITY
                
                
                5,649,185
                
                
                5,880,372TOTAL
      LIABILITIES & STOCKHOLDERS' EQUITY
                
                $
                5,933,889
                
                $
                6,111,358
  The
      accompanying notes are an integral part of these unaudited financial
      statements
  2
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 UPSNAP, INC.CONSOLIDATED
      STATEMENTS OF OPERATIONSFOR
      THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006UNAUDITED


Three
      Months Ended December 31,2007
              
              
              2006SALES
      AND COST OF SALESAdvertising
      Revenue
              
              $
              26,833
              
              
              $
              3,513Revenue
      Share
              
              
              185,372
              
              
              
              246,058Other
              
              
              -
              
              
              
              1,032Total
      Sales
              
              
              212,205
              
              
              
              250,603Cost
      of Sales
              
              
              98,326
              
              
              
              126,649Gross
      Profit
              
              
              113,879
              
              
              
              123,954OPERATING
      EXPENSESProduct
      development
              
              
              22,539
              
              
              
              86,076Sales
      and marketing expenses
              
              
              18,687
              
              
              
              28,876General
      and administrative
              
              
              266,426
              
              
              
              425,149Total
      Expense
              
              
              307,652
              
              
              
              540,101Net
      operating income
              
              
              (193,773
              )
              
              
              (416,147
              )Other
      income and expenseGain
      on extinguishment of debt (Note K)
              
              
              113,500
              
              
              
              -Interest
      income
              
              
              -
              
              
              
              126Net
      Other Income
              
              
              113,500
              
              
              
              126NET
      LOSS
              
              $
              (80,273
              )
              
              $
              (416,021
              )Net
      loss per share
              
              $
              (0.00
              )
              
              $
              (0.02
              )Weighted
      average common shares outstanding:Basic
      and diluted
              
              
              22,720,324
              
              
              
              21,151,324The average shares
      listed below were not included
      in the computation of diluted losses per
      share because to do so would have been antidilutive
      for the periods presented:Warrants
      and options:
              
              
              3,146,667
              
              
              
              5,454,668


The
      accompanying notes are an integral part of these unaudited financial
      statements
  3
 Table of Contents


UPSNAP, INC.CONSOLIDATED
      STATEMENT OF STOCKHOLDER'S EQUITYFOR
      THE PERIOD SEPTEMBER 30, 2005 to DECEMBER 31, 2007UNAUDITED




Common
      StockTotalAdditional
                
                
                
                
                
                Stockholders'Paid-in
                
                
                Accumulated
                
                
                EquityShares
                
                
                Par
      Value
                
                
                capital
                
                
                Deficit
                
                
                (Deficit)Balances,
      September 30, 2005
                
                
                12,999,999
                
                
                
                1,300
                
                
                
                148,699
                
                
                
                (186,060
                )
                
                
                (36,061
                )Shares
      issued in connection with reverse merger
                
                
                5,788,495
                
                
                
                17,488
                
                
                
                2,079,623
                
                
                
                -
                
                
                
                2,097,112Shares
      issued in connection with XSVoice acquisition
                
                
                2,362,830
                
                
                
                2,363
                
                
                
                5,997,712
                
                
                
                -
                
                
                
                6,000,074Net
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,788,068
                )
                
                
                (1,788,068
                )Balances,
      September 30, 2006
                
                
                21,151,324
                
                
                
                21,151
                
                
                
                8,226,034
                
                
                
                (1,974,128
                )
                
                
                6,273,057Stock
      based compensation
                
                
                150,000
                
                
                
                150
                
                
                
                121,829
                
                
                
                -
                
                
                
                121,979Shares
      issued for Placement Agreement
                
                
                400,000
                
                
                
                400
                
                
                
                167,600
                
                
                
                
                
                
                
                168,000Exercise
      of Series A Warrants
                
                
                1,019,000
                
                
                
                1,019
                
                
                
                253,731
                
                
                
                
                
                
                
                254,750Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,102,365
                )
                
                
                (1,102,365
                )Balances,
      September 30, 2007
                
                
                22,720,324
                
                
                
                22,720
                
                
                
                8,769,194
                
                
                
                (3,076,493
                )
                
                
                5,715,421Stock
      based compensation
                
                
                
                
                
                
                
                
                
                
                14,037
                
                
                
                
                
                
                
                14,037Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (80,273
                )
                
                
                (80,273
                )Balances,
      December 31, 2007
                
                
                22,720,324
                
                
                $
                22,720
                
                
                $
                8,783,231
                
                
                $
                (3,156,766
                )
                
                $
                5,649,185
  The
      accompanying notes are an integral part of these unaudited financial
      statements
  4
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 UPSNAP, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWSFOR
      THE THREE MONTH PERIODS ENDED DECEMBER 31, 2007 AND
2006UNAUDITED
  December
      31, 2007
                
                
                December
      31, 2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                
                $
                (80,273
                )
                
                $
                (416,021
                )Adjustments to
      reconcile net loss to net cash used by operating
      activities:Depreciation
                
                
                7,604
                
                
                
                12,708Amortization
      of intangibles
                
                
                84,065
                
                
                
                150,690Stock
      based compensation
                
                
                14,037
                
                
                
                23,336Extinguishment
      of debt
                
                
                (113,500
                )
                
                
                2,000CHANGES
      IN CURRENT ASSETS AND CURRENT LIABILITIES: (Net of effect of
      acquisition)Accounts
      receivable
                
                
                117,264
                
                
                
                68,737Other
      current assets
                
                
                11,050
                
                
                
                (8,134
                )Accounts
      payable and accrued expenses
                
                
                19,949
                
                
                
                (53,000
                )Other
      current liabilities
                
                
                4,753
                
                
                
                33,936NET
      CASH USED FOR OPERATING ACTIVITIES
                
                
                64,949
                
                
                
                (187,748
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Cash
      paid for costs related to Mobile Greetings merger
                
                
                (68,659
                )
                
                
                -Purchase
      of equipment
                
                
                -
                
                
                
                (5,258
                )NET
      CASH PROVIDED BY INVESTING ACTIVITIES
                
                
                (68,659
                )
                
                
                (5,258
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                
                
                -
                
                
                
                -NET
      INCREASE IN CASH
                
                
                (3,710
                )
                
                
                (193,006
                )CASH,
      beginning of period
                
                
                19,382
                
                
                
                380,796CASH,
      end of period
                
                $
                15,672
                
                
                $
                187,791Taxes
      paid
                
                $
                -
                
                
                $
                -Interest
      paid
                
                $
                -
                
                
                $
                -
  The
      accompanying notes are an integral part of these unaudited financial
      statements
 5
 Table of Contents
 NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  NOTE A - ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of
Presentation
 
 The
accompanying unaudited consolidated financial statements have been prepared in
conformity with Generally Accepted Accounting Principles (“GAAP”) for interim
financial information and with the instructions to SEC Form 10-QSB and Article 8
of Regulation S-K. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the balance sheet and the
reported amounts of revenues and expenses for the period. Actual results could
differ significantly from those estimates. The accompanying unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto incorporated by
reference in the Company’s Annual Report on SEC Form 10-KSB for the year ended
September 30, 2007.
 
 In the
opinion of the Company’s management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by GAAP to
present fairly the financial position of UPSNAP, INC. and its subsidiaries as of
December 31, 2007 and the results of their operations for the three month
periods ended December 31, 2007 and 2006 and their cash flows for the three
months ended December 31, 2007 and 2006. All such adjustments are of a normal
recurring nature, unless otherwise disclosed in this Form 10-QSB or other
referenced material. Results of operations for interim periods are not
necessarily indicative of results for the full year.
 
 When
required, certain reclassifications are made to the prior period’s consolidated
financial statements to conform to the current presentation.
 
 NOTE B - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
 
 These
financial statements have been prepared by management in accordance with GAAP.
The significant accounting principles are as follows:
 
 Principles of
consolidation
 
 The  consolidated  financial  statements  include  the  accounts  of  UpSNAP,
Inc. since November 15, 2005 and its
wholly-owned  subsidiary,  UpSNAP USA,  Inc.,
which is 100%  consolidated  in
the  financial  statements, and the accounts and results
from operations acquired as a result of the XSVoice, Inc. acquisition as of
January 6, 2006.  All material inter-company accounts and transactions
have been eliminated.
 
 Use of
Estimates
 
 The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and the accompanying notes. These estimates and assumptions
are based on management's judgment and available information and, consequently,
actual results could be different from these estimates.
 
 Cash and cash
equivalents
 
 For
purposes of the statement of cash flows, the Company considers all highly liquid
debt instruments purchased with an original maturity of three months or less to
be cash equivalents.
 
 Property and
equipment
 
 Property
and equipment are stated at cost.  Major renewals and improvements are
charged to the asset accounts while replacements, maintenance and repairs, which
do not improve or extend the lives of the respective assets, are
expensed.  At
  6
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 the time
property and equipment are retired or otherwise disposed of, the asset and
related accumulated depreciation accounts are relieved of the applicable
amounts.  Gains or losses from retirements or sales are credited or
charged to income.
  The
Company depreciates its property and equipment on the double declining balance
method with a five year life and half year convention.
 
 Disclosure about Fair Value
of Financial Instruments
 
 The
Company estimates that the fair value of all financial instruments at December
31, 2007 and 2006, as defined in FASB 107, does not differ materially from the
aggregate carrying values of its financial instruments recorded in the
accompanying balance sheet. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. Considerable judgment is required in interpreting
market data to develop the estimates of fair value, and accordingly, the
estimates are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
 
 Research and Development
Expenditures
 
 The
Company incurs product development expenses related to the ongoing development
of their search engine technology and connecting new clients to the existing
streaming audio platform. Research and development expenses consist primarily of
wages paid to employees and to independent contractors.  The Company
follows the guidelines in Statement of Financial Accounting Standards No. 2,
Accounting for Research and
Development Costs. Expenditures, including equipment used in research and
development activities, are expensed as incurred.
 
 Revenue
Recognition
 
 The
Company recognizes revenue under the guidance provided by the SEC Staff
Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” and the Emerging
Issues Task Force (“EITF”) Abstract No. 99-19 “Reporting Revenue Gross as a
Principal versus Net as an Agent” (“EITF 99-19”).
 
 The
Company receives revenue from the wireless carriers by providing streaming audio
content that the carriers make available to their mobile handset customers.
UpSNAP generates revenues from this line of business in two distinct
ways:
 
 1.
              Provider
      of Technology Platform: UpSNAP provides technology to brands that have
      their own mobile distribution and revenue arrangements with the carriers.
      In this case, UpSNAP does not act as the principal in the transaction. The
      brands look to UpSNAP to provide the technology platform and service,
      while they retain the relationship with the consumer and set the pricing.
      In these cases, UpSNAP typically reports net revenues received from the
      carrier which are revenues after both carrier charges and content provider
      charges.
 
 The
Company negotiated a new contract with its largest carrier customer effective
February 12, 2007 in which the carrier is no longer deducting content provider
charges before submitting revenue to the Company. Under this arrangement, the
content provider charges are the responsibility of the Company. The net effect
of this new contract is that revenues and cost of revenues are increased by an
identical amount to reflect the content provider charges.
 
 2.
              UpSNAP
      is Principal Party: UpSNAP acts as the principal party in the content
      relationships. Specifically, UpSNAP has the relationship with the
      carriers, sets the re-sale price at which consumers buy the product, pays
      the content provider for the content, and builds the mobile application or
      service.  In these relationships, the Company recognizes revenue
      based on the gross fees remitted by the carrier to the company. The
      Company’s payments to the third party content providers are treated as
      cost of sales.
  The
Company also receives advertising revenues from third parties. These revenues
are resultant from audio ads played on the Company’s SWInG platform, banner ads
on the WAP deck, and pay per call revenues when the consumer proactively
responds to a text message. These advertising revenues are recognized in the
period the transactions are recorded by the third party provider. UpSNAP reports
net advertising revenues received from third parties.
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 Dividends
 
 The
Company has not yet adopted any policy regarding payment of dividends. No
dividends have been paid or declared since inception.
 
 Long-lived
assets
 
 The
Company reviews the carrying value of property, plant, and equipment for
impairment whenever events and circumstances indicate that the carrying value of
an asset may not be recoverable from the estimated future cash flows expected to
result from its use and eventual disposition. In cases where undiscounted
expected future cash flows are less than the carrying value, an impairment loss
is recognized equal to an amount by which the carrying value exceeds the fair
value of assets. The factors considered by management in performing this
assessment include current operating results, trends and prospects, the manner
in which the property is used, and the effects of obsolescence, demand,
competition, and other economic factors.
 
 Accounting
Policyfor
Impairment of Intangible Assets
 
 The
Company evaluates the recoverability of identifiable intangible assets whenever
events or changes in circumstances indicate that an intangible asset’s carrying
amount may not be recoverable. Such circumstances could include, but are not
limited to: (1) a significant decrease in the market value of an asset, (2) a
significant adverse change in the extent or manner in which an asset is used, or
(3) an accumulation of costs significantly in excess of the amount originally
expected for the acquisition of an asset (4) the company’s public market cap is
less than the company’s reported net assets.
 
 For
intangible assets other than goodwill, the Company measures the carrying amount
of the asset against the estimated undiscounted future cash flows associated
with it. Should the sum of the expected future net cash flows be less than the
carrying value of the asset being evaluated, an impairment loss would be
recognized. The impairment loss would be calculated as the amount by which the
carrying value of the asset exceeds its fair value. The fair value is measured
based on quoted market prices, if available. If quoted market prices are not
available, the estimate of fair value is based on various valuation techniques,
including the discounted value of estimated future cash flows. The evaluation of
asset impairment requires the Company to make assumptions about future cash
flows over the life of the asset being evaluated. These assumptions require
significant judgment and actual results may differ from assumed and
estimated amounts.
 
 For
impairment of goodwill, the Company takes the weighted average closing daily
share price for the quarter and multiplies it by weighted average number of
shares outstanding for the quarter. This value is compared to the net assets
reported on the Company’s balance sheet.  To the extent that net
assets exceed this value, goodwill is considered impaired and would be written
down so that reported net assets do not exceed the value.
 
 Segment
reporting
 
 The
Company follows Statement of Financial Accounting Standards No. 130, Disclosures
About Segments of an Enterprise and Related Information. The Company operates as
a single segment and will evaluate additional segment disclosure requirements as
it expands its operations.
 
 Advertising
costs
 
 The
Company expenses all advertising as incurred.   For the quarters
ended December 31, 2007 and 2006, the Company incurred no advertising expenses
and $2,758, respectively.
 
 Income
Taxes
 
 In
accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes,
the Company uses an asset and liability approach for financial accounting and
reporting for income taxes. The basic principles of accounting for income taxes
are: (a) a current tax liability or asset is recognized for the estimated taxes
payable or refundable on tax returns for the current year; (b) a deferred tax
liability or asset is recognized for the estimated future tax effects
attributable to temporary differences and carryforwards; (c) the measurement of
current and deferred tax liabilities and assets is based on provisions of the
enacted tax law and the effects of future changes in tax laws or rates are not
anticipated; and (d) the
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  measurement
of deferred tax assets is reduced, if necessary, by the amount of any tax
benefits that, based on available evidence, are not expected to be
realized.
 
 Loss per common
share
 
 The
Company adopted Statement of Financial Accounting Standards No. 128 that
requires the reporting of both basic and diluted earnings (loss) per share.
Basic loss per share is calculated using the weighted average number of common
shares outstanding in the period.  Diluted loss per share includes
potentially dilutive securities such as outstanding options and warrants, using
the "treasury stock" method and convertible securities using the "if-converted"
method.  The assumed exercise of options and warrants and assumed
conversion of convertible securities have not been included in the calculation
of diluted loss per share as the affect would be anti-dilutive.
 
 Recent Accounting
Pronouncements
 
 In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair value
accounting but does not affect existing standards which require assets or
liabilities to be carried at fair value. Under SFAS 159, a company may elect to
use fair value to measure accounts and loans receivable, available-for-sale and
held-to-maturity securities, equity method investments, accounts payable,
guarantees and issued debt. Other eligible items include firm commitments for
financial instruments that otherwise would not be recognized at inception and
non-cash warranty obligations where a warrantor is permitted to pay a third
party to provide the warranty goods or services. If the use of fair value is
elected, any upfront costs and fees related to the item must be recognized in
earnings and cannot be deferred, e.g., debt issue costs.
 
 The fair
value election is irrevocable and generally made on an instrument-by-instrument
basis, even if a company has similar instruments that it elects not to measure
based on fair value. At the adoption date, unrealized gains and losses on
existing items for which fair value has been elected are reported as a
cumulative adjustment to beginning retained earnings. Subsequent to the adoption
of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is
effective for fiscal years beginning after November 15, 2007 and is required to
be adopted by the Company in the first quarter of fiscal 2009. The Company is
currently is determining whether fair value accounting is appropriate for any of
its eligible items and cannot estimate the impact, if any, which SFAS 159 will
have on its consolidated results of operations and financial
condition.
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, or ("SFAS
141(R)"). SFAS 141(R) establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. SFAS 141(R) also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The provisions of
SFAS 141(R) are effective for financial statements issued for fiscal years
beginning after December 15, 2008. We are currently assessing the financial
impact of SFAS 141(R) on our consolidated financial statements.
 
 In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51("SFAS 160"). SFAS
160 amends Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," or ARB 51, to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This statement also amends certain of ARB 51's consolidation
procedures for consistency with the requirements of SFAS 141(R). In addition,
SFAS 160 also includes expanded disclosure requirements regarding the interests
of the parent and its noncontrolling interest. The provisions of SFAS 160 are
effective for fiscal years beginning after December 15, 2008. Earlier adoption
is prohibited. We are currently assessing the financial impact of SFAS 160 on
our consolidated financial statements.
 
 Stock
Plan
  On
November 2, 2006 the Board of Directors of UpSNAP, Inc. approved a 2006 Omnibus
Stock and Incentive Plan. The Plan will make four million (4,000,000) shares,
either unissued or reacquired by the Company, available for awards of either
options, stock appreciation rights, restricted stocks, other stock grants, or
any combination thereof. Eligible recipients include employees, officers,
consultants, advisors and directors. Options granted generally have a ten-year
term and vest over four years from the date of grant. Certain of the stock
options granted under the Plan have been granted pursuant to various
stock
  9
 Table of Contents
  option
agreements. Each stock option agreement contains specific terms. The Board of
Directors increased the size of the Plan to seven and one half million
(7,500,000) total shares on August 8, 2007, which was ratified by stockholders
in September 2007.
 
 Stock-Based
Compensation
 
 Under the
fair value recognition provisions of SFAS No. 123(R), stock-based
compensation cost is estimated at the grant date based on the fair value of the
award and is recognized as expense over the requisite service period of the
award. The Company has awarded stock-based compensation both as restricted stock
and stock options.
 
 Compensation
expense for restricted stock is recognized on the date of the grant at the
closing price of the stock on the date of the grant. The Company did not grant
restricted stock for the three month periods ended December 31, 2007 and
2006.
 
 We use
the Black-Scholes option valuation model to value option awards under SFAS
No. 123(R). The Company currently has awards outstanding with only service
conditions and graded-vesting features. We recognize compensation cost on a
straight-line basis over the requisite service period.
  Our
statement of operations for the three month periods ended December, 2007 and
2006 included stock-based compensation expense for stock options of $14,037 and
$23,336, respectively.
  Unrecognized
stock-based compensation expense expected to be recognized over an estimated
weighted-average amortization period of 2.7 years was approximately $161,334 at
December 31, 2007.
 
 Time-Based Stock
Awards
  The fair
value of each time-based award is estimated on the date of grant using the
Black-Scholes option valuation model, which uses the assumptions described
below. Our weighted-average assumptions used in the Black-Scholes valuation
model for equity awards with time-based vesting provisions granted during
the quarter ended December 31, 2007 are shown in the following
table:
  Expected
      volatility
                70.0%Expected
      dividends
                0%Expected
      terms
                6.0
      -6.25 yearsPre-vesting
      forfeiture rate
                50%Risk-free
      interest rate
                4.45%
      – 4.76%
 
 The
expected volatility rate was estimated based on historical volatility of the
Company’s common stock over approximately the seventeen month period since the
reverse merger and comparison to the volatility of similar size companies in the
similar industry. The expected term was estimated based on a simplified method,
as allowed under SEC Staff Accounting Bulletin No. 107, averaging the
vesting term and original contractual term. The risk-free interest rate for
periods within the contractual life of the option is based on U.S. Treasury
securities. The pre-vesting forfeiture rate was based upon plan to date
experience. As required under SFAS No. 123(R), we will adjust the estimated
forfeiture rate to our actual experience. Management will continue to assess the
assumptions and methodologies used to calculate estimated fair value of
share-based compensation. Circumstances may change and additional data may
become available over time, which could result in changes to these assumptions
and methodologies, and thereby materially impact our fair value
determination.
  A summary
of the time-based stock awards as of December 31, 2007, and changes during the
quarter ended December 31, 2007, is as follows:
 
 10
 Table of Contents
 
 Shares
                
                
                Weighted
                  Average
                  Exercise
      PriceOutstanding
      at September 30, 2007
                
                
                720,000
                
                
                $
                0.900Granted
                
                
                150,000
                
                
                $
                0.380Forfeited
      or expired
                
                
                -
                
                
                $
                -Outstanding
      December 31, 2007
                
                
                870,000
                
                
                $
                0.810Exercisable
      at December 31, 2007
                
                
                250,000
                
                
                $
                0.833
 The
following tables summarize information about fixed stock options outstanding and
exercisable at December 31, 2007:
  Stock
      Options OutstandingRange
      of Exercise Prices
              
              
              Number
      of
                Shares
                Outstanding
              
              
              Weighted
                Average
                Contractual
      Life
                in
      Years$
              1.130
              
              
              
              400,000
              
              
              
              8.83$
              0.635
              
              
              
              300,000
              
              
              
              8.92$
              0.395
              
              
              
              20,000
              
              
              
              9.00$
              0.038
              
              
              
              150,000
              
              
              
              9.92870,000
              
              
              
              9.05




Stock
      Options ExercisableRange
      of Exercise Prices
              
              
              Number
      of
                Shares
                Exercisable
              
              Weighted
                Average
                Exercise
      Price$
              0.635
              
              
              
              150,000
              
              
              $
              0.635$
              1.130
              
              
              
              100,000
              
              
              $
              1.130
 
 The
exercise price of stock options granted during the quarter ended December 31,
2007 was equal to the market price of the underlying common stock on the grant
date.
 
 There was
no aggregate intrinsic value as of December 31, 2007. Intrinsic value represents
the pretax value (the period’s closing market price, less the exercise price,
times the number of in-the-money options) that would have been received by all
option holders had they exercised their options at the end of the
period.
 
 11
 Table of Contents
 
 Warrants
 
 The
Company has recorded the warrant instruments as equity in accordance with SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activity, paragraph
11(a), and EITF 00-19, Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock.
 
 The
following table summarizes information about warrants outstanding at December
31, 2007:
  A summary
of warrant activity for the quarter ended December 31, 2007 is as
follows:
  Series
B
  Weighted-
                    
                    
                    
                    
                    
                    Weighted-Average
                    
                    
                    
                    
                    
                    AverageNumber
      of
                    
                    
                    Exercise
                    
                    
                    Warrants
                    
                    
                    ExerciseWarrants
                    
                    
                    Price
                    
                    
                    Exercisable
                    
                    
                    PriceOutstanding,
      September 30, 2007
                    
                    
                    1,800,000
                    
                    
                    $
                    1.10
                    
                    
                    
                    1,800,000
                    
                    
                    $
                    1.10GrantedExpiredExercised
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    
                    
                    
                    $
                    -Outstanding,
      December 31, 2007
                    
                    
                    1,800,000
                    
                    
                    $
                    1.10
                    
                    
                    
                    1,800,000
                    
                    
                    $
                    1.10
 Viant
 Weighted-
                            
                            
                            
                            
                            
                            Weighted-Average
                            
                            
                            
                            
                            
                            AverageNumber
      of
                            
                            
                            Exercise
                            
                            
                            Warrants
                            
                            
                            ExerciseWarrants
                            
                            
                            Price
                            
                            
                            Exercisable
                            
                            
                            PriceOutstanding,
      September 30, 2007
                            
                            
                            560,000
                            
                            
                            $
                            0.90
                            
                            
                            
                            560,000
                            
                            
                            $
                            0.90GrantedExercised
                            
                            
                            -Outstanding,
      December 31, 2007
                            
                            
                            560,000
                            
                            
                            $
                            0.00
                            
                            
                            
                            560,000
                            
                            
                            $
                            0.90
 At
December 31, 2007, the range of warrant prices for shares under warrants and the
weighted-average remaining contractual life is as
follows:
  Warrants
      Outstanding
                
                
                Warrants
      ExercisableWeighted-Weighted-
                
                
                Average
                
                
                
                
                
                Weighted-Range
      of
                
                
                Number
                
                
                Average
                
                
                Remaining
                
                
                Number
                
                
                AverageWarrant
                
                
                of
                
                
                Exercise
                
                
                Contractual
                
                
                Of
                
                
                ExerciseExercise
      Price
                
                
                Warrants
                
                
                Price
                
                
                Life
                
                
                Warrants
                
                
                Price$
                1.10
                
                
                
                1,800,000
                
                
                $
                1.10
                
                
                
                2.83
                
                
                
                1,800,000
                
                
                $
                1.10$
                0.90
                
                
                
                560,000
                
                
                $
                0.90
                
                
                
                2.92
                
                
                
                560,000
                
                
                $
                0.902,360,000
                
                
                
                
                
                
                
                
                
                
                
                2,360,000
  The
Company may from time to time reduce the exercise price for any of the warrants
either permanently or for a limited period or extend their expiration
date.
  12
 Table of Contents
  NOTEC- INCOME
TAXES
 
 For the
twelve month periods ended September 30, 2007 and 2006, the Company incurred net
operation losses and accordingly, no provision for income taxes has been
recorded.  In addition, no benefit for income taxes has been recorded
due to the uncertainty of the realization of any tax assets.  At
September 30, 2007, the Company had approximately $2,972,040 of accumulated net
operating losses.  The net operating loss carryforwards, if not
utilized, will begin to expire in 2022.
 
 The
components of the Company’s deferred tax asset are as follows:
  Twelve
      Month Period Ended September 30
                
                
                Twelve
      Month Period Ended September 302007
                
                
                2006Federal
      and state income tax benefit
                
                $
                1,040,214
                
                
                $
                864,783Change
      in valuation allowance on deferred tax assets
                
                
                (1,040,214
                )
                
                
                (864,783
                )Net
      deferred tax assets
                
                $
                -
                
                
                $
                -
  A
reconciliation between the amounts of income tax benefit determined by applying
the applicable U.S. and State statutory income tax rate to pre-tax loss is as
follows:
 Twelve
      Month Period Ended September 30
                  
                  
                  Twelve
      Month Period Ended September 302007
                  
                  
                  2006Federal
      and state statutory rate
                  
                  $
                  1,040,214
                  
                  
                  $
                  864,783Change
      in valuation allowance on deferred tax assets
                  
                  
                  (1,040,214
                  )
                  
                  
                  (864,783
                  )$
                  -
                  
                  
                  $
                  -
  NOTED- GOING
CONCERN
 
 As shown
in the accompanying financial statements, the Company has accumulated net losses
from operations from inception through December 31, 2007 totaling $3,156,766 and
as of December 31, 2007, has had limited revenues from operations. These factors
raise substantial uncertainty about the Company’s ability to continue as a going
concern.
 The
Company’s financial statements are prepared using the generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business.  The accompanying financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
 
 NOTEE- CONCENTRATION OF CREDIT
RISK
 
 For the
quarter ended December 31, 2007, our largest customer accounted for
approximately 82% of sales.
 
 NOTEF- PROPERTY AND
EQUIPMENT
  Property
and equipment consisted of the following:
  As
      of December 31
              
              
              As
      of December 31Fixed
      Assets
              
              2007
              
              
              2006Computer
      and office equipment
              
              $
              169,742
              
              
              $
              167,565Office
      Equipment
              
              
              1,000
              
              
              
              1,000Office
      Furniture
              
              
              3,000
              
              
              
              3,000Accumulated
      Depreciation
              
              
              (100,235
              )
              
              
              (54,921
              )Total
      Fixed Assets
              
              $
              73,507
              
              
              $
              116,644
 Depreciation
expense for the quarters ended December 31, 2007 and 2006 was $7,604 and $
12,708, respectively.  The estimated service lives of property and
equipment are 3 – 7 years.
  13
 Table of Contents
  NOTEG–COMMITMENTS
 
 In March
2006, the Company began a lease for approximately 1,800 square feet of office
space. The lease extends through February 28, 2008 at a rate of $2,250 per
month. Future maturities associated with this commitment are as
follows:
 
 Amount2008
              $4,500
  The Company
has not determined whether or not to extend this lease beyond the current term
or negotiate a reduction in total square footage.
  NOTEH–NOTE
PAYABLE
 
 As part
of the consideration for the purchase of XSVoice, the Company assumed the
principal balance of a November 5, 2004 note that was in default between
XSVoice, Inc. and one of its carrier partners. The principal balance of the note
at the time of the acquisition of XSVoice, Inc. was $113,500 and it carries an
interest rate is 5% above the prime rate and is subject to an additional 2%
after any Event of Default.  The Company has been unable to identify
any parties within the carrier that are aware of the note and are thus able to
negotiate terms. The carrier has also made no attempts to collect the note and
the Company determined during the quarter ended December 31, 2007 that the Note
was not going to be collected and wrote off the full amount of the Note to other
income and expense. The Company had carried the note as long-term and was not
accruing interest.
 
 NOTE I – MERGER
AGREEMENT
  On August
9, 2007, the Company entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with Mobile Greetings, Inc., a California corporation (“MGI”), and
UpSNAP Acquisition Corp., a California corporation and a newly-formed
wholly-owned subsidiary of the Company (“Merger Sub”), pursuant to which, upon
the terms and subject to the conditions of the Merger Agreement, Merger Sub will
be merged with and into MGI, with MGI continuing as the surviving corporation
and a wholly-owned subsidiary of the Company (the “Merger”).  MGI is a
private corporation engaged in providing content to the mobile phone industry.
On January 14, 2008, the Merger Agreement was amended to extend the termination
date to February 28, 2008. Either party may terminate the Merger Agreement at
any time.
 
 Under the
terms of the Merger Agreement, at the effective date of the Merger (the
“Effective Date”), each issued and outstanding share of MGI common stock (other
than any shares held in treasury and any shares as to which the holder has
properly demanded appraisal of his shares under California law) will be
converted into and exchanged for 9.68 shares (the “Exchange Ratio”) of the
Company’s common stock, $.001 par value (“Company Common
Stock”).  Options, warrants and other rights to purchase MGI common
stock as of the Effective Date will be assumed by the Company with an adjustment
in the number of underlying shares and the exercise price thereof based upon the
Exchange Ratio.  The exchange concept is that the shares of Company
Common Stock to be exchanged for MGI common stock on a fully diluted basis would
equal 50% of the number of outstanding shares of Company Common Stock on a
fully-diluted basis immediately after the Merger, and without giving effect to
the Private Financing mentioned below.
 
 In
addition to the share consideration, the Company is to issue an Non-Negotiable
Convertible Note (the “Note”) in the principal amount of up to $2,200,000 to a
representative for the holders of the outstanding MGI common stock, options,
warrants and other rights to purchase MGI common stock as of the Effective Date,
repayable in 12 months subject to a six month extension should the Company then
be working on a public offering, together with interest at the rate of federal
funds payable at maturity or waived upon conversion.  Commencing after
six months, the Note would be convertible at a base conversion price of $.50 per
share into shares of Company Common Stock, or an aggregate of 4,400,000 shares,
subject to customary anti-dilution provisions, after six months.  The
principal amount of the Note may be reduced by reason of indemnification claims
by the Company against MGI and payment of claims of MGI holders under their
dissenter’s appraisal rights.  The principal amount of the Note also
may be reduced in the event the value of the Note could jeopardize the tax-free
reorganization of the Merger.  In such event, the reduction in
principal amount of the Note would increase the number of shares of Company
Common Stock issued on the Effective Date based upon the average price of the
Company Common Stock for the five consecutive trading days ending on the trading
day immediately preceding the Effective Date.
 
 The
Company has made customary representations and warranties in the Merger
Agreement and agreed to customary covenants, including covenants regarding the
operation of its business prior to the closing, and reciprocal
indemnifications.  Completion of the Merger is subject to the
satisfaction of customary closing conditions as set forth in the Merger
Agreement, including among other things, the adoption of the Merger Agreement
and approval of the Merger by the MGI shareholders,
  14
 Table of Contents
  the
consummation by the Company of a private placement to obtain working capital for
the combined operations and the entry into employment agreements with the four
executive officers of MGI.
 
 The
Company is entering into a placement agency agreement with a placement agent for
a placement of $3,000,000 gross proceeds of the Company’s securities (the
“Private Financing”).  As of February 12, 2008, the Company had
non-binding commitments for part of the Private Financing, and is working to
raise the remaining amount. The terms of the Private Financing are subject to
negotiation among the Company, the placement agent and the prospective
investors.  The securities to be offered in the Private Financing will
not be registered under the Securities Act of 1933, and may not be offered or
sold in the United States absent registration or an applicable exemption from
registration.  At the closing of the Merger, the Company will enter
into a Registration Rights Agreement with the MGI shareholders providing them
with “piggyback” registration rights for the Company Common Stock issued to them
on the Merger.  It is anticipated that the Company will enter into a
registration rights agreement with the investors for the Company Common Stock in
the Private Financing.
 
 NOTE
K – ACQUISITION OF XSVOICE, INC.
 
 On
January 6, 2006, the Company completed the purchase of XSVoice, Inc., a
privately held wireless platform and application developer, by acquiring
substantially all of the assets of XSVoice, Inc. for a total purchase price of
$6.3 million. XSVoice, Inc.’s results of operations have been included in the
consolidated financial statements since the date of acquisition.
 
 As a
result of the acquisition, the Company acquired XSVoice's proprietary SWInG
(Streaming Wireless Internet Gateway) technology, which enables mobile access to
virtually any type of audio content, including Internet-based streaming audio,
radio, television, satellite or other audio source. The acquisition also allowed
the Company to gain access to carrier distribution channels and premium content
provider relationships.
 
 The
aggregate purchase price of $6,393,223 consisted of $198,829 in cash
consideration, the assumption of $130,000 in debt, and common stock valued at
$5,735,000. In addition, the Company paid $80,820 for accounting and legal fees
related to the acquisition and issued common stock valued at $265,074 for
investment banking services.
 
 The value
of the 2,362,830 common shares issued as a result of this acquisition was
determined based on the average market price of the Company’s common shares over
the preceding 15-day period before the closing date of the
acquisition.
 
 The
following table presents the allocation of the acquisition cost, including
professional fees and other related acquisition costs, to the assets acquired
and liabilities assumed, based on their fair values:
 Allocation
      of acquisition cost:Accounts
      receivable
                  
                  $
                  71,621Property,
      plant, and equipment
                  
                  
                  -Computer
      equipment
                  
                  
                  28,200Office
      equipment
                  
                  
                  1,000Office
      furniture
                  
                  
                  3,000SWinG
      copyright
                  
                  
                  1,345,040Customer
      relationships
                  
                  
                  104,000Employment
      contracts
                  
                  
                  78,000Supplier
      contracts
                  
                  
                  84,500Goodwill
                  
                  
                  4,791,362Total
      assets acquired
                  
                  
                  6,506,723Note
      payable
                  
                  
                  (113,500
                  )Total
      liabilities assumed
                  
                  
                  (113,500
                  )Net
      assets acquired
                  
                  $
                  6,393,223
 15
 Table of Contents
  Of the
$6,402,902 of acquired intangible assets, $1,345,040 was assigned to the SWinG
technology platform, $104,000 for customer relationships, $78,000 for employment
contracts, and $84,500 for supplier contracts.  These intangible
assets were assigned a life of 45 months. The remaining unallocated intangible
balance of $4,791,362 was assigned to goodwill.  The Company
recognized $84,065 and $150,690 in amortization expense for the quarters ended
December 31, 2007 and 2006, respectively.
 
 16
 Table of Contents
 
 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
 
 The
following discussion should be read in conjunction with the Financial Statements
and related notes thereto included elsewhere in this report.
 
 INTRODUCTION
 
 UpSNAP,
Inc. and its subsidiaries are collectively referred to as UpSNAP. The following
Management Discussion and Analysis of Financial Condition and Results of
Operations was prepared by management and discusses material changes in UpSNAP’s
financial condition and results of operations and cash flows for the quarters
ended December 31, 2007 and 2006. Such discussion and comments on the liquidity
and capital resources should be read in conjunction with the information
contained in the accompanying audited consolidated financial statements prepared
in accordance with U.S. GAAP.
 
 The
discussion and comments contained hereunder include both historical information
and forward-looking information. The forward-looking information, which
generally is information stated to be anticipated, expected, or projected by
management, involves known and unknown risks, uncertainties and other factors
that may cause the actual results and performance to be materially different
from any future results and performance expressed or implied by such
forward-looking information. Potential risks and uncertainties include risks and
uncertainties set forth under the heading “Risk Factors” and elsewhere in this
Form 10-QSB.
 
 OVERVIEW
 
 UpSNAP
provides a mobile search and entertainment platform that enables media companies
to deliver their content to all mobile phones in the United States, and
generates revenue primarily from subscriptions and increasingly from mobile
advertising.  UpSNAP has searchable mobile content from over 1,000
content channels and over 150 content partners. In April 2007, UpSNAP also
launched a multi-media search engine that allows consumers to search for mobile
content, such as ringtones, and mobile videos, from their PC
desktop.
 
 Mobile
consumers are now buying more and more powerful phones with Internet features
capable of sending email, running applications and browsing the Internet.
According to the Pew Wireless Internet Access study in February 2007, as many as
25% of Internet users now have a cell-phone able to access the
Internet.  In the key youth demographic of 18-34, consumers are using
their cell-phones as their primary method of communication and entertainment–
effectively replacing their PC.
 
 The
market in general for mobile services is continuing to show very high growth
rates.  In the U.S, according to the Cellular Telecommunications &
Internet Association (CTIA), as reported in its Wireless Quick Facts December
2006, wireless subscribers reached 233 million by December 2006, reaching more
than 76% of the total U.S. population.
 
 Now that
the number of subscribers has almost reached saturation point – particularly in
the 18-35 demographic – we believe mobile operators are seeking to increase
their revenues by offering mobile entertainment services. According to the CTIA,
Mobile Entertainment Revenues in the US grew particularly sharply, showing
growth of 82% from $4.8 billion in the first half of 2005, to $8.7 billion for
the latter nine months of 2006.
 
 In the
past, the typical revenue model for mobile entertainment services has been a
paid subscription model. Consumers have proved willing to spend several dollars
on a 20 second ring-tone from a mobile carriers store, even when they can
purchase the whole song on Apple’s iTunes for a mere 0.99 cents on their
computer, an example of the current large discrepancies between the mobile and
Internet content pricing models. As the features of the Internet and PCs
converge into powerful handsets with wireless Internet access, the Company
predicts that these discrepancies cannot last for long.
 
 The
global market for mobile-phone premium content is expected to expand to more
than $43 billion by 2010, rising at a compound annual growth rate of 42.5
percent from $5.2 billion in 2004, according to iSuppli Corp.
 
 UpSNAP
management believes that this paid content subscription model will start to
migrate to a search and advertising driven model over time. Most mass media
business models have started as subscription only, and then migrated with the
increasing reach of consumers into advertising driven services. As John
Templeton said: “History never repeats itself, but it often
rhymes.”
  17
 Table of Contents
  In the
United States, most mobile content is sold from ‘virtual’ shops on the mobile
handsets. However, this trend is set to change. In Europe, the mobile operators
are leaving content choice and selection to media and distribution companies who
sell mobile content. Consumers in the US are now being increasingly exposed to
direct marketing for mobile products.
 
 UpSNAP
has built a search and advertising driven business model, which enables UpSNAP
and its media and carrier partners to make money from advertising, rather than
from the content subscription. UpSNAP believes that it is very well positioned
to take advantage of the enormous consumer demand for mobile content and
entertainment. A 2006 study from Shosteck Group showed that revenues from Mobile
advertising could reach $9.6 billion by 2010. Consumers will also increasing
need quick and convenient ways to search for all the latest content they can
consume on their mobile phone.
 
 UpSNAP
currently has one major distribution arrangement, and in order to increase
sales, UpSNAP must increase its media partnerships that can actively promote
offers direct to consumers, as well as continue to partner with as many of the
mobile operators as possible.
 
 In 2007
UpSNAP signed a contract with Lincoln Financial which enables consumers to
listen and search for popular shows such as the Bob and Sheri Show on demand
from their mobile phones. UpSNAP has also recently signed new distribution
partnerships with Cablevision, Go2 Media, and Interop Technologies.
 
 In
January 2006 UpSNAP derived 99% of its revenues from subscription revenue from
one major US mobile operator. In our fiscal quarter October – December 2007, our
dependency on this carrier has been reduced to approximately 82% of our
revenues, as we move towards the more lucrative and higher margin search and
advertising related revenues.
 
 Media
companies and Advertising Agencies are hopeful that mobile advertising can
obtain the massive reach numbers of a TV campaign, combined with the direct
response and tracking potential of the Internet.  However, mobile
marketing is still in its infancy as they struggle with the right forms of
direct marketing, privacy issues, and how to structure mobile advertising deals.
The pace of our deal making activities with the media companies has been much
slower than we would have liked.
 
 UpSNAP is
looking at acquisitions to push this process quicker.  We have now entered
into a Merger Agreement with Mobile Greetings Inc. that could allow us to
increase our average revenue per subscriber as well as our distribution
channels.
 
 If the
MGI merger is consummated, we believe that the merged company would combine
UpSNAP’s voice and advertising platforms with MGI's data platform to provide one
scalable platform integrating content and advertising delivery to all mobile
phones in the US.  We believe that together the companies would be
well positioned to take advantage of a large growth opportunity for mobile
content and advertising based services, would add advertising inventory into our
portfolio, and would allow us to publish comprehensive mobile solutions for our
partners maximizing every mobile revenue earning opportunity.  The
combination of two scalable, automated audio and data platforms that work across
all mobile handsets would give the Company a powerful set of applications
and revenue streams.   Our media partners would be able
to advertise direct to consumer mobile services and products that will work
on any mobile handset in the US. Media companies have been reluctant to
advertise mobile products that only work on a small portion of their target
audience’s mobile handsets. UpSNAP will be well positioned through our
pay-per-call and premium voice platform integrated into our suite of digital
applications. Meanwhile, on-deck branded apps will continue to be very important
to the Tier 1 mobile operators, (AT&T, Verizon, Sprint/Nextel) especially as
they increasingly view themselves as media companies.
 
 We
believe that the combined companies will address several of the weaknesses in
the Company’s present business and operations, as well as playing to the
strengths of our existing advertising platform. The merged company would have
the following benefits:
 
 · Reduce our reliance on
Sprint/Nextel, and expand our distribution into all US network operators,
particularly with Verizon. Our reliance on Sprint/Nextel should be reduced
from 89% of revenues in fiscal Q4 2007, to less than 30% after the MGI
Merger.
 
 · Offer mobile
products to any phone in the US using both voice and data services which will
allow our media partners to advertise service direct to the consumer, increasing
our overall sales and distribution to the consumer.
 
 · Increase revenues and
improve margins from advertising using MGI’s existing inventory and our extended
media relationships direct to the consumer
  18
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  · Improve the ability of the
joint company to market our services to the mobile operators and large media
operators which are demanding to deal with larger players who can handle all the
mobile needs.
 
 We
believe that there is an excellent opportunity for a roll-up of wireless
content providers. Mobile operators and media players are demanding to deal
with larger players and both UpSNAP and Mobile Greetings have built platform
that scale very well across all carriers and networks - allowing us to aggregate
and partner with a wide cross-section of wireless services. Potential wireless
acquisition targets would include mobile marketing, loyalty schemes,
advertising, mobile promotions & mobile social networking
 
 We
continue to look for acquisition targets although it will be challenging
consummating an acquisition due to the timing and availability of appropriate
acquisition opportunities and our ability to find capital to acquire the same
and provide working capital.
 
 Principal Products and
Services
 
 UpSNAP
has two principal products and services:
 
 Mobile
      Entertainment Services – responsible for 87% of first quarter fiscal 2008
      revenues
 
 Mobile
      Search Engine and Advertising Platform – responsible for 3% of fiscal 2007
      revenues
 
 MOBILE
ENTERTAINMENT SERVICES
 
 The
UpSNAP SWinG (Streaming Wireless Internet Gateway) platform enables mobile
access to virtually any type of live and on-demand streaming audio content, such
as radio, podcasts and live sports events.   The software translates
data from almost any type of common audio format, for example MP3 files, to
allow it to be streamed to cell-phones capable of supporting audio streaming. If
the cell-phone does not have any data services, the platform broadcasts the
audio via the voice channel on the cell-phone. The SWinG platform runs on any
mobile phone in the US, regardless of handset, data package or software. The
SWinG platform was built over the course of 2002-2004 and is fully
operational.
 
 Our
catalog of free and premium streaming audio content delivers compelling content
from some of the world’s premier brands including Sporting News Radio, Lincoln
Financial’s Bob and Sheri show, Troy Aikman show, Tony Bruno show, Inside Track
Show (NASCAR), & Batanga (Hispanic Music). The catalogue of content includes
over 1,000 content providers, with a wide selection of content ranging from
Radio Stations, to sports coverage and Podcasts. UpSNAP also developed a
prototype mobile dating service with Hot-or-Not and recently signed distribution
agreements include, Go2 and Cablevision.
 
 The
company generates subscription revenues from the SWinG platform by providing the
technology platform to major companies that already have a relationship with the
carriers. In addition, the Company generates revenues acting as the principal in
the relationship with the carriers, providing content from over 1,000 content
providers.
 
 The
subscription revenues are primarily generated from recurring Subscribers,
Consumers subscribe to a service on a monthly basis. For example, in the case of
the Sporting News Radio content, consumers pay $4.99 per month. The cost of the
paid service is added to the consumer’s phone-bill, and the carriers pay UpSNAP
after deducting their margin and associated costs.
 
 MOBILE
SEARCH ENGINE AND ADVERTISING PLATFORM
 
 UpSNAP
has expanded its search engine suite to enable consumers to search for a wide
variety of mobile content, services and data. In April 2007 UpSNAP launched a
mobile Meta search tool that finds mobile data stored on the Internet. Mobile
consumers can search for ringtones, mobile video content, mobile games, and
other images, wallpapers and multi-media content from their PC. This service is
accessible at http://www.upsnap.com/
 
 The suite
of mobile search products allows consumers to find and access mobile content and
service from any mobile phone in the US. The UpSNAP mobile search engine
platform allows consumers to search via text message, WAP, or
through
  19
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  Interactive
Voice Response (IVR) by simply texting a keyword to a “short-code” or 5 digit
telephone number, which in our case is 2SNAP (27627).  Current
services include yellow pages directory assistance, sport shows and content,
horoscopes, comedy, weather, calorie counter, spelling, and airline travel
information.  Consumers type in search requests e.g. “Leo” for a text
horoscope. The consumer will then be offered a free horoscope, along with an
advertisement to speak with an astrologer direct or hear an extended audio
horoscope. While the service is free, sponsored by advertising, carrier charges
may apply, depending on the consumer's contract.
 
 Similarly,
consumers looking for sports content, for example, will receive a text message
advertising UpSNAP premium sports services. The short-code can also be used for
Premium Text Messaging Services (PSMS) which are subscription based services
directly billed by the carriers, and included on the consumer’s phone bill.
UpSNAP has PSMS services provisioned for billing with most of the major US
carriers including, AT&T, Sprint/Nextel, T-Mobile and Alltel. These
short-codes at present will only work on US handsets, limiting the geographic
coverage of the service to those areas in the United States with cell-phone
coverage. Our mobile search engine was launched live to consumers in November
2005.
 
 These
searches are free to use by the consumer – save for any communications cost
incurred by their cellular phone usage according to their carrier
contract.
 
 UpSNAP
generates revenues from advertisers who value the direct response pay-per-click
model of the Internet, and now want the same model to work on mobile
devices.
 
 Once a
consumer makes a search for a specific search category or uses a “key-word’
identified and purchased by an UpSNAP partner as indicative of buying behavior,
the UpSNAP advertising platform inserts a “paid’ advertising listing into the
search reply.
 
 UpSNAP
has a Voice Over Internet Protocol (VoIP) switch which seamlessly bridges the
merchant telephone number with the consumer via a call connect. Our Pay Per Call
advertising platform can then record the number of calls received by a merchant
and produce an audit trail for a billing engine. UpSNAP partners with
specialized “Pay-Per-Call” companies, that sign-up advertisers nationwide
throughout the US for this type of advertising.
 
 Our
Pay-Per-Call advertising platform technology was built in 2005, and our first
pay-per-call-partnership was announced with Ingenio, who provides pay-per-call
advertisers nationwide on May 4, 2006.  We rely on third party
operators for our advertising.  For example if a national pizza chain
were to only want to target select US cities, our third party partners would
only pass us the advertising for a specific geographical locale. Since then,
UpSNAP has signed up a several more advertising partners, including AdValient,
Third Screen Media, and Millennial Media.
 
 Pay-Per-Call
advertising is receiving a much higher margin than pay-per-click on the
Internet. The average price of a pay-per-click on Google according to the Wall
Street Journal was .50 cents. Pay-Per-Call, which directly bridges a consumer
who is looking to buy on his cell-phone with a merchant, starts at $2 dollars a
call, and goes up considerably depending on the nature of the sale.
 
 DISTRIBUTION
AGREEMENTS
 
 UpSNAP’s
revenues are directly affected by its distribution agreements. The distribution
of our content occurs in one of two ways:
 
 1.
                Carrier
      or “on deck” promotion – where the carrier actually promotes the service
      from the menu’s on the carrier handset, bills the consumer on his mobile
      phone bill, and takes its cuts, and then remits the balance to UpSNAP.
      UpSNAP has ‘on deck’ agreements with Sprint/Nextel.  Recently,
      UpSNAP signed an “on deck” distribution agreement with Go2, one of the
      largest pure play mobile internet traffic sites in the
      USA.  go2MediaTM,
      a company focused on the growing user demand for more localized,
      personalized mobile content.  The goal is to further integrate
      UpSNAP’s vast audio services into the go2 mobile portal for the benefit of
      go2’s base audience of millions of U.S. mobile consumers.  The
      initial offering utilizes go2’s one-touch calling feature to provide
      mobile users with quick access to audio recordings of current sports
      stories, scores and news.  The recordings are updated several
      times a day.
  20
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  2.
                Off
      Deck Promotion – where the consumer signs up for services through media
      partner promotions, internet advertising, affiliate marketing
      relationships, or other media channels directly, and payment is made via a
      short-code or Premium SMS (PSMS) to the consumer’s mobile phone bill.
      UpSNAP has billing relationships in place with most major US carriers
      including, AT&T, T-Mobile, Sprint/Nextel and Alltel. Current Off deck
      partners include, Lincoln Financial and Sporting News, as well as recently
      added: Cablevision’ News12 service and Interop
      Technologies.  Interop Technologies is a leading provider of
      advanced wireless technology solutions.  The goal is to
      incorporate UpSNAP’s extensive audio services that will reach more than
      one million customers.  Cablevision’s, News 12 Networks goal is
      to enable Cablevision customers to receive real time news on demand,
      traffic and weather for the seven coverage areas surrounding New York City
      via their cell phones.
 
 Margins
 
 The
revenue stream from the consumer is shared across several parties:
 
 The
wireless carrier, who operates the cellular infrastructure and billing interface
to add micro-payments from wireless services onto the customer phone bill. The
carrier will typically demand 30-50% of the gross revenues. UpSNAP reports
revenues net of the carrier gross margin. For example, if UpSNAP sells an
application for $10.00 to the consumer, UpSNAP would only report $5-$7 of net
revenue.
 
 An
aggregator or mobile delivery and clearing house for the receipt and delivery of
mobile messages will take 5-10% of the gross sale value
 
 The
content owner who has the rights to the mobile content.
 
 The
mobile supplier, in this case UpSNAP reports net revenue after the carrier and
aggregator have taken their cut of 30 -60%. In turn, UpSNAP’s average pay-out to
content providers is 30% of the net revenue.
 
 UpSNAP’s
margin improves considerably on advertising related services such as banner ads,
audio ads, and Pay-per-call advertising. For these services, UpSNAP receives net
revenue from an advertising partner. When UpSNAP deals directly with the media
companies, the wireless carriers do not share in this revenue.
 
 SELECTED
FINANCIAL INFORMATION
  In
thousands (000’s) except for per share amounts
  Quarter Ended December
      31,2007
                  
                  
                  2006Net
      revenue
                  
                  $
                  212
                  
                  
                  $
                  251Net
      income (loss) for the quarter
                  
                  $
                  (80
                  )
                  
                  $
                  (416
                  )Net
      income (loss) applicable to common shareholders
                  
                  $
                  (80
                  )
                  
                  $
                  (416
                  )Basic
      and diluted income (loss) per share
                  
                  $
                  (0.00
                  )
                  
                  $
                  (0.02
                  )Total
      assets
                  
                  $
                  5,934
                  
                  
                  $
                  6,111Shareholders’
      equity
                  
                  $
                  5,649
                  
                  
                  $
                  5,880
  21
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  RESULTS
OF OPERATIONS FOR THE QUARTER ENDED DECEMBER 31, 2007 COMPARED WITH THE QUARTER
ENDED DECEMBER 31, 2006
 
 In
thousands (000’s)
  Quarter Ended December
      31,2007
                  
                  
                  2006Sales
                  $
                  212
                  
                  
                  $
                  251Cost
      of Sales
                  
                  98
                  
                  
                  
                  127Gross
      Profit
                  
                  114
                  
                  
                  
                  124Product
      development
                  
                  23
                  
                  
                  
                  86Sales
      and marketing expenses
                  
                  19
                  
                  
                  
                  29Stock
      based compensation
                  
                  14
                  
                  
                  
                  23General
      and administrative
                  
                  168
                  
                  
                  
                  251Amortization
      expense
                  
                  84
                  
                  
                  
                  151Total
      Expense
                  
                  308
                  
                  
                  
                  540Net
      operating loss
                  
                  (194
                  )
                  
                  
                  (416
                  )Net
      Other Income
                  
                  114
                  
                  
                  
                  0NET
      LOSS
                  $
                  (80
                  )
                  
                  $
                  (416
                  )
 Revenue.  
The sale of mobile entertainment services accounts for 87.3% of UpSNAP’s first
quarter 2008 revenues.
 
 The
composition of revenue in thousands ($000’s), except for units, is as
follows:
  Quarter Ended December
      31,2007
                  
                  
                  2006Wireless
      data services
                  
                  $
                  185
                  
                  
                  $
                  246Advertising
      and other
                  
                  
                  27
                  
                  
                  
                  5Revenue
                  
                  $
                  212
                  
                  
                  $
                  251
  Net
revenue for the quarter ended December 31, 2007, decreased by $39,000, or 15.6%,
compared with 2006. Advertising revenues increased $22,000 or 227.3% as the
Company continues its efforts to shift its product mix to higher margin
advertising revenues. Wireless data services decreased $61,000 or 24.8% as the
Company’s largest carrier customer continues to lose customers due to a merger.
In addition, the Company made changes to its streaming audio programs in order
to enhance margins.
 
 Cost of goods
sold.   Cost of revenues for the quarter ended December 31,
2007 were $98,000, resulting in a gross profit of $114,000 (53.8%) compared to
cost of revenues for the quarter ended December 31, 2006 of $127,000 and a gross
profit of $124,000 (49.4%). Costs of revenues were primarily fees paid to the
Company’s content providers; royalty payments for the music content, server
farm, and call connect charges.
 
 Product
development expenses.  Product development costs consist primarily
of salaries and related expenses for product development personnel as well as
the cost of independent contractors. Product development expenses for the
quarter ended December 31, 2007 decreased by $63,000, or 73.3%, compared with
the same period in 2006. Product development expenses decreased primarily due to
the elimination of product development headcount.  Product development
expenses are expected to remain at current levels for the next several
quarters.
 
 Sales and
marketing expenses.  Sales and marketing expenses consist primarily
of salaries and related expenses for marketing personnel as well as the cost of
public relations efforts. Sales and marketing expenses for the quarter ended
December 31, 2007 decreased by $10,000 or 34.5%, compared with the same period
in 2006. Sales and marketing expenses decreased primarily due to the elimination
of marketing headcount and reduced public relations spending. Sales and
marketing expenses are expected to remain at current levels for the next several
quarters.
 
 Stock based
compensation expenses.  Stock based compensation expenses consist of
expenses related to the Company’s granting of stock options and restricted
shares. Stock based compensation expenses are expected to remain at current
levels for the next several quarters.
  22
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 General and
administrative expenses.  General and administrative expenses
consist primarily of salaries and related costs for personnel as well as
professional fees for legal, audit, and tax services. General and administrative
expenses for the quarter ended December 31, 2007 decreased by $83,000, or 33.1%,
compared with the same period in 2006. General and administrative expenses
decreased primarily due to the elimination of headcount and reduced spending for
audit fees and travel. The Company deferred half of the salary of its executive
officers for January 2008 and has been accruing the service fee for the
Company’s CFO
since October 1, 2007.
 
 Amortization of
intangibles.Amortization of intangibles for the quarter
ended December 31, 2007 was $84,000 compared with $151,000 in 2006. Amortization
expense is related to the value assigned to the intangible assets resultant from
the XSVoice acquisition. During fiscal 2007 the intangible asset value assigned
to employment agreements, supplier agreements, and customer relationships became
fully amortized.
 
 Other Income and
expense.For the quarter ended December 31, 2007 the Company recognized
$114,000 in income related to the extinguishment of debt.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 We have
funded our cash needs from inception through December 31, 2007 with the
$2,146,200 in funds acquired as part of the September – October 2005 Private
Placement.  In addition, the Company raised $254,750 in February 2007
from the sale of 619,000 Series A warrants and 400,000 Series B warrants at
$0.25 each.
 
 Liquidity.  
At December 31, 2007, UpSNAP had cash and cash equivalents of $16,000, compared
with $19,000 at September 30, 2007, a decrease of $3,000.
 
 During
the quarter ended December 31, 2007, cash used to fund operating activities
was $65,000, consisting primarily of the net loss for the period
of $80,000 offset by non-cash charges related to:
 
 ·
                amortization
      and depreciation charges of $84,000 and $7,000,
    respectively;
 
 ·
                write-off
      of debt of $113,000
 
 ·
                stock
      based compensation of $14,000; and
 
 ·
                working
      capital changes of $153,000, consisting primarily of a decrease
      of $117,000 in accounts receivable, and an increase of $20,000 in
      accounts payable.
 
 Investing
activities for the quarter ended December 31, 2007 used cash of $69,000 in costs
related to the pending MGI merger.
 
 The
Company has entered into placement agency agreements with placement
agents for a placement of at least $3,000,000 in gross proceeds of the Company’s
securities.  The terms of the private financing are subject to
negotiation among the Company, the placement agents and the prospective
investors.  The closing of the merger agreement with MGI is dependent
on the successful completion of this private financing.
 
 As of
February 12, 2008, the Company had non-binding commitments for up to
$1,500,000 in the private financing, and is working to raise the remaining
$1,500,000 to close the MGT merger for a total of $3,000,000 in gross
proceeds.
 
 This
private financing has not been consummated as of the date hereof and the Company
offers no assurances that the private placement will close. The inability to
close the private placement will cause the termination of the MGI Merger. 
Even if completed, the placement terms may be highly dilutive to current
stockholders, and may impose debt service obligations on the Company. We
anticipate that the private financing and the merger will be consummated, if at
all, during the second quarter of fiscal 2008.  Either UpSNAP or
MGI may currently terminate the merger agreement upon providing notice to the
other party.
 
 Without
the completion of the private financing, the Company will not have sufficient
cash to fund future operations.  At the date of this report we are
continuing to incur losses. We are using capital of approximately $25,000 per
month to fund
  23
 Table of Contents
  operations.
At this rate we would require $300,000 of capital over the next twelve months to
fund current operations. We had cash in the bank of $72,000 as of February 8,
2008 and a working capital deficit. If the private financing is not closed
during the second quarter of fiscal 2008, the Company will need to sharply
reduce operations and may no longer be able to continue as a going
concern.
 
 We are
continuing to explore various financing alternatives, including equity financing
transactions. Equity financings would likely include, but are not limited to,
private investments in public equity (PIPE) transactions or strategic equity
investment by interested companies. Corporate collaborations could include
licensing of one or more of our products for upfront and milestone payments, or
co-development and co-funding of our products.
 
 Our
long-term working capital and capital requirements will depend upon numerous
factors, including the following: our ability to close and successfully
integrate the Mobile Greetings Merger; and our general efforts to improve
operational efficiency, conserve cash and implement other cost conservation
programs.
 
 CRITICAL
ACCOUNTING ESTIMATES AND POLICIES
 
 UpSNAP’s
management makes certain assumptions and estimates that impact the reported
amounts of assets, liabilities and stockholders’ equity, and revenues and
expenses. These assumptions and estimates are inherently uncertain. Management
judgments that are currently the most critical are related to revenue
recognition, valuation of goodwill and stock based compensation. Below we
describe these policies as well as the estimates involved. For a more detailed
discussion on accounting policies, see the notes to the audited consolidated
financial statements.
 
 Revenue
recognition
 
 The
Company recognizes revenue under the guidance provided by the SEC Staff
Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” and the Emerging
Issues Task Force (“EITF”) Abstract No. 99-19 “Reporting Revenue Gross as a
Principal versus Net as an Agent” (“EITF 99-19”).
 
 The
Company receives revenue from the wireless carriers by providing streaming audio
content that the carriers make available to their mobile handset customers.
UpSNAP generates revenues from this line of business in two distinct
ways:
 
 Provider
of Technology Platform: UpSNAP provides technology to brands that have their own
mobile distribution and revenue arrangements with the carriers. In this case,
UpSNAP does not act as the principal in the transaction. The brands have their
own relationships with the carriers and look to UpSNAP to provide the technology
platform and service, while they retain the relationship with the consumer and
set the pricing. In these cases, UpSNAP typically reports net revenues received
from the carrier which are revenues after both carrier charges and content
provider charges.
 
 The
Company negotiated a new contract with its largest carrier customer effective
February 12, 2007 in which the carrier is no longer deducting content provider
charges before submitting revenue to the Company. Under this arrangement, the
content provider charges are the responsibility of the Company. The net effect
of this new contract is that revenues and cost of revenues are increased by an
identical amount to reflect the content provider charges.
 
 UpSNAP is
Principal Party: UpSNAP acts as the principal party in the content
relationships. Specifically, UpSNAP has the relationship with the carriers, sets
the re-sale price at which consumers buy the product, pays the content provider
for the content, and builds the mobile application or service.  In
these relationships, the Company recognizes revenue based on the gross fees
remitted by the carrier to the company. The Company’s payments to the third
party content providers are treated as cost of sales.
 
 The
Company also receives advertising revenues from third parties. These revenues
are resultant from audio ads played on the Company’s SWInG platform, banner ads
on the WAP deck, and pay per call revenues when the consumer proactively
responds to a text message. These advertising revenues are recognized in the
period the transactions are recorded by the third party provider. UpSNAP reports
net advertising revenues received from third parties.
 
 24
 Table of Contents
 
 Valuation
of goodwill
 
 In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” UpSNAP reviews the carrying value of long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Such events or circumstances might include a
significant decline in market share, a significant decline in revenue and/or
profits, changes in technology, significant litigation or other
items.
 
 UpSNAP
performs an impairment test of goodwill, at least annually. At December 31,
2007, in evaluating whether there was an impairment of goodwill, management
compared the carrying amounts of such assets with the related enterprise value.
Enterprise value was used to measure the value of the goodwill. Estimates of the
enterprise value at December 31, 2007 were determined by calculating the
weighted average closing price of the stock for the quarter. This calculated
enterprise value was then compared to the carrying value of the net assets of
the Company.  Upon completion of its goodwill impairment test, UpSNAP
determined that the amount of the XSVoice goodwill was not
impaired.
 
 Stock
Based Compensation
 
 The fair value of each time-based award is estimated on the date of
grant using the Black-Scholes option valuation model, which uses the assumptions
described below. Our weighted-average assumptions used in the Black-Scholes
valuation model for equity awards with time-based vesting provisions granted
during the quarter ended December 31, 2007 are shown in the following
table:
 
 Expected
      volatility
                70.0%Expected
      dividends
                0%Expected
      terms
                6.0
      -6.25 yearsPre-vesting
      forfeiture rate
                50%Risk-free
      interest rate
                4.45%
      – 4.76%
 
 The
expected volatility rate was estimated based on historical volatility of the
Company’s common stock over approximately the fourteen month period since the
reverse merger and comparison to the volatility of similar size companies in the
similar industry. The expected term was estimated based on a simplified method,
as allowed under SEC Staff Accounting Bulletin No. 107, averaging the
vesting term and original contractual term. The risk-free interest rate for
periods within the contractual life of the option is based on U.S. Treasury
securities. The pre-vesting forfeiture rate was based upon plan to date
experience. As required under SFAS No. 123(R), we will adjust the estimated
forfeiture rate to our actual experience. Management will continue to assess the
assumptions and methodologies used to calculate estimated fair value of
share-based compensation. Circumstances may change and additional data may
become available over time, which could result in changes to these assumptions
and methodologies, and thereby materially impact our fair value
determination.
 
 OUTSTANDING
SHARE DATA
 
 The
outstanding share data as at December 31, 2007 and 2006 is as
follows:
 
 Number of shares
                    outstanding2007
                  
                  
                  2006Common
      shares
                  
                  
                  22,720,324
                  
                  
                  
                  21,151,324Options
      to purchase common shares
                  
                  
                  870,000
                  
                  
                  
                  700,000Warrants
      to purchase common shares
                  
                  
                  2,360,000
                  
                  
                  
                  5,144,668Debentures
      convertible to common shares
                  
                  
                  -
                  
                  
                  
                  -Accrued
      interest convertible to common shares
                  
                  
                  -
                  
                  
                  
                  -
 The 2007
reduction in warrants was primarily due to 1,019,000 warrants exercised during
February 2007 and 1,765,668 warrants expiring March 31, 2007.
  25
 Table of Contents
 Risk
Factors That May Affect Future Operating Results
 You
should carefully consider the risks described below, which constitute the
principal material risks facing us.  If any of the following risks
actually occur, our business could be harmed.  You should also refer
to the other information about us contained in this report, including our
financial statements and related notes.
 
 Financial
Risks
 
 Our
business has posted net operating losses, faces an uncertain path to
profitability, and we have limited cash resources. For the investor, potential
adverse effects of this include failure of the company to continue as a going
concern. Our auditors have expressed substantial doubt about our ability to
continue as a going concern.
 
 From the
inception of our operating subsidiary, UpSNAP USA, until December 31, 2007,
UpSNAP USA has had accumulated net losses of $3,156,766. Our auditors have
raised substantial doubt about our ability to continue as a going concern due to
recurring losses from operations. In the 2007 fiscal year, we posted sales of
$950,020 net of carrier charges from the sale of premium subscription services
for mobile content. However, we expect to continue to have net operating losses
until we can expand our sales channel and implement our marketing efforts. These
continued net operating losses together with our limited working capital and the
uncertainties of operating in a new industry make investing in our company a
high-risk proposal.
 
 We
have limited cash resources and working capital. The private financing activity
related to the merger with Mobile Greetings, Inc. may not be successful, leaving
us with extremely limited resources.
 
 We
currently have monthly cash burn rate from operations of approximately
$25,000 and have only approximately $16,000 in cash and a working capital
deficit as of December 31, 2007. If the private financing is not successful, we
will need to severely restrict its activities in order to conserve cash and may
need to cease operations.  We currently anticipate that the private
financing will be consummated, if at all, during the second quarter of fiscal
2008. However, we can provide no assurances that the private financing will be
consummated on terms favorable to us, if at all.  Successful
completion of the private financing depends on many factors, some of which are
outside of our control, such as potential investors’ perception of the Company
and our business and financial prospects, the proposed merger with MGI and the
business and financial prospects of MGI and the combined company.  In
addition, MGI may terminate the merger agreement at any time.
 
 Our
business is difficult to evaluate because we have a limited operating history in
a new industry. The adverse effects of a limited operating history include
reduced management visibility into forward sales, marketing costs, customer
acquisition and retention which could lead to missing targets for achievement of
profitability.
 
 UpSNAP is
operating with a brand new business based around mobile entertainment
services.
 
 We expect
to incur expenses associated with the planned expansion of our sales and
marketing efforts and from promotional arrangements with our strategic partners.
We expect that our future agreements and promotional arrangements with our
strategic partners may require us to pay consideration in various
forms, including the payment of royalties, license fees and other
significant guaranteed amounts based upon revenue sharing agreements and the
issuance of stock in certain cases. In addition, our promotional arrangements
and revenue sharing agreements may require us to incur significant expenses, and
we cannot guarantee that we will generate sufficient revenues to offset these
expenses. To date, we have entered into revenue share relationships with
carriers and content providers at industry standard margins, or enter into
promotional arrangements to include guaranteed minimum payments. Based on
management experience, future contractual arrangements will be based upon
standard revenue share relationships at industry-standard margins. We cannot
guarantee that we will be able to achieve sufficient revenues in relation to our
expenses to become profitable. Even if we do attain profitability, we may not be
able to sustain ourselves as a profitable company in the future.
 
 We
have limited resources to execute our business plan. The risk for investors is
that the share price may suffer as better financed competition takes market
share, or the company is forced to raise additional funds on unfavorable terms
to the existing stockholders.
 
 In
September and October 2005, we raised $2,146,200 in a private placement
transaction. As of the date of this annual report, we had approximately $11,000
in cash and cash equivalents. The Company’s current financial models indicate
that the
  26
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  Company’s
cash balances have fallen to levels that will not sustain operations. Therefore,
the Company is dependent on raising additional capital. We have no commitments
for such capital.
 
 Our
closing share price at December 31, 2007 was $0.17 per share, so any additional
capital raise will be highly dilutive.
 
 Current
funding limits our operating plan to a conservative one and our auditors have
expressed substantial doubt about our ability to continue as a going concern. We
will need additional funding to ensure that we are able to continue operating
and compete in a dynamic and high growth mobile sector. Our financial resources
are limited and the amount of funding that we will need to develop and
commercialize our products and services is highly uncertain. Adequate funds to
sustain operations and grow the business may not be available when needed or on
terms satisfactory to us. A lack of funds may cause us to cease operations, or
delay, reduce and/or abandon certain or all aspects of our product development
programs. If additional funds are raised through the issuance of equity or
convertible debt securities, your percentage ownership in us will be reduced,
existing stockholders may suffer dilution. The securities that we issue to raise
money may also have rights, preferences and privileges that are senior to those
of our existing stockholders.
 
 We
anticipate that our results of operations may fluctuate significantly from
period to period due to factors that are outside of our control, which may lead
to reduced revenues or increased expenditures.
 
 Our
operating results may fluctuate significantly as a result of a variety of
factors, many of which are outside of our control. Some of the factors that may
affect our quarterly and annual operating results include:
 
 ·
                  our
      ability to establish and strengthen brand
  awareness;
  ·
                  our
      success, and the success of our potential strategic partners, in promoting
      our products and services;
  ·
                  the
      overall market demand for mobile services and applications of the type
      offered by us;
  ·
                  the
      amount and timing of the costs relating to our marketing efforts or other
      initiatives;
  ·
                  the
      timing of contracts with strategic partners and other
    parties;
  ·
                  fees
      that we may pay for distribution and promotional arrangements or other
      costs that we may incur as we expand our
  operations;
 
 As a
result of our limited operating history and the emerging nature of the markets
in which we compete, it is difficult for us to forecast our revenues or earnings
accurately.
 
 Business
Risks
 
 We
are dependent on strategic partners for content and sales distribution to
consumers. If these partnerships were to cease, this could lead to loss of
revenues and customers.
 
 UpSNAP
relies on the US mobile carriers Verizon, Sprint/Nextel, T-Mobile, and AT&T
to sell its products and collect revenues which are then passed onto UpSNAP.
Although management has no reason to believe that these arrangements are going
to be adversely affected in the future, it is management experience that carrier
contracts are prone to change and re-negotiation. UpSNAP also relies on the
content developers to enter into commercially reasonable relationship with the
company to allow for the re-selling of the content to consumers. UpSNAP has over
150 content partners and is not dependent on any one content
supplier.
 
 We
are dependent upon our executive officers, managers and other key personnel,
without whose services our prospects would be severely limited leading to loss
of revenue and customer acquisition.
 
 Our
success depends to a significant extent upon efforts and abilities of our key
personnel, in particular our Chief Executive Officer Tony Philipp. The loss of
Tony Philipp could have a material adverse effect upon us, resulting in loss of
current
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  business
relationships, strategy and planning. Competition for highly qualified personnel
is intense and we may have difficulty replacing such key personnel. UpSNAP
has no key man insurance in place to help alleviate the loss.
 
 The
mobile entertainment services market in which we operate is subject to intense
competition and we may not be able to compete effectively resulting in loss of
revenues or customers.
 
 We
compete in the mobile entertainment services market. This market is becoming
increasingly more competitive. We face competition from the existing mobile
entertainment players, such as Google and Yahoo!, and newcomers to the mobile
entertainment services markets. There are relatively low barriers to entry into
the mobile entertainment services market. Many of our competitors or potential
competitors have longer operating histories, longer customer relationships and
significantly greater financial, managerial, sales and marketing and other
resources than we do. We are particularly vulnerable to efforts by well funded
competitors and will lose market share unless we can attain a critical mass of
consumers, strategic partners, and affiliates, as well as strong brand
identity.
 
 UpSNAP
is largely dependent on one strategic relationship. We need to significantly
expand our distribution channels. Failure to expand our distribution channels
will result in reduced customer acquisition, and reduced revenues.
 
 In Fiscal
2007 substantially all of our revenues were generated from the Sprint/Nextel
Distribution relationship. In order to decrease our dependence on one major US
carrier, we need to enhance our ability to find new strategic partners in order
to create additional distribution channels for our products and to generate
increased revenues. We expect that we will need to invest on an ongoing basis to
expand our partner sales force. The creation of strategic partnerships requires
a sophisticated sales effort targeted at the senior management of prospective
partners. Given our limited budget dedicated to this effort, we can only focus
on a very limited number of distribution opportunities.
 
 We
plan to build our business through merger with or acquisition of existing
technology companies but may not be successful in finding merger or acquisition
partners. In addition we may need to seek additional finance to support the
acquisitions. The financing and acquisitions will most likely involve the
issuance of common stock, which may result in dilution of the current
stockholders.
 
 We plan
to build our business through the merger with or acquisition of existing
technology companies that will benefit our application service business. It is
reasonable to expect that such activity will be an ongoing part of our business
development efforts. At any given time, we could be in process of analyzing or
making an offer for such a transaction. However, any discussion or speculation
on specific transactions is only conjecture until such time that a definite
agreement is signed and announced in an SEC filing. It is possible that no
transactions will take place at all.
 
 Acquisitions
are difficult to find, close, and take a significant amount of management
time.
 
 Our
intellectual property and other proprietary rights are valuable, and any
inability to protect them could adversely affect our business and results of
operations; in addition, we may be subject to infringement claims by third
parties which we may be unable to settle.
 
 Our
ability to compete effectively is dependent upon our ability to protect and
preserve the intellectual property and other proprietary rights and materials
owned, licensed or otherwise used by us. We currently have a patent-pending
technology. We cannot assure you that the patent application will result in an
issued patent, and failure to secure rights under the patent application may
limit our ability to protect the intellectual property rights that the
application was intended to cover. Although we have attempted to protect our
intellectual property and other proprietary rights both in the United States and
in foreign countries through a combination of patent, trademark, copyright and
trade secret protection, these steps may be insufficient to prevent unauthorized
use of our intellectual property and other proprietary rights, particularly in
foreign countries where the protection available for such intellectual property
and other proprietary rights may be limited. To date, we are not currently
engaged in and have not had any material infringement or other claims pertaining
to our intellectual property brought by us or against us in recent years. We
cannot assure you that any of our intellectual property rights will not be
infringed upon or that our trade secrets will not be misappropriated or
otherwise become known to or independently developed by competitors. We may not
have adequate remedies available for any such infringement or other unauthorized
use. We cannot assure you that any infringement claims asserted by us will not
result in our intellectual property being challenged or invalidated, that our
intellectual property will be held to be of adequate scope to protect our
business or that we will be able to deter current and former employees,
contractors or other parties from breaching confidentiality obligations
and
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  misappropriating
trade secrets. In addition, we may become subject to claims against us which
could require us to pay damages or limit our ability to use certain
intellectual property and other proprietary rights found to be in violation of a
third party’s rights, and, in the event such litigation is successful, we may be
unable to use such intellectual property and other proprietary rights at all or
on reasonable terms. Regardless of its outcome, any litigation, whether
commenced by us or third parties, could be protracted and costly and could
result in increased litigation related expenses, the loss of intellectual
property rights or payment of money or other damages, which may result in lost
sales and reduced cash flow and decrease our net income.
 
 In
order to be successful and profitable, we must grow rapidly. We expect that
rapid growth will put a large strain on our management team and our other
resources. We may not have sufficient resources to manage this growth
effectively leading to potential loss of customers through poor service and
support.
 
 We
anticipate that a period of significant expansion will be required to address
potential growth in our customer base, market opportunities and personnel. This
expansion will place a significant strain on our management, operational and
financial resources. To manage the expected growth of our operations and
personnel, we will be required to implement new operational and financial
systems, procedures and controls, and to expand, train and manage our growing
employee base. We also will be required to expand our finance, administrative
and operations staff. Further, we anticipate that we will be entering into
relationships with various strategic partners and third parties necessary to our
business. Our current and planned personnel, systems, procedures and controls
may not be adequate to support our future operations. Management may not able to
hire, train, retain, motivate and manage required personnel for our planned
operations.
 
 Our
business is subject to frequent technology changes, multiple standards, rapid
roll-out of new mobile handsets, and changes in the method of Internet
broadcasting delivery, that could lead to us being unable to provide our
services to some our existing and new users, leading to loss of revenues, poor
performance or both.
 
 We are
presently able to sell and deliver information to our product carriers
throughout the world, but any changes in the method of delivery of Internet
broadcasting or mobile communications standards, could result in our not being
able to deliver our services to some or all of our customers. We will continue
to develop our technology to address emerging mobile platforms and standards to
avoid this problem, but no assurance can be given that this will be accomplished
in a timely manner.
 
 Some
of our existing stockholders can exert control over us and may not make
decisions that are in the best interests of all stockholders which could lead to
a reduced stock price.
 
 As of the
date of this quarterly report, officers, directors, and stockholders holding
more than 5% of our outstanding shares collectively controlled approximately
47.2% of our outstanding common stock. As a result, these stockholders, if they
act together, would be able to exert a significant degree of influence over our
management and affairs and over matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. Accordingly, this concentration of ownership may harm the market
price of our common stock by delaying or preventing a change in control of us,
even if a change is in the best interests of our other
stockholders.
 
 In
addition, the interests of this concentration of ownership may not always
coincide with the interests of other stockholders, and accordingly, they could
cause us to enter into transactions or agreements that we would not otherwise
consider.  No officers or directors of UpSNAP are currently or have
ever been affiliated with any of the other greater than 5% beneficial
owners.
 
 Market
Risks
 
 A
limited public market exists for the trading of our securities, which may result
in shareholders being unable to sell their shares, or forced to sell them at a
loss.
 
 Our
common stock is quoted on the NASD Over-the-Counter Bulletin Board. Our common
stock is thinly traded and has little to no liquidity. The stock has a limited
number of market makers, and a limited number of round lot holders. As a result,
investors may find it difficult to dispose of our securities. This lack of
liquidity of our common stock will likely have an adverse effect on the market
price of our common stock and on our ability to raise additional
capital.
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 If an
active trading market does develop, the market price of our common stock is
likely to be highly volatile due to, among other things, the low revenue nature
of our business and because we are a new public company with a relatively
limited operating history. Further, even if a public market develops, the volume
of trading in our common stock will presumably be limited and likely be
dominated by a few individual stockholders. The limited volume, if any, will
make the price of our common stock subject to manipulation by one or more
stockholders and will significantly limit the number of shares that one can
purchase or sell in a short period of time.
 
 The
equity markets have, on occasion, experienced significant price and volume
fluctuations that have affected the market prices for many companies’ securities
that have often been unrelated to the operating performance of these companies.
Any such fluctuations may adversely affect the market price of our common stock,
regardless of our actual operating performance. As a result, stockholders
may be unable to sell their shares, or may be forced to sell them at a
loss.
 
 We
do not intend to pay dividends to our stockholders, so you will not receive any
return on your investment in our company prior to selling your interest in
us.
 
 We have
never paid any dividends to our stockholders. We currently intend to retain any
future earnings for funding growth and, therefore, do not expect to pay any
dividends in the foreseeable future. If we determine that we will pay dividends
to the holders of our common stock, we cannot assure that such dividends will be
paid on a timely basis. As a result, you will not receive any return on your
investment prior to selling your shares in our company and, for the other
reasons discussed in this “Risk Factors” section, you may not receive any return
on your investment even when you sell your shares in our company and your shares
may become worthless.
 
 A
significant number of our shares will be eligible for sale and their sale or
potential sale may depress the market price of our common stock.
 
 Sales of
a significant number of shares of our common stock in the public market could
harm the market price of our common stock. We have authorized 97,500,000 shares
of common stock. As of December 31, 2007, we had outstanding 22,720,324shares of
common stock. Accordingly, we have 74,779,676 shares of common stock available
for future sale.
 
 On August
9, 2007, we entered into an Agreement and Plan of Merger with Mobile Greetings,
Inc., a California corporation, or MGI.  Under the terms of the Merger
Agreement, at the effective date of the Merger (the “Effective Date”), each
issued and outstanding share of MGI common stock (other than any shares held in
treasury and any shares as to which the holder has properly demanded appraisal
of his shares under California law) will be converted into and exchanged for
9.68 shares (the “Exchange Ratio”) of the Company’s common stock, $.001 par
value (“Company Common Stock”).  Options, warrants and other rights to
purchase MGI common stock as of the Effective Date will be assumed by the
Company with an adjustment in the number of underlying shares and the exercise
price thereof based upon the Exchange Ratio.  The exchange concept is
that the shares of Company Common Stock to be exchanged for MGI common stock on
a fully diluted basis would equal 50% of the number of outstanding shares of
Company Common Stock on a fully-diluted basis immediately after the Merger, and
without giving effect to the private financing mentioned below. As of December
31, 2007, the number of shares that would be issued under this Merger Agreement
would be 21,550,324 shares. On January 14, 2008, the Merger Agreement was
amended to extend the termination date to February 28, 2008. Either party may
terminate the Merger Agreement at any time.
 
 In
addition to the share consideration, the Company is to issue an Non-Negotiable
Convertible Note (the “Note”) in the principal amount of up to $2,200,000 to a
representative for the holders of the outstanding MGI common stock, options,
warrants and other rights to purchase MGI common stock as of the Effective Date,
repayable in 12 months subject to a six month extension should the Company then
be working on a public offering, together with interest at the rate of federal
funds payable at maturity or waived upon conversion.  Commencing after
six months, the Note would be convertible at a base conversion price of $.50 per
share into shares of Company Common Stock, or an aggregate of 4,400,000 shares,
subject to customary anti-dilution provisions.
 
 In order
to provide working capital for the combined company after the MGI merger,
we are negotiating to raise up to $3 million in a private financing of
convertible debt securities.  The shares of Company Common Stock issuable
upon conversion of such debt together with other Company securities issuable
in connection with the private financing could be highly dilutive to
current shareholders.
 
 Under our
2006 Omnibus Stock and Incentive Plan, (the “Plan”) up to 7,500,000 shares of
Company Common Stock, either unissued or reacquired by the Company, are
available for awards of either options, stock appreciation rights, restricted
stocks,
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  other
stock grants, or any combination thereof. Eligible recipients include employees,
officers, consultants, advisors and directors.
 
 As
additional shares of our common stock become available for resale in the public
market, the supply of our common stock will increase, which could decrease its
price. Some or all of the shares of common stock may be offered from time to
time in the open market under Rule 144, and these sales may have a depressive
effect on the market for our shares of common stock. In general, a person who
has held restricted shares for a period of one year may, on filing with the SEC
a notification on Form 144, sell into the market common stock in an amount equal
to 1% of the outstanding shares for Bulletin Board Companies. Such sales may be
repeated once each three months, and any of the restricted shares may be sold by
a non-affiliate after they have been held for one year (after February 15,
2008).
 
 Because
our stock is considered a penny stock, any investment in our stock is considered
to be a high-risk investment and is subject to restrictions on
marketability.
 
 Our
common stock is a “penny stock” within the meaning of Rule 15g-9to the
Securities Exchange Act of 1934, which is generally an equity security with a
price of less than $5.00. Our common stock is subject to rules that impose sales
practice and disclosure requirements on certain broker-dealers who engage in
certain transactions involving a penny stock. Under the penny stock regulations,
a broker-dealer selling penny stock to anyone other than an established customer
or “accredited investor” must make a special suitability determination for the
purchaser and must receive the purchaser’s written consent to the
transaction prior to the sale, unless the broker-dealer is otherwise exempt.
Generally, an individual with a net worth in excess of $1,000,000 or annual
income exceeding $200,000 individually or $300,000 together with his or her
spouse is considered an accredited investor.
 
 In
addition, the penny stock regulations require the broker-dealer to:
 
 ·           deliver,
prior to any transaction involving a penny stock, a disclosure schedule prepared
by the Securities and Exchange Commission relating to the penny stock market,
unless the broker-dealer or the transaction is otherwise exempt;
 
 ·           disclose
commissions payable to the broker-dealer and the Registered Representative and
current bid and offer quotations for the securities; and
 
 ·           send
monthly statements disclosing recent price information with respect to the penny
stock held in a customer’s account, the account’s value and information
regarding the limited market in penny stocks.
 
 Because
of these regulations, broker-dealers may encounter difficulties in their attempt
to sell shares of our common stock, which may affect the ability of selling
stockholders or other holders to sell their shares in the secondary market and
have the effect of reducing the level of trading activity in the secondary
market. These additional sales practice and disclosure requirements could impede
the sale of our securities. In addition, the liquidity of our securities may be
decreased, with a corresponding decrease in the price of our securities. 
Our common stock in all probability will be subject to such penny stock rules
and our stockholders will, in all likelihood, find it difficult to sell their
securities.
 
 ITEM3. CONTROLS AND PROCEDURES
 
 Quarterly Evaluation of
Controls.  As of the end of the period covered by this
quarterly report on Form 10-QSB, we evaluated the effectiveness of the design
and operation of our disclosure controls and procedures ("Disclosure Controls").
This evaluation (“Evaluation”) was performed by our Chairman and Chief Executive
Officer, Tony Philipp, and our Chief Financial Officer, Paul C. Schmidt
(“CFO”).  In addition, we have discussed these matters with our
securities counsel and board.  In this section, we present the
conclusions of our CEO and CFO as of the date of the Evaluation with respect to
the effectiveness of our Disclosure Controls.
 
 CEO and CFO
Certifications.  Attached to this quarterly report, as Exhibits
31.1 through 31.4, are certain certifications of the CEO and CFO, which are
required in accordance with the Exchange Act and the Commission's rules
implementing such section (the "Rule 13a-14(a)/15d–14(a) Certifications"). This
section of the quarterly report contains the information
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  concerning
the Evaluation referred to in the Rule 13a-14(a)/15d–14(a) Certifications. This
information should be read in conjunction with the Rule 13a-14(a)/15d–14(a)
Certifications for a more complete understanding of the topic
presented.
 
 Disclosure Controls.
Disclosure Controls are procedures designed with the objective of ensuring that
information required to be disclosed in our reports filed with the Commission
under the Exchange Act, such as this quarterly report, is recorded, processed,
summarized and reported within the time period specified in the Commission's
rules and forms. Disclosure Controls are also designed with the objective of
ensuring that material information relating to us is made known to the CEO and
the CFO by others, particularly during the period in which the applicable report
is being prepared.
 
 Scope of the Evaluation. The
CEO and CFO's evaluation of our Disclosure Controls included a review of the
controls' (i) objectives, (ii) design, (iii) implementation, and (iv) the effect
of the controls on the information generated for use in this quarterly report.
This type of evaluation is done on a quarterly basis so that the conclusions
concerning the effectiveness of our controls can be reported in our quarterly
reports on Form 10-QSB and annual reports on Form 10-KSB. The overall goals of
these various evaluation activities are to monitor our Disclosure Controls, and
to make modifications if and as necessary.  Our intent in this regard
is that the Disclosure Controls will be maintained as dynamic systems that
change (including improvements and corrections) as conditions
warrant.
 
 Conclusions.  Based
upon the Evaluation, our Disclosure Controls and procedures are designed to
provide reasonable assurance of achieving our objectives. Our CEO and CFO have
concluded that our Disclosure Controls and procedures are effective at that
reasonable assurance level to ensure that material information relating to the
Company is made known to management, including the CEO and CFO, particularly
during the period when our periodic reports are being prepared.. Additionally,
there has been no change in our internal controls over financial reporting that
occurred during our most recent fiscal quarter that has materially affected, or
is reasonably likely to affect, our Internal Controls over financial
reporting.
 
 PARTII – OTHER INFORMATION
 
 ITEM6. EXHIBITS
 
 The
exhibits to this form are listed in the attached Exhibit Index.
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  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
 
 UPSNAP,
      INC.
                    (Registrant)Date:  February
      14, 2008
                  /s/ Tony PhilippTony
      Philipp
                    Chairman
      of the Board and Chief Executive Officer
                    (Principal
      Executive Officer)Date:  February
      14, 2008
                  /s/ Paul C. SchmidtPaul
      C. Schmidt
                    Chief
      Financial Officer
                    (Principal
      Financial Officer)
 
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  INDEX
TO EXHIBITS
 
 Exhibit
      No.
                  Description31.1
                  Rule 13a-14(a)/15d-14(a) Certification of Tony
      Phillips, Chairman and Chief Executive Officer*31.2
                  Rule 13a-14(a)/15d-14(a) Certification of Paul C.
      Schmidt, Chief Financial Officer*32
                  Certification of Principal Executive Officer and
      Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350,
      as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.*
 
 * filed
herein
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