---

SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


FORM
10-K


(Mark
One)





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


For the
fiscal year ended December 31, 2008


or





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


For the transition period
from                    to





Commission
File No.  333-124405





DIGITALPOST
INTERACTIVE, INC.





(Exact
Name of Registrant as Specified in Charter)


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





4040
Barranca Parkway, Suite 220, Irvine, CA 92602


(Address
of Principal Executive Offices) (Zip Code)





(949)
333-7500


Registrant’s
Telephone Number, Including Area Code




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




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




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






Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.  [  ]
Yes   [X] No




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





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





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





Large
accelerated
filer [  ]                                                                                                                            Accelerated
filer  [  ]


Non-accelerated
filer [  ] (Do not check if a smaller reporting
company)                                                                                                                                    Smaller
reporting company   [X]





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





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates was approximately $6,064,800 based on the last reported sale
price of registrant's common stock on June 30, 2008.




Number of
common voting shares outstanding as of March 31, 2009: 74,139,856.





List
hereunder the following documents if incorporated by reference and the Part of
the Form 10-K (e.g., Part I, Part II, etc.) into
which the document is incorporated: None.







Table
      of Contents
                                PagePART
      IItem
      1.   Business
                                2Item
      1A.  Risk Factors
                                7Item
      1B.  Unresolved Staff Comments
                                7Item
      2.   Properties
                                7Item
      3.   Legal Proceedings
                                7Item
      4.   Submission of Matters to a Vote of Security
      Holders
                                7PART
      IIItem
      5.   Market For Registrant’s Common Equity, Related Stockholder
      Matters and
      Issuer        Purchases of Equity
      Securities
                                8Item
      6.   Selected Financial Data
                                9Item
      7.   Managements Discussion and Anlaysis of Financial Condition and
      Results of Operations
                                9Item
      7A. Quantitative and Qualitative Disclosures About Market Risk
                                15Item
      8.   Financial Statements and Supplementary Data
                                15Item
      9.   Changes in and Disagreements With Accountants on Accounting
      and Financial Disclosure
                                16Item
      9A(T) Controls and Procedures
                                16Item
      9B Other Information
                                16PART
      IIIItem
      10. Directors, Executive Officers and Corporate Governance
                                17Item
      11. Executive Compensation
                                19Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
                                24Item
      13. Certain Relationships and Related Transactions and Director
      Independence
                                25Item
      14. Principal Accountant Fees and Services
                                26PART
      IVItem
      15. Exhibits And Financial Statement Schedules
                                27Signatures
                                28
















1




CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS






This
report contains forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, and Section 27A of the Securities Act. Any
statements contained in this report that are not statements of historical fact
may be forward-looking statements. When we use the words “anticipates,” “plans,”
“expects,” “believes,” “should,” “could,” “may,” “will” and similar expressions,
we are identifying forward-looking statements. Forward-looking statements
involve risks and uncertainties, which may cause our actual results, performance
or achievements to be materially different from those expressed or implied by
forward-looking statements. These factors include, among others, our need to
raise additional financing, risks related to the development of our business,
our history of losses; the historical volatility of our stock prices; general
market conditions; and other factors that may affect our business.






Except
as may be required by applicable law, we do not undertake or intend to update or
revise our forward-looking statements, and we assume no obligation to update any
forward-looking statements contained in this Annual Report on Form 10-K as a
result of new information or future events or developments. You should not
assume that our silence over time means that actual events are bearing out as
expressed or implied in such forward-looking statements. You should carefully
review and consider the various disclosures we make in this report and our other
reports filed with the Securities and Exchange Commission (the “Commission”)
that attempt to advise interested parties of the risks, uncertainties and other
factors that may affect our business.




ITEM
1.     Description of Business.





DigitalPost
Interactive, Inc. was incorporated on July 15, 2004, in the State of Nevada.
 The Company's principal executive offices are located at #4040 Barranca
Parkway, Suite 220, Irvine, CA 92602. Our telephone number is (949) 333-7500. We
maintain Internet websites at www.DigitalPostInteractive.com
and www.TheFamilyPost.com. 
These websites, and the information contained therein, are not a part of this
current report.





The
Merger




Prior to
January 25, 2007, we were known as HomAssist Corporation, a Nevada corporation
(“HomAssist”).  On January 30, 2007, we acquired The Family Post, Inc., a
privately held California corporation (“Old TFP”), pursuant to an agreement and
plan of merger, dated as of January 16, 2007, as amended (the “Merger
Agreement”), by and among us, Old TFP and our wholly-owned subsidiary (“Merger
Sub”), providing for the merger of Merger Sub and Old TFP, with the Merger Sub
being the surviving corporation as our wholly-owned subsidiary (the
“Merger”).  Immediately following the Merger, we changed our name to
DigitalPost Interactive, Inc. (“DPI” or the “Company”), the Merger Sub changed
its name to The Family Post, Inc. (“New TFP”), and we began operating New TFPs
business of Internet content sharing.




Effective
upon the closing of the Merger, the directors elected at the special meeting,
who comprise all of the then current HomAssist directors, resigned and the sole
director of Old TFP became the new sole director of DPI.




Prior to
the Merger, HomAssist had 15,600,000 shares of common stock issued and
outstanding.  As part of the Merger, the Company issued 37,233,385
shares of our common stock to the former stockholders of Old TFP in exchange for
all of the issued and outstanding shares of common stock of Old TFP (16,478,175
shares).  As part of the Merger, HomAssist also adopted the existing stock
option agreements of Old TFP (“Old TFP Option Agreements”) outstanding under
which options to purchase 7,724,850 shares of common stock of Old TFP
outstanding prior to the Merger were converted into options to purchase
17,426,615 shares of common stock of DPI.




As of
January 30, 2007, just immediately following the closing of the Merger, there
were 52,833,385 shares of DPI common stock outstanding, of which the pre-Merger
stockholders of HomAssist owned approximately 29.6% and the pre-Merger
stockholders of Old TFP owned approximately 70.4%.  As a result, Old TFP
has been treated as the acquiring company for accounting purposes.  The
Merger has been accounted for as a reverse acquisition in accordance
with




2


generally
accepted accounting principles in the United States of America, or “U.S.
GAAP.”  Reported results of operations of the combined group issued after
completion of the transaction will reflect Old TFP’s operations.




On
January 25, 2007, the Company changed its fiscal year end from January 31st to
December 31st.





Business
      of the Issuer




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





We earn
revenue primarily from subscriptions generated from monthly subscriptions for
website hosting services. The typical subscription agreement includes the usage
of a personalized website and hosting services.  As of March 31, 2009,
we have generated 22,523 subscribers, 15,171 recurring subscribers, 29,503
users, and have transferred more than 4,746 gigabytes of consumer digital media
across our systems. However, our revenues are not sufficient to cover our
operating costs and expenses. We also earn revenue from providing professional
software development services in addition to our subscription based business
model.  During the years ended December 31, 2008 and 2007, our
revenues were $488,900 and $118,100, respectively. We are in the early phases of
revenue generating activities and we intend to continue marketing our product
more aggressively upon the implementation of business arrangements we’ve
recently entered into with marketing partners and the completion of additional
debt or equity financing.





During
the fourth quarter of 2008, we launched a strategic marketing partnership with
Kiddie Kandids, America’s largest children’s photography studio chain with 185
retail locations nationwide.  We derived 17% of our total 2008 revenue
from this marketing partnership in the fourth quarter of 2008 alone and we
expect this trend to continue through the foreseeable future.  It is
our expectation that the growth from this strategic marketing partnership may
assist us in becoming less reliant upon sourcing cash from debt and equity
financings, however, we have no assurance that such growth shall
continue.




Industry Overview and
      Addressable Market




Internet
and image-based technology today enables consumers to create an abundance of
content that includes photos and video requiring highly functional, online
destinations that can present, protect and preserve this
content.  This is the new web, digital media sharing
era.  We believe that the key forces driving the expansion of this
segment of the digital media sharing market are:





-
The proliferation of digital cameras and camcorders to a broader base of
consumers


-
The strong consumer desire for secure sharing digital content on the
Internet


-
The growing consumer desire to find an easy, single location for storing their
user-generated digital content


-
The increasing participation by consumers in online communities


-
The increasing penetration of high-speed connectivity to a broader base of
consumers


3


The
addressable market for our platform and tools includes the vast population of
users who create Internet content in text, and by digital photographic devices
such as cameras and camcorders. We currently address several adjacent markets
related to consumers’ desire to create and share content,
including:





-
The photo studio market


-
The wedding industry


-
The baby industry


-
The scrapbooking industry


-
The military


-
Consumer ISPs / Hosting & Domain Services





Our
platforms are highly scalable to a variety of additional vertical
markets.  Our tools fit well in sectors and industries where
simplified and powerful sharing of content, images, and video effectively brings
groups of people together in an interactive online environment.  As
the new web rushes forward, we will attempt to expand our market penetration to
include:





-
The sports industry


-
The education sector


-
The pet industry


-
The travel industry


-
The religious sector


-
The newborn sector




Competition






The
user-generated content industry is competitive, and we expect competition to
increase in the future. These competitors include My Family, Famster, Family
Lobby, My Great Big Family, EasySite and Connected Family.






The DPI Competitive
      Advantage






We have
developed platforms and tools that allow us to offer consumers a better way to
enjoy, share and preserve their user-generated content. We believe that our
business model is supported by the following characteristics:




Viral network effect. Our
customers create a viral network of new users and customers in a number of ways.
They generate most of the content on our service by uploading their photos. They
share their photos electronically with their friends and families, extending and
endorsing our brand and creating a sense of community.




Loyal customer base. Our
high-quality products and services, together with our focus on continuous
innovation, have allowed us to establish high customer loyalty. Our conversion
of users within the free two week trial has been over 80% for the past
6 months.  Post-trial, we enjoy a high subscription retention rate of
over 92% per month for the past six months.  As users populate their
websites with content, photos, and videos, they remain as active subscribers,
adding monthly revenue until the consumer cancels their service.




Premium pricing power. We
believe that we are able to maintain premium pricing for our services as a
result of our brand equity, the high-quality of our platform and tools, and the
loyal customer base we have created.




Deep customer understanding.
Customer insights are an important source of new product and service innovation
for us, and we continually strive to understand our customers’ needs in order to
improve customer satisfaction. We have invested significant time and resources
to understand and address the needs of our customers through market research,
focus groups, customer surveys, usability testing, customer response to
promotions and customer service interactions.




Trusted premium brand. Our
focus on ease of use, website quality, secure storage, continual product
advancement and attentive customer service has established DPI as a trusted
premium brand.




4




Customer-focused approach.
The entire DPI customer experience - including free trial, the ability to
upload, edit, store and share content in a dynamic website environment and the
fact that a single subscription can host an unlimited number of users - reflects
our customer-focused approach.




With DPI
at the forefront of the digital media sharing space, we face competition from
dozens of established Internet companies.






Our Growth
Strategy






Our goal
is to grow our suite of Internet services into a premium lifestyle brand and
become the leading platform for highly functional, interactive website
destinations dedicated to improving the sharing, protection and preservation of
user-generated content. In addition to the strong market trends supporting our
business, we believe our growth will be supported by the following
initiatives:






Expansion ofvertical integration. We
will continue to introduce our platform and tools into additional verticals
through strategic marketing partnerships.




Expansionproducts and services
offerings. We will continue to develop our technology to include
forward-thinking functionality and benchmarks increasing the widespread adoption
of our platform and tools.




Promotion ofbrand awareness. We will
continue promote the DPI brand through marketing campaigns. We will leverage new
and existing channels, which include word-of-mouth marketing, print and online
advertising, affiliate and referral programs, search engine marketing and
complementary strategic alliances to generate high visibility to the DPI
brand.




International expansion. We
intend to develop additional business opportunities through international
expansion, targeting consumers in key geographic areas where user-generated
content is high and where Internet usage is widespread.




Product
Overview





The
DPI Platform





The DPI
platform provides user content generating tools for uploading content and
digital media within a very easy user interface. Our platform is highly scalable
to a variety of market verticals, effectively bringing groups of people together
in an attractive and interactive online environment.





The DPI
platform includes the following key features:




Security/ Disaster
Recovery - Our members’ information is safe and secure in our data center
and further backed-up weekly to Iron Mountain,the industry
standard 3rd party
data vault.




Ease Of Use - DPI
uses a browser based interface providing easy-to-use, intuitive management of
the customer sites.





Powerful Application
Install – The DPI Management Interface, Qwik-Post, comes with the Aurigma
Image Uploader, giving users the ability to upload any number of files at one
time.  In addition, it also provides file compression before
uploading, thereby greatly reducing the time needed to upload
media.




Web Based - Because
DPI is web-based, the application is accessed through the internet and resides
on servers at our data center.  All standard browsers are 100%
compliant with the DPI Platform.





Safe Access- Our
members can securely access their website and Qwik-Post administration panel at
anytime, from wherever they are, from any computer connected to the
internet.




Unlimited Members-
Our members may grant website access into their accounts to as many other users
as they like.




5






Compatibility – Our members can access their DPI websites and Qwik-Post
using Internet Explorer, Firefox, Safari, Netscape and Opera
Browsers




Support – Our
customer service team is available by email or phone, seven days a
week.




Immediacy – Members
can have their website up and running in minutes.




Affordability – Due
to the highly-refined automation of the DPI engine, pricing can be tiered to
accommodate all service levels and budgets.





The
DPI Qwik-Post Application





Qwik-Post
is the proprietary application that enables the user to administer all DPI
functionality.  Qwik-Post allows users to add content to their
websites within seconds and upload hundreds of pictures and videos in minutes.
Accessible anywhere in the world, yet password-protect­ed at the choice of
the user, our interactive technology enables extended user bases to
simultaneously upload and manage their digital media. With Qwik-Post, managing a
website or a digital platform is made easy for users of all ages and levels of
technical computer understanding.





The DPI
Qwik-Post application includes the following key functionality:




Photo Albums - The
Qwik-Post Photo Album feature enables users to gather their digital photos and
post them quickly to their site. Users simply upload their images, then organize
them in any order they like using our simplified drag and drop interface. In a
matter of minutes users have created a professional quality multimedia slide
show to share with friends and family over the internet.






Videos - The
Video-Post upload engine enables users to quickly upload video directly to their
websites regardless of the digital file format. Within three clicks, users can
securely share their self-generated content with other users over the
internet.






Family Tree - Allows
user generation of relationships between family members in a visual and
interactive format and provides families an entertaining and unique way to track
their family history, share birthdays and lineage.






Online Photo Editor
-Qwik-Edit is a user friendly photo-editing solution for
enhancing photos directly online with no additional downloads or special user
skills required.






Message Boards - Our
variety of Chat Rooms and Message Boards feature real time delivery of content
for conversation over the internet. These interfaces are password protected and
are enabled to be monitored through Qwik-Post. DPI provides a safe platform for
children and families of all ages to communicate.






Site Calendar -
Coordinating schedules, planning get-togethers and celebrations can involve
endless phone calls and emails. DPI’s simple-to-use calendar makes event
planning efficient as important dates such as meetings, birthdays, games, or
anniversaries are all recorded in one place.






Newsletter – The
newsletter feature enables users to create professional-looking newsletters that
can be emailed to family and friends. Users simply select one of the
pre-designed newsletter templates, add text, and insert photos from albums
already on their family website.






Photo Store – The
Photo Store application allows users to purchase prints and photo-related gifts
such as mugs, T-shirts, calendars and more directly through their family
website.






Many more features –
Including eMail, News, History, Kids Pages, Directory, and Blogs.


6


Additional
Product Enhancements


Our
mission is to build the most advanced digital media sharing user content
generating tools for uploading content and digital media within a very easy user
interface.  In pursuit of that mission, we intend to rapidly respond
to ongoing customer feedback, feature requests and continue additional product
enhancements.




Intellectual
Property





We have
applied for certain trademarks and service marks and have a portfolio of
intellectual property. When necessary, we intend to enforce our
intellectual property rights by, among other things, searching the Internet to
detect unauthorized use of our intellectual property, identifying products that
feature unauthorized use of our intellectual property and seeking restraining
orders and/or damages in court against individuals or entities infringing upon
our intellectual property rights.  Our failure to thwart piracy,
infringement or other unauthorized use of our intellectual property rights
effectively could adversely affect our operating results.





Employees




As of
December 31, 2008, we had 7 full-time employees and several independent
contractors and consultants.  Our employees are located in Irvine,
California.  We believe that our relationships with our employees are
generally good.  None of our employees is represented by a
union.




ITEM  1A.   Risk
Factors.Not Applicable.







ITEM  1B.    Unresolved
Staff Comments.Not
Applicable.







ITEM  2.
    Description Of Property.





During
the year ended December 31, 2008, our principal office was located in Irvine,
California where we leased approximately 2,900 square feet of office space
pursuant to a lease that expired in February 2009.  In March 2009, we
began a new lease of approximately 1,800 square fee as our principal offices
also located in Irvine, California which expires in February
2011.   If we require additional space, we believe that we will
be able to obtain such space on commercially reasonable terms.





ITEM
3.     Legal Proceedings.





From time
to time, we may be involved in litigation relating to claims arising out of our
operations in the normal course of business.  We are not aware of any
pending or threatened legal proceeding that, if determined in a manner adverse
to us, could have a material adverse effect on our business and
operations.




ITEM 4.
    Submission Of Matters To A Vote Of Security
Holders.





None.





7


PART
II






ITEM
5.     Market For Registrant’s Common Equity And Related
Stockholder Matters And Issuer Purchases Of Equity Securities




Our
shares of common stock, par value $0.001 per share, are quoted on the OTC
Bulletin Board under the symbol “DGLP.”  Effective January 26, 2007, our
stock quote symbol was changed to DGLP and remains quoted on the OTC Bulletin
Board.  The following table sets forth the range of high and low
closing sale prices for the common stock as reported by the OTC Bulletin Board
for the periods indicated below.




High
                  
                  Low2008Fourth
      Quarter
                  $
                  .06
                  $
                  .02Third
      Quarter
                  
                  .16
                  
                  .03Second
      Quarter
                  
                  .24
                  
                  .11First
      Quarter
                  
                  .73
                  
                  .192007Fourth
      Quarter
                  $
                  .87
                  $
                  .29Third
      Quarter
                  
                  1.15
                  
                  .35Second
      Quarter
                  
                  1.20
                  
                  .40First
      Quarter
                  
                  2.70
                  
                  .95






The
closing sale prices in the table above reflect inter-dealer prices, without
retail mark-up or commissions and may not represent actual
transactions.




Holders




As of
March 31, 2009, there were approximately 600 holders of our common
stock.




Dividend
      Policy




We have
never declared or paid dividends on our common stock.  We intend to retain
earnings, if any, to support the development of our business and therefore do
not anticipate paying cash dividends for the foreseeable future.  Payment
of future dividends, if any, will be at the discretion of our board of directors
after taking into account various factors, including current financial
condition, operating results and current and anticipated cash
needs.




Securities
      Authorized for Issuance Under Equity Compensation
  Plans




The
following table sets forth information as of December 31, 2008 with respect to
the stock options issued under our 2007 Incentive and Nonstatutory Stock Option
Plan, for which our common stock is authorized for
issuance.




Number of securities to
                be issued upon exercise
                of outstanding options
              
              Weighted average
                exercise price of
                outstanding options
              
              Number of securities
                remaining available
                for future issuanceEquity
      compensation plans or stock option agreements approved by security
      holders
              
              27,399,032
              
              $                                         .09
              
              7,600,968Equity
      compensation plans or stock option agreements not approved by security
      holders
              
              —
              
              —
              
              —Total
              
              27,399,032
              
              $
              .09
              
              7,600,968







8







Recent
Sales of Unregistered Securities




None.





Purchases
of Equity Securities by the Issuer and Affiliated Purchasers




None.




Item 6.   Selected
Financial Data.  Not applicable.




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




The
following discussion and analysis should be read in conjunction with our
financial statements and related notes included elsewhere in this report. This
discussion contains forward-looking statements that involve risks, uncertainties
and assumptions. Our actual results could differ materially from those
anticipated in these forward-looking statements.





Business
Overview





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





We earn
revenue primarily from subscriptions generated from monthly subscriptions for
Website hosting services. The typical subscription agreement includes the usage
of a personalized website and hosting services.  As of March 31, 2009,
we have generated 22,523 subscribers, 15,171 recurring subscribers, 29,503
users, and have transferred more than 4,746 gigabytes of consumer digital media
across our systems. However, our revenues are not sufficient to cover our
operating costs and expenses. We also earn revenue from providing professional
software development services in addition to our subscription based business
model.  During the years ended December 31, 2008 and 2007, our
revenues were $488,900 and $118,100, respectively. We are in the early phases of
revenue generating activities and we intend to continue marketing our product
more aggressively upon the implementation of business arrangements we’ve
recently entered into with marketing partners and the completion of additional
debt or equity financing.





Current
Conditions





Historically
we have incurred significant losses and we continue to incur additional losses
during the year ended December 31, 2008.  Our net loss was $4,017,200 and
$2,544,500 for the years ended December 31, 2008 and 2007, respectively, which
includes non-cash stock-based compensation expense of $1,811,500 and $462,200,
respectively.  Our cash used in operations was $1,515,700 and
$1,724,700 for the years ended December 31, 2008 and 2007,
respectively.  As of December 31, 2008, we had an accumulated deficit
of approximately $7,511,400. We expect operating losses and negative cash flow
to continue for the foreseeable future.  We expect that our losses may
decrease as result of generating new revenues driven from the implementation of
our business arrangements we’ve entered into with our marketing partners,
however, there is no assurance that the implementations will produce sufficient
revenues to cover our costs and expenses.  Our ability to become
profitable depends on our ability to generate new revenue and sustain
substantially higher revenue while maintaining reasonable expense levels. 
In particular, although we intend to increase significantly our spending on
marketing and promotional activities, these efforts may not be effective in
growing our brand, increasing our subscriber base or generating new
revenues.  If we do not achieve profitability, we may not be able to
continue our operations.





Historically,
we have relied upon private debt and equity financings as our primary source of
cash and we continue to rely on these financings to meet our working capital
needs. In January 2008, we entered into a $1 million private placement with
foreign investors under a Regulation S Stock Purchase agreement, of which we
received approximately $619,000 during the first and second quarter of 2008.
Additionally, during the second and third quarter of 2008, we received
approximately $850,000 pursuant to convertible notes offerings (see Note 7 to
the financial statements included elsewhere in this report). Additionally, in
September 2008, we received $256,000 pursuant to a private placement of our
common stock (see Note 8 to the financial statements included elsewhere in this
report).


9


We plan
to use the proceeds of the most recent offerings for marketing of our product,
increasing revenue generating activities and for general working capital
purposes.





In
addition to the above financings, we plan to continue to raise capital by sales
of additional private placement equity or debt offerings during 2009, although
we have no assurance that such financings will be completed.





During
the fourth quarter of 2008, we launched a strategic marketing partnership with
Kiddie Kandids, America’s largest children’s photography studio chain with 185
retail locations nationwide.  We derived 17% of our total 2008 revenue
from this marketing partnership in the fourth quarter of 2008 alone and we
expect this trend to continue through the foreseeable future.  It is
our expectation that the growth from this strategic marketing partnership may
assist us in becoming less reliant upon sourcing cash from debt and equity
financings, however, we have no assurance that such growth shall
continue.





Going
Concern





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





Results
of Operations





The
Year Ended December 31, 2008 Compared to the Year Ended December 31,
2007





Total
revenue was $488,900 and $118,100 for the years ended December 31, 2008 and
2007, respectively, representing an increase of $370,800. The increase was due
to an increase in subscription revenues of $211,900 during the year ended
December 31, 2008 as compared the same period last year and an increase in
professional services of $158,900 during the year ended December 31, 2008 as
compared to the same period last year.





Subscription
revenues for the year ended December 31, 2008 was $310,000 as compared to
$98,100 during the same period last year. Subscription revenue increased
$211,900 due to an increase in our customers to 13,151 recurring subscribers as
of December 31, 2008 from 2,775 recurring subscribers as of December 31, 2007.
The increase in subscriptions was due to additional sales and marketing
activities performed through a major marketing partnership which was launched
during the fourth quarter 2008.  As we continue marketing activities
and promotions, subscription revenues continued to increase through December 31,
2008.   Digital media sharing products and services are
relatively new, and as a result, it is difficult to determine our current market
share or predict our future market share.  We believe that the market
for digital media sharing products and services is growing and that related
market opportunities are also expected to grow. Our revenue, profitability and
future growth depend not only on the anticipated market growth, but also our
ability to execute our business plan and ultimate customer acceptance of our
products and services and the success or failure of our
competitors.  As a result, we expect the trend of our revenues to be
positive, however, provide no assurance that such will occur.





Professional
services revenues for the year ended December 31, 2008 was $178,900 as compared
to $20,000 during the same period last year. The increase was due to us
providing custom website design services under software development contracts
completed during the year ended December 31, 2008.  We did not have
similar contracts during the same period last year.  From time to
time, we may enter into professional services agreements resulting from our
strategic partnership marketing activities and as a result, revenues from
professional services may recur in future periods. As of December 31,
2008, we had not entered into any significant professional services agreements,
however, on February 19, 2009, we entered into a professional services
agreement for an aggregate amount of $165,000. As a result, we expect
the trend of our revenues to be positive, however, provide no assurance that
such will occur.


10


Total
cost of revenue was $150,900 and $48,100 for the years ended December 31, 2008
and 2007, respectively, representing an increase of $102,800. The increase was
due to an increase in subscription cost of revenues of $59,300 and increased
cost of professional services revenue of $43,500 during the year ended December
31, 2008, respectively.





The
increase in cost of subscription revenues for the year ended December 31, 2008
as compared to the same period last year is due to primarily having an increase
in subscription sales. Cost of subscription revenues for the year ended December
31, 2008 were mostly derived from our marketing partnerships, hosting and setup
services incurred from website services provided to our
subscribers.





The
increase in cost of professional services revenues for the year ended December
31, 2008 as compared to the same period last year is due to having provided
professional services, primarily labor related costs, during the year ended
December 31, 2008 whereas there were fewer such services provided during the
same period last year.





Research
and development expense was $299,200 and $361,700 for the years ended December
31, 2008 and 2007, respectively, representing an decrease of $62,500. The
decrease was primarily due to lower amounts of research and development
activities, including  lowering development personnel and consultants
which was part of a company-wide cost reduction program implemented in the
fourth quarter 2008 as compared to the same period last year.





Sales and
marketing expense was $633,600 and $685,400 for the years ended December 31,
2008 and 2007, respectively, representing an decrease of $51,800. The decrease
was primarily due to lower amounts of sales and marketing activities and
promotions during the year ended December 31, 2008 including a decrease in media
advertising of $87,700 and a decrease in marketing salaries of $158,000 related
to fewer marketing personnel primarily, both reductions due in part by a
company-wide cost reduction program implemented in the fourth quarter 2008 as
compared to the same period last year.  Also, the overall decrease in
sales and marketing expense was partially offset by an increase in non-cash
stock based compensation expense of $168,200.





General
and administrative expense was $2,729,300 and $1,468,800 for the years ended
December 31, 2008 and 2007, respectively, representing an increase of
$1,260,500. The increase was primarily due to increase in warrant expense of
$1,069,500 a majority of which relates to warrants granted to our investor
relations firm which expired unexercised in July 2008.  There were no
such warrants granted or outstanding to our investor relations firm the same
period last year.





Interest
expense was $693,100 and $98,600 for the years ended December 31, 2008 and 2007,
respectively, representing an increase of $594,500.  The increase was
attributable to interest and debt discount amortization expense of $693,100
during the year ended December 31, 2008, which was primarily related to our
prior year convertible notes being outstanding the entire year ended December
31, 2008, as compared to being outstanding for only a few months during the same
period last year, and additional borrowings of $850,000 during
2008.








Liquidity
and Capital Resources





Cash
Flows





At
December 31, 2008, our cash and cash equivalents were $67,700, a decrease of
$20,700 from $88,400 as of December 31, 2007.   The change in our
cash was due to receiving $619,000 related to our Regulation S Stock Purchase
agreement entered into January 2008, $850,000 related to our convertible notes
entered into in May 2008 through September 2008, and $256,000 related to our
private placement of our common stock in September 2008; all of which was offset
by cash used in operating activities of $1,515,700 and $153,900 of cash used in
the acquisition of and development of software.





Historically,
we have incurred losses and have had capital and stockholders’ deficits and
limited cash to fund our operations.  During the year ended December 31,
2008, we raised approximately $1.6 million through equity and debt financings
and have no other significant source of cash. Although we expect to grow our
revenues, they are not a significant source of cash at this time. Because we
expect that revenues from operations may continue to be insufficient to meet our
working capital needs, we may need to raise additional capital through equity or
debt financings in the near future.


11


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





Foreign Private Placement Equity
Financing





In
January 2008, we entered into a $1 million private placement with foreign
investors under a Regulation S Stock Purchase agreement, which we issued
5,145,837 restricted shares for cash proceeds of $619,000 during
2008.  The offer and sale of the securities above were effected in
reliance on the exemptions for sales of securities not involving a public
offering, as set forth in Rule 501 promulgated under Regulation S of the
Securities Act.





The
2008 Convertible Promissory Notes





In May
2008, four individual investors purchased an aggregate of $100,000 of 12%
secured convertible notes and were issued warrants to purchase shares of the
Company’s common stock (the “2008 Convertible Notes”). Each convertible note
holder has the right, at any time, to convert their note into shares of the
Company’s common stock at a conversion ratio of one share of common stock for
each $0.14 of principal amount of their note for a maximum potential aggregate
of 714,285 shares of common stock; in addition, the investors were issued
warrants to purchase an aggregate of 357,143 shares of common stock at an
exercise price of $.14 per share that expire five years from the date of
issuance.  Additionally, the convertible notes are secured by
approximately 1.4 million restricted shares of the Company’s common stock held
by a third party. These collateral shares return to the Company and become
canceled when the terms of the convertible notes have been
satisfied.   In December 2008, the maturity date of these notes
was extended to December 2009.  The offer and sale of the securities
underlying the convertible notes were effected in reliance on the exemptions for
sales of securities not involving a public offering, as set forth in Sections
4(2) and Section 4(6) of the Securities Act of 1933 and/or Rule 506 of
Regulation D adopted thereunder.








The
AOI Fund Convertible Promissory Notes





In May
2008, an investor purchased $242,400 of 15% secured convertible notes and was
issued warrants to purchase shares of our common stock. The convertible note
holder has the right, at any time, to convert their note into shares of our
common stock at a conversion ratio of one share of common stock for each $0.25
of principal amount of their note for a maximum potential aggregate of 969,696
shares of common stock; in addition, the investors were issued “Series A
Warrants" to purchase 96,969 shares of common stock at an exercise price of $.25
per share that expire five years from the date of issuance and “Series B
Warrants” to purchase 96,969 shares of common stock at an exercise price of $.30
per share that expire five years from the date of issuance.  The Series A
Warrants also have a put option in the amount of $60,000 which can only be
exercised after the two year anniversary date of the convertible
note.  The Series B Warrants have no put option.  The
convertible note included an original issue discount of
$42,400.  Additionally, the convertible notes are secured by a
security interest in all assets of the Company. The offer and sale of the
securities underlying these convertible notes were effected in reliance on the
exemptions for sales of securities not involving a public offering, as set forth
in Sections 4(2) and Section 4(6) of the Securities Act of 1933 and/or Rule 506
of Regulation D adopted thereunder.




In June
2008, the same investor purchased for a second investment, $242,400 of 15%
secured convertible notes and was issued warrants to purchase shares of our
common stock. The convertible note holder has the right, at any time, to convert
their note into shares of our common stock at a conversion ratio of one share of
common stock for each $0.25 of principal amount of their note for a maximum
potential aggregate of 969,696 shares of common stock; in addition, the
investors were issued “Series A Warrants" to purchase 96,969 shares of common
stock at an exercise price of $.25 per share that expire five years from the
date of issuance and “Series B Warrants” to purchase 96,969 shares of common
stock at an exercise price of $.30 per share that expire five years from the
date of issuance.  The Series A Warrants also have a put option in the
amount of $60,000 which can only be exercised after the two year anniversary
date of the convertible note.  The Series B Warrants have no put
option.  The convertible note included an original issue discount of
$42,400.


12


Additionally,
the convertible notes are secured by a security interest in all assets of the
Company. The offer and sale of the securities underlying these convertible
notes were effected in reliance on the exemptions for sales of securities not
involving a public offering, as set forth in Sections 4(2) and Section 4(6) of
the Securities Act of 1933 and/or Rule 506 of Regulation D adopted
thereunder.





In July
2008, the same investor purchased for a third investment, $242,400 of 15%
secured convertible notes and was issued warrants to purchase shares of our
common stock. The convertible note holder has the right, at any time, to convert
their note into shares of our common stock at a conversion ratio of one share of
common stock for each $0.25 of principal amount of their note for a maximum
potential aggregate of 969,696 shares of common stock; in addition, the
investors were issued “Series A Warrants" to purchase 96,969 shares of common
stock at an exercise price of $.25 per share that expire five years from the
date of issuance and “Series B Warrants” to purchase 96,969 shares of common
stock at an exercise price of $.30 per share that expire five years from the
date of issuance.  The Series A Warrants also have a put option in the
amount of $60,000 which can only be exercised after the two year anniversary
date of the convertible note.  The Series B Warrants have no put
option.  The convertible note included an original issue discount of
$42,400.  Additionally, the convertible notes are secured by a
security interest in all assets of the Company. The offer and sale of the
securities underlying these convertible notes were effected in reliance on the
exemptions for sales of securities not involving a public offering, as set forth
in Sections 4(2) and Section 4(6) of the Securities Act of 1933 and/or Rule 506
of Regulation D adopted thereunder.





In
September 2008, the same investor purchased for a fourth investment,
$180,000 of the AOI Convertible Notes (15% secured convertible notes) and were
issued warrants to purchase shares of our common stock. The convertible note
holder has the right, at any time, to convert their note into shares of our
common stock at a conversion ratio of one share of common stock for each $0.123
of principal amount of their note for a maximum potential aggregate of 1,463,414
shares of common stock; in addition, the investors were issued “Series C
Warrants" to purchase 750,000 shares of common stock at an exercise price of
$.123 per share that expire five years from the date of issuance and “Series D
Warrants” to purchase 750,000 shares of common stock at an exercise price of
$.15 per share that expire five years from the date of issuance.  The
Series D Warrants also have a put option in the amount of $45,000 which can only
be exercised after the one year anniversary date of the convertible
note.  The Series C Warrants have no put option.  The
convertible note included an original issue discount of
$30,000.  Additionally, the convertible notes are secured by a
security interest in all assets of the Company. The offer and sale of the
securities underlying these convertible notes were effected in reliance on the
exemptions for sales of securities not involving a public offering, as set forth
in Sections 4(2) and Section 4(6) of the Securities Act of 1933 and/or Rule 506
of Regulation D adopted thereunder.





Other Financings





In
September 2008, the Company entered into a $256,000 private placement with
accredited investors, which the Company had received $256,000 cash proceeds for
the issuance of 8,533,333 restricted shares.   $100,000 of the
$256,000 cash proceeds was provided by two executive officers of the Company and
3,333,333 restricted shares were issued to them as part of the private placement
in September 2008.  The offer and sale of the securities above were
effected in reliance on the exemptions for sales of securities not involving a
public offering, as set forth in Section 4(2) and Section 4(6) of the Securities
Act and/or Rule 506 of Regulation D thereunder.





In
addition to the equity and debt financing discussed above, we intend to
conduct additional capital raising activities seeking additional private
financings through the issuance of our common stock or issuance of debt
instruments to increase our required working capital, increase the marketing of
our product and increase revenue generating activities. We plan to complete
additional private placement offerings during the foreseeable future, although
we have no assurance that such financing will be completed.





Off-Balance
Sheet Arrangements





As of
December 31, 2008, we had no off-balance sheet arrangements.





Critical
Accounting Policies and Estimates


13


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





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





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





Revenue Recognition— Our
subscription revenue is generated from monthly subscriptions for Website hosting
services. The typical subscription agreement includes the usage of a
personalized website and hosting services. The individual deliverables are not
independent of each other and are not sold or priced on a standalone basis.
Costs to complete the Website and ready it for the end customer are minimal and
are expensed to cost of revenue as incurred. Upon the completion of a customer’s
signup and initial hosting of the Website, the subscription is offered free of
charge for a two week trial period during which the customer can cancel at
anytime. In accordance with Staff Accounting Bulletin (SAB) No. 104, after
the two week trial period has ended, revenue is recognized when all of the
following conditions are satisfied: (1) there is persuasive evidence of an
arrangement; (2) the service has been provided to the customer;
(3) the amount of fees to be paid by the customer is fixed or determinable;
and (4) the collection of our fees is probable. These criteria are met
monthly as our service is provided on a month-to-month basis and collections are
generally made in advance of the services. There is no provision for refunds as
December 31, 2008, as the Company’s historical refund experience has been
minimal.





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





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





During
the year ended December 31, 2008, the Company also distributed its website
service through a marketing partnership and shared a portion of revenue
generated with the marketing partner. In accordance with Emerging Issue Task
Force No. 99-19, Reporting Revenue Gross as a
Principal Versus Net as an Agent, revenue is reported gross of the
payment received from its marketing partner because the Company acts as the
primary obligor and is responsible for the fulfillment of
services.





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





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


14






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





Recently
Issued Accounting Standards





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
This statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosure about
fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurement, the FASB having
previously concluded in those accounting pronouncement that fair value is the
relevant measurement attribute. This statement does not require any new fair
value measurements. This statement was effective on January 1, 2008, with
respect to financial assets and liabilities and its adoption did not have a
material effect on our financial statements.  With respect to
non-financial assets and liabilities, this statement is effective for financial
statements issued for fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. We are currently reviewing the
effect, if any, that these new provisions will have on our financial
statements.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities - including an amendment of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities”, which
applies to all entities with available-for-sale and trading securities. This
Statement permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. This Statement is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. The adoption of SFAS 159 did not have any material impact on
our consolidated financial position or results of operations.





In
December 2007, FASB issued SFAS No. 141R, Business Combinations(SFAS 141R), which retains the underlying concepts of SFAS 141
in that all business combinations are still required to be accounted for at fair
value under the acquisition method of accounting but SFAS 141R changed the
method of applying the acquisition method in a number of significant aspects.
Acquisition costs will generally be expensed as incurred; noncontrolling
interests will be valued at fair value at the acquisition date; in-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset at the acquisition date; restructuring costs associated with a
business combination will generally be expensed subsequent to the acquisition
date; and changes in deferred tax asset valuation allowances and income tax
uncertainties after the acquisition date generally will affect income tax
expense. The provisions of SFAS 141R are effective for fiscal years
beginning after December 15, 2008 and its adoption will not materially
impact our financial statements.





ITEM
7A. Quantitative and Qualitative Disclosures About Market Risk.  
Not Applicable.




ITEM 8.      Financial
Statements And Supplementary Data.





The
financial statements required by this Item begin on Page F-1 of this Form 10-K,
and include:








PageReport
      of Independent Registered Public Accounting Firm
              F-2Consolidated
      Financial Statements:Consolidated
      Balance Sheets
              F-3Consolidated
      Statements of Operations
              F-4Consolidated
      Statements of Stockholders’ Deficit
              F-5Consolidated
      Statements of Cash Flows
              F-6Consolidated
      Notes to Financial Statements
              F-7




15
 ITEM 9.
Changes In And Disagreements With Accountants On Accounting And Financial
Disclosure




None





ITEM
9A and 9A(T).  Controls and procedures





Evaluation
of Disclosure Controls and Procedures




Our
management has evaluated, under the supervision and with the participation of
our Chief Executive Officer and Chief Financial Officer, the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this report pursuant to Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation,
our Chief Executive Officer and our Chief Financial Officer have concluded that,
as of the end of the period covered by this report, our disclosure controls and
procedures were not effective due to the material weaknesses in our internal
control over financial reporting as of December 31, 2008, described
below.




Management’s Report on Internal
Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control system is designed to
provide reasonable assurance to our management, the Board of Directors and
investors regarding reliable preparation and presentation of published financial
statements. Nonetheless, all internal control systems, no matter how well
designed, have inherent limitations. Even systems determined to be effective as
of a particular date can only provide reasonable assurance with respect to
reliable financial statement preparation and presentation.




A
material weakness in internal control over financial reporting is a control
deficiency (within the meaning of the Public Company Accounting Oversight Board
(United States) Auditing Standard No. 5), or a combination of control
deficiencies, that result in there being a reasonable possibility that a
material misstatement in the annual or interim financial statements would not be
prevented or detected.




Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control — Integrated Framework (COSO).
Based on our assessment, we believe that, as of December 31, 2008, our
internal control over financial reporting was ineffective based on those
criteria, in consideration of the material weaknesses described
below.




Control
environment.  We did not maintain an effective control
environment. Specifically, (i) our board of directors consists of a sole
director and no other members, (ii) our audit committee consists of a single
independent member, and, (iii) we did not maintain a sufficient number of
personnel in the areas of accounting and financial reporting.


Financial close and
reporting.  We did not maintain sufficient number of accounting
personnel supporting the financial close and reporting processes to ensure:
(i) changes and entry to spreadsheets utilized in the financial reporting
process were properly reviewed, (ii) analysis and reconciliation of
significant accounts were properly reviewed, and, (iii) proper review of
period close entries and procedures.


This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.   Management’s report was not subject
to  attestation by the Company’ registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.  Management’s report is deemed furnished, rather than filed,
for purposes of liability under Section 18 of the 1934 Act.





Remediation
Activities




The
following activities expect to remediate the material weaknesses: (i) we
anticipate appointing additional members of our Board of Directors and Audit
Committee, and, (ii) upon sufficient funding, we anticipate
hiring additional accounting personnel to improve our overall control
environment, account analysis and financial close and reporting
process. Management is committed to correcting material weaknesses and will
continue to evaluate appropriate remediation plans.





Changes
in Internal Control Over Financial Reporting.




There
have been no changes in our internal control over financial reporting during the
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.  Our
most recent assessment resulted in reaffirming the material weaknesses noted
above.





ITEM
9B.   Other Information





None.


16


PART
III







ITEM
      10.  Directors, Executive Officers, Promoters And Control Persons And
      Corporate Governance; Compliance With Section 16(A) Of The Exchange
      Act




Directors
and Executive Officers




The
following persons are our current executive officers and directors since January
30, 2007, and hold the offices set forth opposite their names:




Name
              
              Age
              
              PositionMichael
      Sawtell
              
              50
              
              Chairman
      and Sole Director of the Board of Directors, Chief Executive Officer and
      PresidentSteven
      Dong
              
              42
              
              Chief
      Financial Officer






Michael
Sawtell is the founder and Chief Executive Officer since July
2005.  Prior to then, he was President and Chief Operating Officer of
Interchange Corporation (now known as Local.com Corporation), a publicly-held
Internet advertising and local search company from March of 2000 to April of
2005. From 1993 to 2000, Mr. Sawtell was the Chief Operating Officer and
the Vice President of Sales for Informative Research, one of the largest
mortgage services firms in the United States. From 1986 to 1993,
Mr. Sawtell worked as a director of operations on the B-2 Stealth
Bomber program for Northrop Grumman Corporation, a global defense company. He
has also held key operational positions at General Dynamics, another global
defense company.





Steven
Dong has been our Chief Financial Officer since January 30,
2007.  From March 2006, he served as our consulting CFO under an
agreement with a professional services firm owned by Mr. Dong.  Mr Dong
has owned the professional services firm since 2002.  Prior
thereto, from 1999 to 2002, Mr. Dong served as Chief Financial Officer of
Taitron Components, Inc., a publicly-held semi-conductor company. From 1995 to
1999, Mr. Dong served as a financial consultant specializing in assisting
publicly held companies by serving as their interim Chief Financial Officer.
From 1988 to 1995, Mr. Dong was employed by Coopers & Lybrand, LLP. Mr. Dong
is a Certified Public Accountant and a member in good standing with the American
Institute of Certified Public Accountants and California State Board of
Accountancy.





Family
      Relationships




There are
no family relationships among the individuals comprising our board of directors,
management and other key personnel.




Involvement
in Certain Legal Proceedings.




During
the past five years, none of the following have occurred that are material to an
evaluation of the ability or integrity of any director, person nominated to
become a director, executive officer, promoter or control person of the
Company:






1.
 Any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;




17




2.
 Any conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations and other minor
offenses);




3.
 Being subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities;
and




4.
 Being found by a court of competent jurisdiction (in a civil action) , the
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment has not been
reversed, suspended, or vacated.




Compliance
With Section 16(a) of the Exchange Act




Section 16(a)
of the Exchange Act requires "insiders," including our executive officers,
directors and beneficial owners of more than 10% of our common stock, to file
reports of ownership and changes in ownership of our common stock with the
Securities and Exchange Commission and to furnish us with copies of all
Section 16(a) forms they file. Based solely on our review of the copies of
such forms received by us, or written representations from reporting persons, we
believe that our insiders complied with all applicable Section 16(a) filing
requirements during 2008.




Changes
      to Nominating Process




There
have been no changes to the nominating process or adoption of procedures by
which security holders may recommend nominees to our board of
directors.




Board
      Committees




Audit
      Committee




David
Vanderhorst is our Audit Committee member and non-board member. Mr. Vanderhorst
is an “audit committee financial expert” in accordance with SEC rules.
Stockholders should understand that this designation is a disclosure requirement
of the SEC related to Mr. Vanderhorst’s experience and understanding with
respect to certain accounting and auditing matters. The designation does not
impose upon Mr. Vanderhorst any duties, obligations, or liability that are
greater than are generally imposed on him as a member of the Audit
Committee.  Because we are not a listed issuer, the members of the
Audit Committee are not subject to the independence requirements of any national
securities exchange or association.  Mr. Vanderhorst is a non-related
party and independent of the Company.




REPORT OF THE AUDIT
COMMITTEE




The following Report of the Audit
Committee does not constitute soliciting material and should not be deemed filed
or incorporated by reference into any other Company filing under the Securities
Act of 1933 or the Securities Exchange Act of 1934, except to the extent we
specifically incorporate this Report by reference
therein.





The Audit
Committee of the Board of Directors operates pursuant to a written charter. Our
Audit Committee charter is available on our website, www.dglp.com. The Committee
met quarterly and acted by unanimous written consent during fiscal 2008 to
fulfill its responsibilities. To ensure independence, the Audit Committee also
meets separately with the Company’s independent registered public accounting
firm and members of management. The sole member of the Audit Committee is a
non-employee, non-board member and satisfies the SEC requirements with respect
to independence, financial sophistication and experience.





The role
of the Audit Committee is to oversee the Company’s financial reporting process
on behalf of the Board of Directors. Management of the Company has the primary
responsibility for the Company’s consolidated financial statements as well as
the Company’s financial reporting process, principles and internal controls. The
independent registered public accounting firm is responsible for performing an
audit of the Company’s financial statements and expressing
an opinion as to the conformity of such consolidated financial statements with
generally accepted accounting principles.


18





In this
context, the Audit Committee has reviewed and discussed the audited financial
statements of the Company as of and for the year ended December 31, 2008,
with management and the independent registered public accounting firm. These
reviews included discussion with the outside independent registered public
accountants of matters required to be discussed
pursuant to Statement on Auditing Standards No. 61 (Communication with
Audit Committees). In addition, the Audit Committee has received the written
disclosures required by PCAOB Rule 3526, and it has discussed with the
independent registered public accountants its independence with respect
to the Company.





Based on
the reports and discussions described above, the Audit Committee recommended to
the Board of Directors that the audited financial statements be included in the
Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2008, for filing with the Securities and Exchange
Commission.





/s/ David
Vanderhorst


March 31,
2009







Other
Committees




The Board
intends to appoint such persons and form such committees as are required to meet
the corporate governance requirements imposed by the national securities
exchanges.  Therefore, we intend that a majority of our directors will
eventually be independent directors and at least one director will continue to
qualify as an “audit committee financial expert.” Additionally, the Board is
expected to appoint a nominating committee and compensation committee, and to
adopt charters relative to each such committee. Until further determination by
the Board, the full Board will undertake the duties of the compensation
committee and nominating committee.




Code
      of Ethics




We have
formally adopted a written code of ethics that applies to our board of
directors, principal executive officer, principal financial officer and
employees; it can be found on our website at www.dglp.com.




ITEM 11.     Executive
Compensation.





Compensation
Discussion and Analysis




With
respect to our executive compensation policies, the board of directors had
determined that until a business combination or other strategic transaction was
completed, we would continue to compensate our executive officer on a basis
commensurate with cash compensation and benefit levels suitable with our cash
position as a new company.




The
following discussion and analysis reflects the compensation arrangements that we
had with our executive officers.  After the Merger, and upon additional
financing, if any, we expect to round out our management team. Our board of
directors intends to review and modify, as necessary, our executive compensation
policies in light of our current status as a new operating company and working
capital (deficit) positions.  This review will be conducted with the goal
of compensating our executives so as to maximize their, as well as our,
performance.




Chief
      Executive Officer
Compensation




Mr.
Sawtell has served as our Chief Executive Officer and our Sole Director
from July 2005.  From July 2005 through December 31, 2006, Mr. Sawtell did
not have any employment agreement with us and received an annual salary of
$75,000. Effective January 30, 2007, we entered into an employment
agreement with Mr. Sawtell (See Executive Employment
Contractsbelow)
to serve as our Chief Executive Officer and President.




Compensation
      of Other Executive Officers




19


Mr.
      Dong has served as our Consulting Chief Financial Officer from March 2006
      under a contract with a financial consulting firm owned by Mr. Dong.Effective
      January 30, 2007, we entered into an employment agreement with Mr. Dong
      (See Executive
      Employment Contractsbelow) to serve as our
      Chief Financial Officer.




Stock
      Options




Stock
options generally have been granted to our executive officer at the time of hire
and at such other times as the board of directors has deemed appropriate, such
as in connection with a promotion or upon nearing full vesting of prior
options.  In determining option grants, the board of directors has
considered the same industry survey data as used in its analysis of base
salaries and bonuses, and has strived to make awards that are in line with its
competitors. In general, the number of shares of common stock underlying the
stock options granted to each executive has reflected the significance of that
executive’s current and anticipated contributions to us.




In
addition, the stock option grants made by the board of directors are designed to
align the interests of management with those of the stockholders. In order to
maintain the incentive and retention aspects of these grants, the board of
directors has determined that a significant percentage of any officer’s stock
options should be unvested option shares.




The value
that may be realized from exercisable options depends on whether the price of
the common stock at any particular point in time accurately reflects our
performance. However, each individual optionholder, and not the board of
directors, makes the determination as to whether to exercise options that have
vested in any particular year.




During
2005, Mr. Sawtell was granted an option to purchase 4,511,833 shares of our
common stock and during 2006, Mr. Sawtell was granted an option to
purchase 6,767,749 shares of our common stock.  These
options were partially cancelled, as discussed further below. During 2007, Mr.
Sawtell was not granted any options.  During 2008, Mr. Sawtell was
granted options to purchase up to 875,000 shares of our common stock, as
discussed further below.




In March
2006, options to purchase 902,366 shares of our common stock were granted to a
financial consulting firm owned by Mr. Dong and in November 2006, he was granted
an option to purchase 225,592 shares of our common stock. These options were
partially cancelled, as discussed further below.  During 2007, Mr.
Dong was granted an option to purchase 875,000 shares of our common stock, as
discussed further below.  During 2008, Mr. Dong was granted options to
purchase up to 750,000 shares of our common stock, as discussed further
below.




Compliance
with Internal Revenue Code Section 162(m)




Section
162(m) of the Internal Revenue Code generally disallows a tax deduction to a
public company for compensation over $1 million paid to its Chief Executive
Officer and its three other most highly compensated executive officers. However,
if certain performance-based requirements are met, qualifying compensation will
not be subject to this deduction limit.  Although the limitations of
Section 162(m) generally have not been of concern to us while we were a shell
corporation, we intend to consider the requirements of Section 162(m) in
developing our compensation policies now that we are an operating
company.




Summary
      Compensation Table




The
following table sets forth certain compensation information as to our Chief
Executive Officer and Chief Financial Officer who were our executive
officers (the “Named Executive Officers”), for each of the years ended December
31, 2008, 2007 and 2006; no other executive officers had compensation of more
than $100,000 annually for 2008, 2007, and 2006:




20


SUMMARY
COMPENSATION TABLE




Name and Position
                                                              
                                                              Year
                                                              
                                                              Salary
                                                              
                                                              Bonus
                                                              
                                                              Stock
      Awards
                                                              
                                                              Option
      Awards
                                                              
                                                              Non-Equity
      Incentive Plan Compensation
                                                              
                                                              Change
      in Pension Value and Nonqualified Deferred Compensation
      Earnings
                                                              
                                                              All Other
      Compensation
                                                              
                                                              Total($)(1)
                                                              
                                                              ($)
                                                              
                                                              ($)
                                                              
                                                              ($)
      (2)
                                                              
                                                              ($)
                                                              
                                                              ($)
                                                              
                                                              ($)
                                                              
                                                              ($)Michael
      Sawtell
                                                              
                                                              2008
                                                              (1)
                                                              210,000
                                                              
                                                              --
                                                              
                                                              --
                                                              
                                                              99,500
                                                              
                                                              --
                                                              
                                                              --
                                                              
                                                              28,500
                                                              (6)
                                                              338,000President
      and CEO
                                                              
                                                              2007
                                                              (1)
                                                              185,800
                                                              
                                                              50,000
                                                              
                                                              --
                                                              
                                                              195,400
                                                              
                                                              --
                                                              
                                                              --
                                                              
                                                              18,900
                                                              (3)
                                                              450,1002006
                                                              
                                                              75,000
                                                              
                                                              --
                                                              
                                                              --
                                                              
                                                              25,600
                                                              
                                                              --
                                                              
                                                              --
                                                              
                                                              15,000
                                                              
                                                              115,600Steven
      Dong
                                                              
                                                              2008
                                                              (1)
                                                              175,000
                                                              
                                                              --
                                                              
                                                              
                                                              
                                                              86,800
                                                              
                                                              --
                                                              
                                                              
                                                              
                                                              7,100
                                                              (7)
                                                              268,900CFO
                                                              
                                                              2007
                                                              (1)(5)
                                                              146,800
                                                              
                                                              --
                                                              
                                                              
                                                              
                                                              18,900
                                                              
                                                              --
                                                              
                                                              --
                                                              
                                                              45,000
                                                              (4)
                                                              210,7002006
                                                              (5)
                                                              --
                                                              
                                                              --
                                                              
                                                              --
                                                              
                                                              
                                                              
                                                              --
                                                              
                                                              --
                                                              
                                                              --
                                                              
                                                              --








(1)
            Mr. Sawtell and Mr. Dong entered
      into employment agreements on January 30, 2007, (further discussed below)
      for annual salaries of $210,000 and $175,000, respectively.For 2008,the amounts shown above include
      the amountsearnedstarting on January1, 2008through December 31,
      2008. In October
      2008, we started deferring salaries and therefore the amounts of cash
      salary paid to Mr. Sawtell and Mr. Dong was $203,900 and $169,900,
      respectively, during the year ended December 31, 2008.  As of
      December 31, 2008, deferred salary owed to Mr. Sawtell and Mr. Dong was
      $7,300, and $6,100, respectively. For 2007, the amounts shown above include
      the amountsof cash
      salary paidfromJanuary30, 2007through December 31,
      2007.


(2)
            The
      value of the options granted to our named executives has been estimated
      pursuant to Statement of Financial Accounting Standards
      No. 123R,  Share-Based Payment
      ("SFAS 123R"), using the Black-Scholes option pricing model with the
      following weighted average assumptions: For 2008: expected life of 4.5
      years, volatility of 336%, risk-free interest of 2.9%, and no dividend
      yield; for 2007: expected life of 4.5 years, volatility of 45%, risk-free
      interest of 4.43%, and no dividend yield; for 2006: expected life of 4.5
      years, volatility of 45%, risk-free interest of 4.69%, and no dividend
      yield.  See the table below for the grants made and see Note 8 of the
      Notes to the Consolidated Financial Statements included elsewhere in this
      report for a description of the vesting schedule of option awards granted
      under the 2007 SOP.


(3)
            Includes
      deferred salary for Mr. Sawtell in the amount of $8,100 that was accrued
      yet unpaid as of December 31, 2007, and car allowance paid in the amount
      of $10,800.


(4)
            Includes
      deferred salary for Mr.Dong in the amount of $6,700, respectively, that
      was accrued yet unpaid as of December 31, 2007; and other compensation
      amounts due to Steven Dong in the amount of  $38,300; both the
      $6,700 and $38,300 were used as consideration from Mr. Dong to purchase
      $45,000 of convertible notes in October, 2004, see Note 7 of the Notes to
      the Consolidated Financial Statements included elsewhere in this report
      for a description of the convertible notes
  financing.


(5)
            Mr.
      Dong became an employee on January 30, 2007, as a result, no amounts are
      shown paid to him as an employee during 2006. From March 2006 through
      January 30, 2007, Mr. Dong performed consulting work for us pursuant to a
      consulting agreement with a firm owned by Mr. Dong.  We paid
      this consulting firm $11,600 and $81,000 during 2006 and 2007,
      respectively.  Additionally, the consulting firm was granted
      options to purchase 1,127,958 shares of our common stock in 2006 which
      SFAS 123R related expense incurred amounted to $11,800 in 2006 and $21,500
      in 2007.


(6)
            Other
      compensation for Mr. Sawtell for payments made in 2008 of $17,200 of bonus
      payments which was accrued in 2007 and $11,300 of auto expense
      reimbursement pursuant to his employment
  agreement.


(7)
            Other
      compensation for Mr. Dong for payments made in 2008 for reimbursement for
      phone and auto expense reimbursement pursuant to his employment
      agreement.














Grants of Plan-Based
Awards




The
following table provides information regarding grants of plan-based awards that
we granted to the Named Executive Officers during the fiscal year ended
December 31, 2008. All options were granted at the fair market value of our
common stock on the date of grant, as determined by our board of
directors.  Each option represents the right to purchase one share of
our common stock. Generally, none of the shares subject to options are vested at
the time of grant and 25% of the shares subject to such option grants vest on
the date which is nine months from the date of grant. The remainder of the
shares vests in equal nine month installments over the remaining 27 months
thereafter.


21





2008Plan-Based Awards Table andOutstanding Equity Awards at Fiscal
Year-End





The
following table provides information regarding exercisable and unexercisable
stock options held by the Named Executive Officers as of December 31,
2008.







Name
              
              Number
      of Securities Underlying Unexercised Options(#)Exercisable
              
              Number
      of Securities Underlying Unexercised Options(#)
                Unexercisable
              
              Option
      Exercise
                Price($)
              
              Option
      Expiration DateMike
      Sawtell, CEO
              
              --
              
              650,000
              (3)
              $                   0.06
              
              9/30/1356,250
              
              168,750
              (4)
              $                   0.27
              
              2/28/136,767,749
              
              --
              
              $                   0.09
              
              11/13/2012--
              
              550,000
              (5)
              $                   0.06
              
              9/30/13Steven
      Dong, CFO
              
              50,000
              
              150,000
              (6)
              $                   0.27
              
              2/28/13218,750
              
              656,250
              (7)
              $                   0.27
              (7)
              10/4/2012451,183
              (2)
              --
              
              $                   0.09
              
              3/15/2011304,204
              (2)
              --
              
              $                   0.04
              
              3/15/2011225,592
              (2)
              --
              
              $                   0.09
              
              4/3/2011











Name
                          
                          Grant
      Date
                          
                          
                          All
      Other Stock Awards: Number of Shares of Stock or Units (#)
                          
                          
                          Exercise
      or Base Price of Option Awards ($/Sh)
                          
                          Grant
      Date Fair Value of Stock and Option AwardsMike
      Sawtell, CEO
                          
                          2/28/2008
                          
                          
                          225,000
                          
                          $
                          0.27
                          $
                          60,6009/30/2008
                          
                          
                          650,000
                          
                          $
                          0.06
                          $
                          39,00011/13/2006
                          
                          
                          6,767,749
                          
                          $
                          0.09
                          $
                          260,3007/14/2005
                          (1)
                          
                          4,511,833
                          
                          $
                          0.04
                          $
                          44,200$Steven
      Dong, CFO
                          
                          2/28/2008
                          
                          
                          200,000
                          
                          $
                          0.27
                          $
                          53,9009/30/2008
                          
                          
                          550,000
                          
                          $
                          0.06
                          $
                          33,00010/4/2007
                          
                          
                          875,000
                          (7)
                          $
                          0.27
                          (7)           $
                          263,4003/15/2006
                          (2)
                          
                          451,183
                          (2)
                          $
                          0.04
                          $
                          17,4003/15/2006
                          (2)
                          
                          451,183
                          (2)
                          $
                          0.09
                          $
                          25,9004/3/2006
                          (2)
                          
                          225,592
                          (2)
                          $
                          0.09
                          $
                          17,400








(1)
            An
      option to purchase 4,511,833 shares of our common stock granted to Mr.
      Sawtell was cancelled unexercised pursuant to the Merger on January 30,
      2007.  None of the 4,511,833 option shares remain
      outstanding.


(2)
            Mr.
      Dong became an employee on January 30, 2007. From March 2006 through
      January 30, 2007, Mr. Dong performed consulting work for us pursuant to a
      consulting agreement with a firm owned by Mr. Dong.  We granted
      options to purchase 451,183, 451,183 and 225,592 to this consulting firm
      owned by Mr. Dong.


(3)
            162,500
      option shares will vest on each of the dates: June 30, 2009; March 30,
      2010; December 31, 2010 and September 30,
2011.


(4)
            56,250
      option shares will vest on each of the dates: August 28, 2009; February
      28, 2010; and November 28, 2010.


(5)
            137,500
      option shares will vest on each of the dates: June 30, 2009; March 30,
      2010; December 31, 2010 and September 30,
2011.


(6)
            50,000
      option shares will vest on each of the dates: August 28, 2009; February
      28, 2010; and November 28, 2010.


(7)
            218,750
      option shares will vest on each of the dates: April 4, 2009; January 4,
      2010; and October 4, 2010.  Also, on May 13, 2008, the Board of
      Directors approved the changing of exercise price of compensation options
      granted in 2007 to purchase up to 3,355,000 shares (for all
      employees/consultants) of our common stock from a weighted average
      exercise price of $0.70 per share to a weighted average price of $0.27 per
      share; included in this re-price event were the 875,000 options owned by
      Mr. Dong.  The option to purchase up to 875,000 shares of the
      Company was originally granted on 10/4/07 at an exercise price of $.70 per
      share. The same option now has an amended exercise price of $.27 per
      share. All other terms of the option remains the
  same.








22


Compensation
      of Directors and Committee
Members




During
2008, we agreed to pay Mr. Vanderhorst, our sole audit committee member $2,500
per fiscal quarter.  There are presently no other arrangements
providing for payments to directors for director or consulting services. 
We expect to establish these arrangements shortly upon increased business
activities.




Executive
      Employment Contract




Employment
Agreement with Michael Sawtell




We
entered into an employment agreement with Mr. Sawtell, our Chief Executive
Officer on January 30, 2007. The employment agreement has a term of five years
and automatically renews for additional one year terms unless either party
terminates it with at least 30 days notice to the other
party.





The
material terms of the agreement are:  (i) base annual salary of
$210,000; (ii) participation in our standard employee benefit plans; (iii)
initial one time bonus of $50,000 for successful closing of Merger; (iv)
reimbursable expenses


customarily
given to Executives; (v) other bonuses at the discretion of the board of
directors and (vi) severance arrangements described below.





If we
terminate Mr. Sawtell’s employment agreement without cause, or if Mr.
Sawtell resigns for good reason, each as defined in the agreement, we are
obligated to pay Mr. Sawtell the greater of his annual salary for the
remaining term of the agreement or three years of his annual salary rate at the
time of termination without cause or resignation for good reason, benefits for
24 months following the date of termination, and the right for
24 months from the date of termination to exercise all vested options
granted to him prior to that time; provided that in the event the termination
occurs within 120 days of the execution of an agreement which results in a
change of control, as described below, vesting of all options will be
accelerated and in the event the termination occurs outside of such 120 day
period, all unvested options that would have vested had Mr. Sawtell’s
employment agreement remained in force through the end of the initial term will
be fully vested immediately prior to such termination.





Employment
Agreement with Steven Dong




We
entered into an employment agreement with Mr. Dong, our Chief Financial Officer
on January 30, 2007. The employment agreement has a term of two years and
automatically renews for additional one year terms unless either party
terminates it with at least 30 days notice to the other
party.





The
material terms of the agreement are:  (i) base annual salary of
$175,000; (ii) participation in our standard employee benefit plans; (iii)
initial one time bonus of $30,000 for successful closing of Merger (iv)
reimbursable expenses customarily given to Executives; (v) various bonuses
related to performance metrics; (vi) other bonuses at the discretion of the
board of directors and (vii) severance arrangements described
below.





If we
terminate Mr. Dong’s employment agreement without cause, or if Mr. Dong
terminates the agreement with good reason, each as defined in the agreement, we
are obligated to pay Mr. Dong: (i) his annual salary and other
benefits earned prior to termination, (ii) the greater of his annual salary
for the remaining term of the agreement or his annual salary payable over one
year, (iii) benefits for 12 months following the date of termination,
and (iv) the right for 12 months from the date of termination to
exercise all vested options granted to him prior to that time; provided that in
the event the termination occurs within 120 days of the execution of an
agreement which results in a change of control, as described below, vesting of
all options will be accelerated and in the event the termination occurs outside
of such 120 day period, all unvested options that would have vested had
Mr. Dong’s employment agreement remained in force through the end of the
initial term will be fully vested immediately prior to such
termination.





Each of
the employment agreements discussed above provide for the immediate vesting of
stock options granted pursuant thereto upon (i) a change in control of us
or (ii) a termination of the executive’s employment without cause or for
good reason within 120 days prior to the execution and delivery of an
agreement which results in a change in control. Additionally, a change in
control constitutes “good reason” under the terms of each of the agreements,
thus permitting each of Mr. Sawtell and Mr. Dong to terminate his respective
employment and receive the severance benefits discussed above. Under the terms
of each employment agreement, a change in control is deemed to have occurred if,
as a result of a tender


23


offer,
other acquisition, merger, consolidation or sale or transfer of assets, any
person(s) (as used in Sections 13(d) or 14(d) of the Securities Exchange
Act of 1934) becomes the beneficial owner (as defined in regulations
promulgated under the Exchange Act) of a total of fifty percent (50%) or more of
either our outstanding common stock or our assets; provided, however, that a
change of control is not deemed to have occurred if a person who beneficially
owned fifty percent (50%) or more of our common stock as of the effective date
of the respective employment agreement continued to do so during the term the
employment agreement.




The
employment agreements with Mr. Sawtell and Mr. Dong also contain standard
confidentiality provisions that apply indefinitely and non-solicitation
provisions that will apply during the term of the employment agreements and for
a 12-month period thereafter.







Compensation
Committee Interlocks and Insider Participation




During
2008, we did not have a compensation committee or another committee of the board
of directors performing equivalent functions.  Instead the entire board of
directors performed the function of compensation committee.  As a
sole member of the board of directors, Mr. Sawtell, our chief executive
officer and sole board of director, approved the executive compensation,
however, there were no deliberations relating to executive officer compensation
during 2008.




Compensation
Committee Report




None.







ITEM
12. Security Ownership Of Certain Beneficial Owners And Management and Related
Stockholder Matters





The
following table set forth information regarding the beneficial ownership of our
common stock after consummation of the forward stock split and the Merger,
except as noted in the footnotes below, by:




-
each person known to be the beneficial owner of 5% or more of our outstanding
common stock;


-
each of our executive officers;


-
each of our directors; and


-
all of our executive officers and directors as a group.





Beneficial
ownership is determined in accordance with the rules of the SEC and is
calculated based on 72,005,906 shares of our common stock issued and outstanding
on December 31, 2008.  In computing the number of shares beneficially owned
by a person and the percentage of ownership of that person, shares of common
stock subject to options held by that person that are currently exercisable, as
appropriate, or will become exercisable within 60 days of the reporting date are
deemed outstanding, even if they have not actually been exercised.  Those
shares, however, are not deemed outstanding for the purpose of computing the
percentage ownership of any other person.




Unless
otherwise indicated in the table, the persons and entities named in the table
have sole voting and sole investment power with respect to the shares set forth
opposite the stockholder’s name.  The address of each stockholder is listed
in the table.




Name and Address of Beneficial Owner
              
              BeneficiallyOwned
              
              Percentof ClassMike
      Sawtell, CEO and Sole Director (1)
              
              30,342,087
              (3)
              38.49
              %Steven
      Dong, CFO (1)
              
              5,630,108
              (4)
              7.64
              %Peter
      and Irene Gauld (2)
              
              8,142,973
              (5)
              10.57
              %All
      executive officers and directors as a group (2 persons)
              
              35,972,195
              (3)(4)
              46.13
              %





(1)
       4040 Barranca Parkway, Suite #220, Irvine,
      CA  92604.


(2)
       c/o DigitalPost Interactive, Inc., 4040 Barranca Parkway, Suite
      #220, Irvine, CA  92604.


(3)
       Includes 6,823,999 shares that can be issued to Mr. Sawtell pursuant
      to options to purchase shares of our common stock within 60
      days.


(4)
       Includes 1,249,728 shares that can be issued to Mr. Dong or a
      consulting firm owned by Mr. Dong pursuant to options to purchase shares
      of our common stock within 60 days; 365,854 conversion shares that can be
      issued upon conversion of convertible notes and 85,585 warrant shares that
      can be issued pursuant to convertible note
  warrants.


(5)
       Includes 4,065,041 conversion shares that can be issued to Mr. and
      Mrs. Gauld pursuant to conversion of convertible notes and 950,945 warrant
      shares that can be issued pursuant to convertible note
      warrants.


24


ITEM
13. Certain Relationships And Related Transactions and Director
Independence




As of
December 31, 2008 we owed an executive officer $36,600 (see further discussion
in Note 6 of the Notes to Audited Consolidated Financial Statements included
elsewhere in this report).





In July
2008, pursuant to a consulting agreement, we granted an option to purchase
50,000 shares of our common stock to a consultant who is a sibling of an
executive officer.





In May
2008 and June 2008, we entered into subordination agreements with the holders of
the 2007 Convertible Notes and an executive officer was a party to those
agreements.  Also, in September 2008, we entered into waiver
agreements with the holders of the 2007 Convertible Notes and an executive
officer was also party to those agreements (see further discussion in Note 8 of
the Notes to Audited Consolidated Financial Statements included elsewhere in
this report).





In May
2008, the Board of Directors approved changing the exercise price of
compensation options granted in 2007 to purchase up to 3,355,000 shares of our
common stock from a weighted average exercise price of $0.70 per share to a
weighted average price of $0.27 per share; included in this re-price event were
875,000 options owned by an executive officer.  The option to purchase
up to 875,000 shares of the Company was originally granted on October 4, 2007,
at an exercise price of $.70 per share. The same option now has an amended
exercise price of $.27 per share. All other terms of the option remains the
same.





In
November 2008, the Board of Directors approved changing the exercise price of
compensation options granted in May 2008 to purchase up to 8,025,000 shares of
our common stock from a weighted average exercise price of $0.187 per share to a
weighted average price of $0.04 per share. All other terms of the option remains
the same.





In
September 2008, $100,000 of $256,000 cash proceeds received in aggregate from a
private placement was provided by two executive officers and 3,333,333
restricted shares were issued to them as part of the private placement (see
further discussion in Note 8 of the Notes to Audited Consolidated Financial
Statements included elsewhere in this report).







Director
      Independence




Presently,
we are not required to comply with the director independence requirements of any
securities exchange.  In determining whether our directors are independent,
however, we intend to comply with the rules of the American Stock Exchange LLC,
or the AMEX.  The board of directors also will consult with counsel to
ensure that the board of director’s determinations are consistent with those
rules and all relevant securities and other laws and regulations regarding the
independence of directors, including those adopted under the Sarbanes-Oxley Act
of 2002 with respect to the independence of audit committee members.  The
AMEX listing standards define an “independent director” generally as a person,
other than an officer of a company, who does not have a relationship with the
company that would interfere with the director’s exercise of independent
judgment.




Currently
we do not satisfy the “independent director” requirements of the American Stock
Exchange, which requires that a majority of a company’s directors be
independent.  Our board of directors intends to appoint additional members,
each of whom will satisfy such independence requirements.


25




ITEM
      14. Principal Accountant Fees and Services




Audit
Fees.





The
aggregate fees billed by our independent registered public accounting firm for
professional services rendered for the audit of our annual financial statements
for the years ended December 31, 2008 and 2007 and for the reviews of the financial
statements included in our Quarterly Reports on Form 10-Q (or 10-QSB) during
those fiscal years were $69,100  and $53,750,
respectively.





Audit
Related Fees.





We
incurred no other audit related fees during the years ended December 31, 2008
and 2007.





Tax
Fees.





We
incurred fees for tax related services during the years ended December 31, 2008
and 2007 in the amounts of $7,000 and $3,000, respectively.





All
Other Fees.





We did
not incur any other fees billed by auditors for services rendered to us, other
than the services covered in "Audit Fees" for the years ended December 31, 2008
and 2007.





The Board
of Directors has considered whether the provision of non-audit services is
compatible with maintaining the principal accountant's
independence.





Audit
Committee Pre-Approval Policies And Procedures




The
Company’s Audit Committee has policies and procedures that require the
pre-approval by the Audit Committee of all fees paid to, and all services
performed by, the Company’s independent accounting firms. At the beginning of
each year, the Audit Committee approves the proposed services, including the
nature, type and scope of services contemplated and the related fees, to be
rendered by these firms during the year. In addition, Audit Committee
pre-approval is also required for those engagements that may arise during the
course of the year that are outside the scope of the initial services and fees
pre-approved by the Audit Committee.




Pursuant
to the Sarbanes-Oxley Act of 2002, the fees and services provided as noted in
the table above were authorized and approved by the Audit Committee in
compliance with the pre-approval policies and procedures described
herein.







26


PART
IV









ITEM
15. Exhibits and Financial  Statement Schedules




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















27


SIGNATURE




Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned hereunto
duly authorized.




DigitalPost
      Interactive, IncBy:
      /s/ Mike SawtellName:
      Mike SawtellTitle:
      Chief Executive Officer, President and Sole DirectorAnd
      Principal Executive OfficerBy:
      /s/ Steven DongName
      Steven DongTitle:
      Chief Financial Officer and Principal Accounting
  Officer




Date:      
March 31, 2009











28


DIGITALPOST
INTERACTIVE, INC.





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008














Report
      of Independent Registered Public Accounting Firm
                  F-2Consolidated
      Financial Statements:Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                  F-3Consolidated
      Statements of Operations for the years ended December 31, 2008 and
      2007
                  F-4Consolidated
      Statements of Stockholders’ Deficit for the years ended December 31, 2008
      and 2007
                  F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 and
      2007
                  F-6Notes
      to Consolidated Financial Statements for the years ended December 31, 2008
      and 2007
                  F-7







F-1


REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM









To the
Board of Directors and Stockholders of


DigitalPost
Interactive, Inc.




We have
audited the accompanying consolidated balance sheets of DigitalPost Interactive,
Inc (the “Company”), a Nevada corporation, as of December 31,
2008 and 2007, and the related consolidated statements of operations,
stockholders’ deficit, and cash flows for the each of the years ended December
31, 2008 and 2007.  These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on the consolidated financial statements based on
our audits.




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




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the  consolidated financial position of the
Company as of December 31, 2008 and 2007, and the consolidated results of
its operations and its cash flows for each of the years ended December 31, 2008
and 2007, in conformity with accounting principles generally accepted in the
United States of America.




The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 3
to the consolidated financial statements, the Company has incurred losses
from operations and negative cash flows from operations since inception and has
limited working capital. These and other matters raise substantial doubt
about the Company’s ability to continue as a going
concern.  Management’s plans regarding those matters are also
described in Note 3. The accompanying consolidated financial statements do
not include any adjustments that may result from the outcome of this
uncertainty.









/s/
HASKELL & WHITE LLP




Irvine,
California


March 31,
2009







F-2








DIGITALPOST
INTERACTIVE, INC.


CONSOLIDATED
BALANCE SHEETS





December
      31,
                  
                  December
      31,2008
                  
                  2007AssetsCurrent
      assetsCash
      and cash equivalents
                  $
                  67,700
                  $
                  88,400Accounts
      receivable and other current assets
                  
                  22,200
                  
                  2,400Total
      current assets
                  
                  89,900
                  
                  90,800Property
      and equipment, net
                  
                  46,900
                  
                  64,200Web
      site development costs and software, net
                  
                  195,200
                  
                  103,300Deferred
      financing costs
                  
                  
                  89,200
                  
                  -Other
      assets
                  
                  
                  8,300
                  
                  8,200Total
      assets
                  
                  $
                  429,500
                  $
                  266,500Liabilities
      and Stockholders' DeficitCurrent
      liabilitiesAccounts
      payable
                  
                  $
                  104,100
                  $
                  41,700Accrued
      expenses
                  
                  
                  94,600
                  
                  86,900Deferred
      revenue
                  
                  
                  91,600
                  
                  58,900Due
      to stockholder
                  
                  
                  36,600
                  
                  54,000Convertible
      promissory notes, net – current (Note 7)
                  
                  
                  1,092,000
                  
                  -Total
      current liabilities
                  
                  1,418,900
                  
                  241,500Convertible
      promissory notes, net  - long term (Note 7)
                  
                  328,600
                  
                  221,100Total
      liabilities
                  
                  1,747,500
                  
                  462,600Commitments
      and contingencies (Note 10)Stockholders’
      deficit (Note 8)Preferred
      Stock, $.001 par value; 20,000,000shares
      authorized; no sharesissued
      and outstanding
                  
                  -
                  
                  -Common
      Stock, $.001 par value; 480,000,000 shares authorized;72,005,906
      and 53,550,840 shares issued and outstandingat
      December 31, 2008 and 2007, respectively
                  
                  72,000
                  
                  53,600Additional
      paid in capital
                  
                  6,121,400
                  
                  3,244,500Accumulated
      deficit
                  
                  
                  (7,511,400)
                  
                  (3,494,200)Stockholders’
      deficit
                  
                  (1,318,000)
                  
                  (196,100)Total
      liabilities and stockholders’ deficit
                  $
                  429,500
                  $
                  266,500








The
accompanying notes to the audited consolidated financial statements
are


an
integral part of these balance sheets.


F-3


DIGITALPOST
INTERACTIVE, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS











Year
                      
                      YearEnded
                      
                      EndedDecember
      31, 2008
                      
                      December
      31, 2007Revenues:Subscriptions
                      
                      
                      
                      
                      
                      $
                      310,000
                      $
                      98,100Professional
      services
                      
                      
                      
                      
                      
                      
                      178,900
                      
                      20,000Total
      Revenue
                      
                      
                      
                      
                      
                      
                      488,900
                      
                      118,100Cost
      of Revenues:Subscriptions
                      
                      
                      
                      
                      
                      
                      99,900
                      
                      40,600Professional
      services
                      
                      
                      
                      
                      
                      
                      
                      51,000
                      
                      7,500Total
      Cost of Revenue
                      
                      
                      
                      
                      
                      150,900
                      
                      48,100Gross
      Profit
                      
                      
                      
                      
                      
                      
                      
                      338,000
                      
                      70,000Operating
      expenses:Research
      and development
                      
                      
                      
                      
                      
                      
                      299,200
                      
                      361,700Sales
      and marketing
                      
                      
                      
                      
                      
                      
                      633,600
                      
                      685,400General
      and administrative
                      
                      
                      
                      
                      
                      2,729,300
                      
                      1,468,8003,662,100
                      
                      2,515,900Loss
      from operations
                      
                      
                      
                      
                      
                      (3,324,100)
                      
                      (2,445,900)Interest
      (expense)
                      
                      
                      
                      
                      
                      (693,100)
                      
                      (98,600)Net
      loss
                      
                      
                      
                      
                      
                      
                      $
                      (4,017,200)
                      $
                      (2,544,500)Weighted
      average outstanding shares
                      
                      
                      
                      
                      60,366,704
                      
                      55,136,982Basic
      and diluted loss per share
                      
                      
                      
                      
                      $
                      (0.066)
                      $
                      (0.046)


























The
accompanying notes to the audited consolidated financial statements
are


an
integral part of these statements.


F-4








DIGITALPOST
INTERACTIVE, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLERS’ DEFICIT


YEARS
ENDED DECEMBER 31, 2008 AND 2007










Common
      Stock, $.001 Par Value
                                            
                                            Additional
                                            
                                            
                                            
                                            TotalPaid
      In
                                            
                                            Accumulated
                                            
                                            Stockholders'Shares
                                            Amount
                                            
                                            Capital
                                            
                                            Deficit
                                            
                                            DeficitBalance
      at December 31, 2006
                                            32,674,357
                                            $   32,700
                                            
                                            $      1,202,200
                                            
                                            $      (949,700)
                                            
                                            $            285,200Issuance
      of common stock for services
                                            78,957
                                            100
                                            
                                            -
                                            
                                            -
                                            
                                            100Issuance
      of common stock for reprice
                                            4,419,976
                                            4,400
                                            
                                            (4,400)
                                            
                                            -
                                            
                                            -Issuance
      of common stock related to merger
                                            15,660,000
                                            15,700
                                            
                                            (15,700)
                                            
                                            -
                                            
                                            -Issuance
      of common stock for cash
                                            717,550
                                            700
                                            
                                            1,129,300
                                            
                                            -
                                            
                                            1,130,000Beneficial
      conversion feature and warrants issued   related to
      issuance of convertible promissory notes
                                            -
                                            -
                                            
                                            623,900
                                            
                                            -
                                            
                                            623,900Financing
      cost related to issuance of common stock
                                            -
                                            -
                                            
                                            (153,000)
                                            
                                            -
                                            
                                            (153,000)Non-cash
      stock based compensation related to stock options granted
                                            -
                                            -
                                            
                                            435,100
                                            
                                            -
                                            
                                            435,100Non-cash
      stock based compensation related to warrants granted
                                            -
                                            -
                                            
                                            27,100
                                            
                                            -
                                            
                                            27,100Net
      loss
                                            -
                                            -
                                            
                                            -
                                            
                                            (2,544,500)
                                            
                                            (2,544,500)Balance
      at December 31, 2007
                                            53,550,840
                                            53,600
                                            
                                            3,244,500
                                            
                                            (3,494,200)
                                            
                                            (196,100)Issuance
      of common stock for cash
                                            13,779,170
                                            13,800
                                            
                                            877,200
                                            
                                            -
                                            
                                            891,000Issuance
      of common stock for exercise of options
                                            329,535
                                            300
                                            
                                            42,500
                                            
                                            -
                                            
                                            42,800Issuance
      of common stock for professional services
                                            3,393,200
                                            3,400
                                            
                                            30,500
                                            
                                            -
                                            
                                            33,900Issuance
      of common stock for interest
                                            953,161
                                            900
                                            
                                            59,400
                                            
                                            -
                                            
                                            60,300Beneficial
      conversion feature and warrants issued   related to
      issuance of convertible promissory notes
                                            -
                                            -
                                            
                                            178,100
                                            
                                            -
                                            
                                            178,100Due
      from shareholder
                                            -
                                            -
                                            
                                            (28,300)
                                            
                                            -
                                            
                                            (28,300)Non-cash
      stock based compensation related to stock options granted
                                            -
                                            -
                                            
                                            620,900
                                            
                                            -
                                            
                                            620,900Non-cash
      stock based compensation related to warrants granted
                                            -
                                            -
                                            
                                            1,096,600
                                            
                                            -
                                            
                                            1,096,600Net
      loss
                                            -
                                            -
                                            
                                            -
                                            
                                            (4,017,200)
                                            
                                            (4,017,200)Balance
      at December 31, 2008
                                            72,005,906
                                            $     72,000
                                            
                                            $      6,121,400
                                            
                                            $   (7,511,400)
                                            
                                            $      (1,318,000)

















The
accompanying notes to the audited consolidated financial statements
are


an
integral part of these statements.


F-5


DIGITALPOST
INTERACTIVE, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year
                              
                              YearEnded
                              
                              EndedDecember
      31, 2008
                              
                              December
      31, 2007Cash
      flows from operating activitiesNet
      loss
                              
                              
                              
                              
                              $
                              (4,017,200)
                              
                              $
                              (2,544,500)Adjustments
      to reconcile net loss to net cashused
      by operating activities:Depreciation
      and amortization
                              
                              
                              79,200
                              
                              
                              55,500Non-cash
      stock-based compensation
                              
                              
                              1,811,500
                              
                              
                              462,200Amortization
      of debt discounts
                              
                              
                              519,600
                              
                              
                              78,000Finders
      fees and additional compensation due to stockholder
accrued
                              
                              
                              -
                              
                              
                              107,900Changes
      in operating assets and liabilities:Accounts
      receivable and other assets
                              
                              
                              
                              (19,700)
                              
                              
                              -Other
      assets
                              
                              
                              
                              -
                              
                              
                              (10,000)Accounts
      payable
                              
                              
                              
                              62,500
                              
                              
                              4,000Accrued
      expenses
                              
                              
                              
                              15,700
                              
                              
                              71,400Deferred
      revenue
                              
                              
                              
                              32,700
                              
                              
                              50,800Net
      cash used by operating activities
                              
                              
                              (1,515,700)
                              
                              
                              (1,724,700)Cash
      flows from investing activitiesAcquisition
      of property and equipment
                              
                              
                              (3,300)
                              
                              
                              (58,300)Acquisition
      and development of software
                              
                              
                              (150,600)
                              
                              
                              (54,400)Net
      cash used by investing activities
                              
                              
                              (153,900)
                              
                              
                              (112,700)Cash
      flows from financing activitiesProceeds
      from the issuance of common stock
                              
                              
                              891,000
                              
                              
                              1,130,000Proceeds
      from convertible notes
                              
                              
                              850,000
                              
                              
                              722,000Payments
      made on shareholder loans
                              
                              
                              (17,400)
                              
                              
                              (110,200)Proceeds
      from the exercise of options
                              
                              
                              42,800
                              
                              
                              -Financing
      cost
                              
                              
                              (117,500)
                              
                              
                              (153,000)Net
      cash provided by financing activities
                              
                              
                              1,648,900
                              
                              
                              1,588,800Net
      decrease in cash and cash equivalents
                              
                              
                              (20,700)
                              
                              
                              (248,600)Cash
      and cash equivalents, beginning of period
                              
                              
                              88,400
                              
                              
                              337,000Cash
      and cash equivalents, end of period
                              
                              $
                              67,700
                              
                              $
                              88,400Supplemental
      disclosures:Cash
      paid for income taxes
                              
                              
                              $
                              1,600
                              
                              $
                              1,600Cash
      paid for interest
                              
                              
                              $
                              52,300
                              
                              $
                              900Supplemental
      disclosures of non cash activities:Common
      stock issued for interest
                              
                              
                              $
                              60,300
                              
                              $
                              -Finders
      fees and additional compensation due to stockholders
    accrued
                              
                              
                              $
                              -
                              
                              $
                              180,300Common
      stock issued for professional services and fees
                              
                              
                              $
                              33,900
                              
                              $
                              -Convertible
      promissory notes issued for amount due to stockholder
                              
                              
                              $
                              -
                              
                              $
                              45,000








The
accompanying notes to the audited consolidated financial statements
are


an
integral part of these statements.


F-6


DIGITALPOST
INTERACTIVE, INC.


NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS








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





Organization
and Merger





Prior to
January 30, 2007, the Company was known as HomAssist Corporation, a Nevada
corporation (“HomAssist”).  On January 30, 2007, the Company acquired The
Family Post, Inc, a privately held California corporation (“Old TFP”).
Immediately following the Merger (as defined below in Note 2), the Company
changed its name to DigitalPost Interactive, Inc. (“DPI”, “we” or the “Company”)
and began operating Old TFP’s business of internet content sharing as its
operating subsidiary (“New TFP”).





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





Basis
of Presentation





As
discussed further below in Note 2, immediately following the Merger, there were
52,833,385 shares of Company common stock outstanding, of which the pre-Merger
stockholders of Old TFP owned approximately 70.4% and the pre-Merger
stockholders of HomAssist owned approximately 29.6%. As a result, Old TFP has
been treated as the acquiring company for accounting purposes.  The Merger
has been accounted for as a reverse acquisition in accordance with generally
accepted accounting principles in the United States of America, or “U.S.
GAAP.”  Reported results of operations of the combined group after
completion of the transaction reflects Old TFP’s operations.





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





Cash
and Cash Equivalents





The
Company considers all cash on hand, cash accounts not subject to withdrawal
restrictions or penalties, and all highly liquid debt instruments purchased with
a maturity of three months or less to be cash and cash equivalents.





Property
and Equipment





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





Web
Site and Software Development Costs





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





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


F-7





As of
December 31, 2008 and 2007, the Company capitalized $195,200 and $103,300,
respectively, net of accumulated amortization, related to its web site and
software development.





Research
and Development Costs





The
Company expenses research and development costs as incurred.





Revenue
Recognition





The
Company’s subscription revenues are generated from monthly subscriptions for web
site hosting services. The typical subscription agreement includes the usage of
a personalized web site and hosting services. The individual deliverables are
not independent of each other and are not sold or priced on a standalone basis.
Costs to complete the web site and prepare it for the use of an end customer are
minimal, and are expensed to cost of revenues as incurred. Upon the completion
of a customer’s signup and initial hosting of the web site, the subscription is
offered free of charge for a two week trial period during which the
customer can cancel at anytime. In accordance with SAB No. 104, after the
two week trial period has ended, revenue is recognized when all of the
following conditions are satisfied: (1) there is persuasive evidence of an
arrangement; (2) the service has been provided to the customer;
(3) the amount of fees to be paid by the customer is fixed or determinable;
and (4) the collection of the Company’s fees is probable. These criteria
are met monthly as the Company’s service is provided on a month-to-month basis,
and collections are generally made in advance of the services. There is no
provision for refunds as of December 31, 2008, as the Company’s historical
refund experience has been minimal.





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





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





During
the year ended December 31, 2008, the Company also distributed its web site
through a marketing partnership and shared a portion of revenue generated with
the marketing partner. In accordance with Emerging Issue Task Force
No. 99-19, Reporting
Revenue Gross as a Principal Versus Net as an Agent, revenue is reported
gross of the payment received from its marketing partner because the Company
acts as the primary obligor and is responsible for the fulfillment of
services.





The
Company derived 17% and none of its total revenue from the marketing partner
during the year ended December 31, 2008 and 2007,
respectively.





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


Loss
per Common Share





Basic
loss per share is computed by dividing the net loss attributable to the common
stockholders by the weighted average number of shares of common stock
outstanding during the period. Fully diluted loss per share is computed similar
to basic loss per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive. Due to the anti-dilutive nature of the Company’s stock options, there
is no effect on the calculation of weighted average shares for diluted net loss
per common share. As a result, the basic and diluted net losses attributable per
common share amounts are identical. 45,615,381 and 21,366,422 shares of
potentially dilutive securities have been excluded for twelve month periods
ended December 31, 2008 and 2007, respectively, because their effect was
anti-dilutive.








Stock-Based
Compensation


F-8


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





The
Company adopted SFAS No. 123R on January 1, 2006, using the modified-prospective
transition method. Under the modified-prospective transition method, prior
periods of the Company’s financial statements are not restated for
comparisonpurposes. In addition, the measurement, recognition and attribution
provisions of SFAS No. 123R apply to new grants and grants outstanding on the
adoption date. Estimated compensation expense for outstanding grants at the
adoption date will be recognized over the remaining vesting period using the
compensation expense calculated for the pro forma disclosure purposes under SFAS
No. 123, Accounting for
Stock-Based Compensation. The Company’s 2008 calculations were made using
the Black-Scholes option-pricing model with the following weighted average
assumptions: expected life of 4.5 years; 336% stock price volatility; risk-free
interest rate of 2.9%; forfeitures rate of 10% and no dividends during the
expected term. During the twelve month periods ended December 31, and 2008 and
2007, the Company recognized employee stock option expense of $607,000 and
$435,100, respectively.





Fair
Value of Financial Instruments





The
Company estimates the fair value of financial instruments using the available
market information and valuation methods. Considerable judgment is required in
estimating fair value. Accordingly, the estimates of fair value may not be
indicative of the amounts the Company could realize in a current market
exchange. As of December 31, 2008, the carrying value of accounts receivable and
payable, loans from stockholders and accrued liabilities approximated fair value
due to the short-term nature and maturity of these instruments.  The
fair value of the 2007 Convertible Promissory Notes and 2008 Convertible
Promissory Notes (See Note 7) have not been estimated since the cost of doing so
would be excessively prohibitive and not practicable.





Concentration
of Risk





Credit is
extended based on an evaluation of the customer’s financial condition, and
collateral is not required. The Company also evaluates its credit customers for
potential credit losses. The accounts receivable balance at December 31, 2008 is
primarily due from a single major marketing partner which individually accounted
for more than 10% of the Company's total revenues for the year ended
December 31, 2008.  At December 31, 2008, the Company had a single
marketing partner, which individually accounted for more than 10% of the net
accounts receivable with a balance of $51,900.   There was no
such significant marketing partner as of December 31, 2007 and for the year then
ended.





As of
December 31, 2008, the Company maintained its cash account at one commercial
bank. The cash balance at December 31, 2008, does not exceed the FDIC
coverage.











Advertising





Advertising
and promotion costs are charged to operations when incurred. For the years ended
December 31, 2008 and 2007, advertising and promotion costs amounted to $189,500
and $282,800, respectively.





Impairment
of Long-Lived Assets





The
Company evaluates the recoverability of long-lived assets and the related
estimated remaining lives when events or circumstances lead management to
believe that the carrying value of an asset may not be recoverable. For the
years ended December 31, 2008 and 2007, no events or circumstances occurred for
which an evaluation of the recoverability of long-lived assets was
required.





Estimates


F-9





The
consolidated financial statements are prepared on the basis of accounting
principles generally accepted in the United States of America. The preparation
of consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of December 31, 2008,
and revenues and expenses the years ended December 31, 2008 and 2007. Actual
results could differ from those estimates made by management.





Reclassification





Certain
balances in the 2007 presentation periods have been regrouped to reflect the
classification used in the 2008 balances.





Income
Taxes





The
process of preparing the financial statements requires management estimates of
income taxes in each of the jurisdictions that the Company operates. This
process involves estimating current tax exposure together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in the balance sheet. Under the provisions of
SFAS No. 109, "Accounting for Income
Taxes", the Company utilizes an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Management must assess the likelihood that
the deferred tax assets or liabilities will be realized for future periods, and
to the extent management believes that realization is not likely, must establish
a valuation allowance. To the extent a valuation allowance is created or
adjusted in a period, the Company must include an expense or benefit, within the
tax provision in the statements of operations. Significant management judgment
is required in determining the provision for income taxes, deferred tax asset
and liabilities and any valuation allowance recorded against net deferred tax
assets. It is possible that different tax models, and the selection of different
input variables, could produce a materially different estimate of the provision,
asset, liability and valuation allowance. The Company determined that it was
unlikely to realize any future benefit from the deferred tax asset in 2008 and
2007 and therefore booked a 100% valuation allowance both years resulting in the
elimination of the deferred tax asset from the Company's balance sheet as of
December 31, 2008 and 2007.





2.           MERGER





Prior to
January 25, 2007, the Company was known as HomAssist.  On January 30, 2007,
HomAssist acquired Old TFP, pursuant to an agreement and plan of merger, dated
as of January 16, 2007, as amended (the “Merger Agreement”), by and among
HomAssist, Old TFP and our wholly-owned subsidiary (“Merger Sub”), providing for
the merger of Merger Sub and Old TFP, with the Merger Sub being the surviving
corporation as our wholly-owned subsidiary (the “Merger”).  Immediately
following the Merger, HomAssist changed its name to DigitalPost Interactive,
Inc., the Merger Sub changed its name to The Family Post, Inc. (“New TFP”), and
the Company began operating New TFPs business of internet content
sharing.





Prior to
the Merger, HomAssist had 15,660,000 shares of common stock issued and
outstanding. As part of the Merger, HomAssist issued 37,173,385 shares of its
common stock to the former stockholders of Old TFP in exchange for all of the
issued and outstanding shares of common stock of Old TFP (16,478,175
shares).  As part of the Merger, HomAssist also adopted the existing stock
option agreements of Old TFP (“Old TFP Option Agreements”) outstanding under
which options to purchase 7,724,850 shares of common stock of Old TFP
outstanding prior to the Merger were converted into options to purchase
17,426,615 shares of common stock of DPI.





On
January 30, 2007, immediately following the Merger, there were 52,833,385 shares
of DPI common stock outstanding, of which the pre-Merger stockholders of
HomAssist owned approximately 29.6% and the pre-Merger stockholders of Old TFP
owned approximately 70.4%.  As a result, Old TFP has been treated as the
acquiring company for accounting purposes.  The Merger has been accounted
for as a reverse acquisition in accordance with generally accepted accounting
principles in the United States of America, or “U.S. GAAP.”  Reported
results of operations of the combined group after completion of the transaction
reflects Old TFP’s operations.





Unless
otherwise indicated or the context otherwise requires, the terms “Company” and
“DPI,” refer to DigitalPost Interactive, Inc. (formerly known as HomAssist
Corporation) and its affiliates, including its subsidiary New TFP, after giving
effect to the Merger.


F-10


3.           GOING
CONCERN AND MANAGEMENT’S PLANS





The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate the continuation of the Company as a going concern. The
Company has not established sufficient sources of revenue to cover its operating
costs, and as such, has incurred an operating loss since inception. Further, as
of December 31, 2008, the cash resources of the Company are insufficient to meet
its current working capital needs and on going business plan. These and other
factors raise substantial doubt about the Company’s ability to continue as a
going concern. The accompanying consolidated financial statements do not include
any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern. During the
year ended December 31, 2008, the Company has raised approximately $1.6 million
in private debt and equity financing.  Since inception through
December 31, 2008, the Company has raised an aggregate amount of approximately
$4.8 million in private debt and equity financing. The offer and sale of the
securities above were effected in reliance on the exemptions for sales of
securities not involving a public offering, as set forth in (i) Section 4(2) and
Section 4(6) of the Securities Act and/or Rule 506 of Regulation D promulgated
thereunder or (ii) Rule 501 of Regulation S.





Since as
of December 31, 2008, the cash resources of the Company are insufficient to meet
its current working capital needs and on going business plan, the Company is
seeking to raise additional funds either through additional debt or equity
financings during 2009.  Also, the  Company expects to
improve its cash flow from operating activities through cost reductions and its
continued implementation of a strategic marketing partnership with Kiddie
Kandids.





4.           PROPERTY
AND EQUIPMENT





Property
and equipment consisted of the following:





December
      31, 2008
              
              
              December
      31, 2007Computer
      equipment and software
              $
              53,100
              
              $
              49,800Furniture
      and fixtures
              
              37,500
              
              
              37,500Less
      -accumulated depreciation and amortization
              
              (43,700)
              
              
              (23,100)$
              46,900
              
              $
              64,200





5.           WEB
SITE DEVELOPMENT AND SOFTWARE COSTS





Web site
development costs consisted of the following:


December
      31,2008
              
              
              December
      31, 2007Website
      development costs
              $
              323,800
              
              $
              173,300Less
      -accumulated amortization
              
              (128,600)
              
              
              (70,000)$
              195,200
              
              $
              103,300





6.           DUE
TO STOCKHOLDER





As of
December 31, 2008 and 2007, $36,600 and 54,000, respectively, was due to an
officer of the Company and principal stockholder. The amount due to the officer
does not bear interest, is not collateralized and has no formal repayment
terms.  During the year ended December 31, 2008, $17,400 of the net
amount owed was paid to the officer.





7.           CONVERTIBLE
PROMISSORY NOTES





The
2007 Convertible Promissory Notes





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


F-11


secured
convertible notes in the event of default become secured by the Company’s assets
and are due two years from the date of each note, but are subordinate to the AOI
Fund Convertible Promissory Notes discussed below.  Initially, each
secured convertible note holder had the right, at any time, to convert their
note into shares of the Company’s common stock at a conversion ratio of one
share of common stock for each $0.40 of principal amount of their note for a
maximum potential aggregate
of 1,917,500 shares of common stock; in addition, the investors were issued
warrants to purchase an aggregate of 1,917,500 shares of common stock at an
exercise price of $0.50 per share that expire five years from the date of
issuance.  Half of these warrants are exercisable immediately and the
remaining half are exercisable upon the conversion of the related notes payable.
Initially, for a period of twelve months after the effective date, if the
Company sells common stock at a price per share below the conversion price of
$0.40 per share, the conversion price will adjust accordingly downward to the
new lower sales price per share.  Since then, the Company has sold
securities at a lower price of $0.123 per share, as a result the





Company
is obligated to lower the conversion price from $.40 per share to the same
$0.123 per share price which gives each investor the right, at any time, to
convert their note into shares of the Company’s common stock at a conversion
ratio of one share of common stock for each $0.123 of principal amount of their
note for a maximum potential aggregate of 6,235,772 shares of common
stock.  In connection with this financing, a form of the convertible
notes agreement was filed with the Securities and Exchange Commission on Form
8-K, dated October 4, 2007. The offer and sale of the securities underlying the
convertible notes were effected in reliance on the exemptions for sales of
securities not involving a public offering, as set forth in Sections 4(2) and
Section 4(6) of the Securities Act of 1933 and/or Rule 506 of Regulation D
adopted thereunder.





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





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





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





Interest
charges associated with the convertible notes, including amortization of the
discounts associated with the beneficial conversion feature and the vested
warrants, totaled $373,000 and $78,000 for the years ended December 31, 2008,
and 2007, respectively.





The
2008 Convertible Promissory Notes





In May
2008, four individual investors purchased an aggregate of $100,000 of 12%
secured convertible notes and were issued warrants to purchase shares of the
Company’s common stock (the “2008 Convertible Notes”). Each convertible note
holder has the right, at any time, to convert their note into shares of the
Company’s common stock at a conversion ratio of one share of common stock for
each $0.14 of principal amount of their note for a maximum potential aggregate
of 714,285 shares of common stock; in addition, the investors were issued
warrants to purchase an aggregate of 357,143 shares of


F-12


common
stock at an exercise price of $0.14 per share that expire five years from the
date of issuance.  Additionally, the convertible notes are secured by
approximately 1.4 million restricted shares of the Company’s common stock held
by a third party. These collateral shares return to the Company and become
canceled when the terms of the convertible notes have been
satisfied.   In December 2008, the maturity date of these notes
was extended to December 2009.  The offer and sale of the securities
underlying the convertible notes were effected in reliance on the exemptions for
sales of securities not involving a public offering, as set forth in Sections
4(2) and Section 4(6) of the Securities Act of 1933 and/or Rule 506 of
Regulation D adopted thereunder.





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




Interest
charges associated with the convertible notes, including amortization of the
discounts associated with the beneficial conversion feature and the vested
warrants, totaled $100,600 and none for the years ended December 31, 2008 and
2007, respectively.





The
AOI Fund Convertible Promissory Notes





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





The
Company determined that the embedded conversion option in the AOI Convertible
Notes qualifies for equity classification under EITF 00-19, qualifies for the
scope exception of paragraph 11(a) of SFAS 133, and is not bifurcated from the
host contract. The Company also determined that the warrants issued to the note
holders qualify for equity classification under the provisions of SFAS 133 and
EITF 00-19. In accordance with the provisions of Accounting Principles Board
Opinion No. 14, the Company allocated the net proceeds received in this
transaction to each of the convertible notes and common stock purchase warrants
based on their relative estimated fair values. As a result, the Company
allocated $182,600 to the convertible notes and $17,400 to the common stock
purchase warrants, which was recorded in additional paid-in-capital. In
accordance with the consensus of EITF issues 98-5 and 00-27, management
determined that the convertible notes did not contain a beneficial conversion
feature based on the effective conversion price after allocating proceeds of the
convertible notes to the common stock purchase warrants. The amounts recorded
for the common stock purchase warrants are amortized as interest expense over
the term of the convertible notes.  Interest charges associated with
the convertible notes, including amortization of the discounts associated with
the original issue discount, put option and the vested warrants, totaled
$35,300 for the year ended December 31, 2008.




In June
2008, the same investor purchased for a second investment, $242,400 of the
AOI Convertible Notes (15% secured convertible notes) and were issued warrants
to purchase shares of our common stock. The convertible note holder has the
right, at any time, to convert their note into shares of our common stock at a
conversion ratio of one share of common stock for each $0.25 of principal amount
of their note for a maximum potential aggregate of 969,696 shares of common
stock; in addition, the investors were issued “Series A Warrants" to purchase
96,969 shares of common stock at an exercise price of


F-13


$0.25 per
share that expire five years from the date of issuance and “Series B Warrants”
to purchase 96,969 shares of common stock at an exercise price of $0.30 per
share that expire five years from the date of issuance.  The Series A
Warrants also have a put option in the amount of $60,000 which can only be
exercised after the two year anniversary date of the convertible
note.  The Series B Warrants have no put option.  The
convertible note included an original issue discount of
$42,400.  Additionally, the convertible notes are secured by a
security interest in all assets of the Company. The offer and sale of the
securities underlying these convertible notes were effected in reliance on the
exemptions for sales of securities not involving a public offering, as set forth
in Sections 4(2) and Section 4(6) of the Securities Act of 1933 and/or Rule 506
of Regulation D adopted thereunder.





The
Company determined that the embedded conversion option in the AOI Convertible
Notes qualifies for equity classification under EITF 00-19, qualifies for the
scope exception of paragraph 11(a) of SFAS 133, and is not bifurcated from the host
contract. The Company also determined that the warrants issued to the note
holders qualify for equity classification under the provisions of SFAS 133 and
EITF 00-19. In accordance with the provisions of Accounting Principles Board
Opinion No. 14, the Company allocated the net proceeds received in this
transaction to each of the convertible notes and common stock purchase warrants
based on their relative estimated fair values. As a result, the Company
allocated $185,500 to the convertible notes and $14,500 to the common stock
purchase warrants, which was recorded in additional paid-in-capital. In
accordance with the consensus of EITF issues 98-5 and 00-27, management
determined that the convertible notes did not contain a beneficial conversion
feature based on the effective conversion price after allocating proceeds of the
convertible notes to the common stock purchase warrants. The amounts recorded
for the common stock purchase warrants and beneficial conversion
feature are amortized as interest expense over the term of the convertible
notes.   Interest charges associated with the convertible notes,
including amortization of the discounts associated with the original issue
discount, put option and the vested warrants, totaled $29,200 for the year ended
December 31, 2008.





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





The
Company determined that the embedded conversion option in the AOI Convertible
Notes qualifies for equity classification under EITF 00-19, qualifies for the
scope exception of paragraph 11(a) of SFAS 133, and is not bifurcated from the
host contract. The Company also determined that the warrants issued to the note
holders qualify for equity classification under the provisions of SFAS 133 and
EITF 00-19. In accordance with the provisions of Accounting Principles Board
Opinion No. 14, the Company allocated the net proceeds received in this
transaction to each of the convertible notes and common stock purchase warrants
based on their relative estimated fair values. As a result, the Company
allocated $185,500 to the convertible notes and $14,500 to the common stock
purchase warrants, which was recorded in additional paid-in-capital. In
accordance with the consensus of EITF issues 98-5 and 00-27, management
determined that the convertible notes did not contain a beneficial conversion
feature based on the effective conversion price after allocating proceeds of the
convertible notes to the common stock purchase warrants. The amounts recorded
for the common stock purchase warrants are amortized as interest expense
over the term of the convertible notes.   Interest charges
associated with the convertible notes, including amortization of the discounts
associated with the original issue discount, put option and the vested warrants,
totaled $23,000 for the year ended December 31, 2008.





In
September 2008, the same investor purchased for a fourth investment,
$180,000 of the AOI Convertible Notes (15% secured convertible notes) and were
issued warrants to purchase shares of our common stock. The convertible note
holder has the right, at any time, to convert their note into shares of our
common stock at a conversion ratio of one share of common stock for each $0.123
of principal amount of their note for a maximum potential aggregate of 1,463,414
shares of common stock; in addition, the investors were issued “Series C
Warrants" to purchase 750,000 shares of common stock at an exercise price of
$0.123 per share that expire five years from the date of issuance and “Series D
Warrants” to purchase 750,000 shares of common stock at an exercise price of
$.15 per share that expire five years from the date of issuance.  The
Series D


F-14


Warrants
also have a put option in the amount of $45,000 which can only be exercised
after the one year anniversary date of the convertible note.  The
Series C Warrants have no put option.  The convertible note included
an original issue discount of $30,000.  Additionally, the convertible
notes are secured by a security interest in all assets of the Company. The
offer and sale of the securities underlying these convertible notes were
effected in reliance on the exemptions for sales of securities not involving a
public offering, as set forth in Sections 4(2) and Section 4(6) of the
Securities Act of 1933 and/or Rule 506 of Regulation D adopted
thereunder.





The
Company determined that the embedded conversion option in the AOI Convertible
Notes qualifies for equity classification under EITF 00-19, qualifies for the
scope exception of paragraph 11(a) of SFAS 133, and is not bifurcated from the
host contract. The Company also determined that the warrants issued to the note
holders qualify for equity classification under the provisions of SFAS 133 and
EITF 00-19. In accordance with the provisions of Accounting Principles Board
Opinion No. 14, the Company allocated the net proceeds received in this
transaction to each of the convertible notes and common stock purchase warrants
based on their relative estimated fair values. As a result, the Company
allocated $105,000 to the convertible notes and $45,000 to the common stock
purchase warrants, which was recorded in additional paid-in-capital. In
accordance with the consensus of EITF issues 98-5 and 00-27, management
determined that the convertible notes did not contain a beneficial conversion
feature based on the effective conversion price after allocating proceeds of the
convertible notes to the common stock purchase warrants. The amounts recorded
for the common stock purchase warrants are amortized as interest expense over
the term of the convertible notes.  Interest charges associated with
the convertible notes, including amortization of the discounts associated with
the original issue discount, put option and the vested warrants, totaled $25,900
for the year ended December 31, 2008.





Convertible
promissory notes summary:





December
      31, 2008
              
              
              December
      31, 2007The
      2007 Convertible Promissory Notes
              $
              767,000
              
              $
              767,000The
      2008 Convertible Promissory Notes
              
              108,000
              
              
              -The
      AOI Fund Promissory Notes
              
              907,300
              
              
              -The
      AOI Fund Promissory Notes Put Option
              
              192,500
              
              
              -Total
      borrowings
              
              1,974,800
              
              
              767,000Debt
      discount
              
              (554,200
              )
              
              (545,900
              )Total
      borrowings less debt discount
              
              1,420,600
              
              
              221,100Less
      current portion
              
              1,092,000
              
              
              -Noncurrent
      portion
              $
              328,600
              
              $
              221,100








8.           STOCKHOLDERS’
DEFICIT





Authorized
Capital Stock





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





Common
Stock





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





Shares
Issued in Connection with the Merger


F-15





As part
of the Merger, the Company issued 37,173,385 shares of its common stock to the
former stockholders of Old TFP in exchange for all of the issued and outstanding
shares of common stock of Old TFP.  As part of the Merger, in exchange for
options to purchase 7,724,850 shares of Old TFP common stock, the Company issued
to the holders thereof options to purchase an aggregate of 17,426,615 shares of
common stock under the same terms and conditions as the Old TFP Option
Agreements.  As a result of the Merger, the former stockholders of Old TFP
became holders of Company common stock, and holders of Old TFP options became
holders of options to acquire shares of Company common stock.Following the Merger,
there were 52,833,385 shares of Company common stock outstanding, of which the
pre-Merger stockholders of HomAssist owned approximately 29.6% and the
pre-Merger stockholders of Old TFP owned approximately 70.4%.





Shares
Issued After the Merger





During
April 2007, the Company agreed to a $4 million private placement for the
issuance of up to 2,540,000 restricted common shares at $1.57 per
share.  As of October 2007, the Company had received $1,130,000 of the
$4 million private placement and closed the private placement and issued 717,500
of restricted shares of the Company’s common stock for the $1,130,000 cash
proceeds received.  Subsequently, the Company commenced the
convertible note offerings, pursuant to which it had issued $1,773,800 in
aggregate of convertible notes (see Note 7 for further discussion) through
September 30, 2008.  Under the convertible note agreements the Company
may issue up to 11,322,559 restricted shares if all the outstanding principal
amounts of the convertible notes convert into common stock of the Company. In
January 2008, the Company entered into a $1 million private placement with
foreign investors under a Regulation S Stock Purchase agreement, which the
Company had received $619,000 cash proceeds for the issuance of 5,145,837,
restricted shares as of September 30, 2008. In February 2008, the Company
entered into a one month unsecured loan with an unrelated party for an amount of
$50,000.  The loan was fully paid in February 2008 and in conjunction
with the loan, the Company issued 100,000 restricted common shares valued at
$16,000 for a service fee related to the loan.  In September 2008, the
Company entered into a $256,000 private placement with accredited investors,
which the Company had received $256,000 cash proceeds for the issuance of
8,533,333, restricted shares.  $100,000 of the $256,000 cash proceeds
was received by two executive officers of the Company and 3,333,333 restricted
shares were issued to them as part of the private placement in September 2008.
The offer and sale of the securities above were effected in reliance on the
exemptions for sales of securities not involving a public offering, as set forth
in (i) Section 4(2) and Section 4(6) of the Securities Act and/or Rule 506 of
Regulation D promulgated thereunder; or (ii) Rule 501 under Regulation
S





During
the year ended December 31, 2008, the Company issued 953,161 shares of common
stock for $60,300 of interest due on the 2007 Convertible Promissory
Notes.





During
the year ended December 31, 2008, the Company issued 329,535 shares of common
stock for options exercised in the amount of $42,800 cash proceeds.





In
December 2008, the Company entered into an agreement for professional services
and issued 3,393,200 restricted shares of common stock valued at
$33,900.





Options





Just
prior to the Merger, there were no outstanding options to
purchase HomAssist's stock.





Effective
January 30, 2007, as part of the Merger, in exchange for options to purchase
7,724,850 shares of Old TFP common stock, the Company issued to the holders
thereof options to purchase an aggregate of 17,426,615 shares of the Company’s
common stock under the same terms and conditions as the Old TFP option
agreements. As part of the terms and conditions of the Old TFP option
agreements, 50% of the options granted and outstanding just prior to the Merger
fully vested and became exercisable as a result of the Merger transaction
itself. As a result, 8,713,308 of the 17,426,615 options issued became fully
vested and exercisable. See Note 2 for further discussion on the
Merger.





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


F-16





Summary
of the 2007 Option Plan





On
January 30, 2007, the board of directors approved and a majority of the
Company’s stockholders ratified by consent the Company’s 2007 incentive and
nonstatutory stock option plan (“Plan”). The 17,426,615 options to purchase the
Company’s common
stock issued under the terms of the Merger (discussed above) have been issued
pursuant to the Plan.  The Plan is intended to further the growth and
financial success of the Company by providing additional incentives to selected
employees, directors, and consultants to the Company and its subsidiary
corporations, as those terms are defined in Sections 424(e) and 424(f) of the
Internal Revenue Code of 1986, as amended (“Code”) (such subsidiary corporations
hereinafter collectively
referred to as “Affiliates”) so that such employees and consultants may acquire
or increase their proprietary interest in the Company. Stock options granted
under the Plan (hereinafter the “Options”) may be either “Incentive Stock
Options,” as defined in Section 422A of the Code and any regulations promulgated
under said Section, or “Nonstatutory Options” at the discretion of the Board of
Directors of the Company (the “Board”) and as reflected in the respective
written stock option agreements granted pursuant hereto.





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





In May
2008, the Board of Directors approved changing the exercise price of
compensation options granted in 2007 to purchase up to 3,355,000 shares of our
common stock from a weighted average exercise price of $0.70 per share to a
weighted average price of $0.27 per share; included in this re-price event were
875,000 options owned by an executive officer.  The option to purchase
up to 875,000 shares of the Company was originally granted on October 4, 2007,
at an exercise price of $0.70 per share. The same option now has an amended
exercise price of $0.27 per share. All other terms of the option remains the
same. The Company recognized $1,600 as an option modification expense resulting
from this re-price during the year ended December 31, 2008.





In
November 2008, the Board of Directors approved changing the exercise price of
compensation options granted in May 2008 to purchase up to 8,025,000 shares of
our common stock from a weighted average exercise price of $0.187 per share to a
weighted average price of $0.04 per share. All other terms of the option remains
the same.  The Company recognized $300


as an
option modification expense resulting from this re-price during the year ended
December 31, 2008.





In
accordance with the provisions of SFAS 123R, and for nonemployees, the
measurement criteria of EITF 96-18, the Company recognized stock-based
compensation expense of $620,900 and $435,100 for the year ended December 31,
2008, and 2007, respectively. The fair value of each option granted was
estimated on the date of grant using the Black-Scholes option-pricing model.
Until the quarterly period ended March 31, 2008, the expected volatility is
based on industry comparables as the Company recently became a publicly held
company and trading volumes have been low.  The risk-free rate is
based on the U.S. Treasury yield curve in effect at the time of grant. The
expected term of options granted is based on the remaining expected life of the
option. The following weighted average assumptions were used for the
options granted during the years ended December 31, 2008 and 2007:





Years
      Ended
                              December
      31,2008
                            
                            2007Expected
      volatility
                            
                            
                            336%
                            
                            
                            45.0%Risk-free
      rate
                            
                            
                            2.9%
                            
                            
                            3.5%Expected
      term
                            
                            
                            4.5
      years
                            
                            
                            4.5
      years





A summary
of stock option activity for the year ended December 31, 2008, is as
follows:





Number of
              Shares
            
            Weighted-
              Average
              Exercise
              Price
            
            Weighted-
              Average
              Remaining
              Contractual
              Term
            
            Aggregate
              Intrinsic
              ValueOutstanding
      as of December 31, 2007
            
            
            18,098,922
            
            $
            .21Granted
            
            
            12,265,000
            
            $
            .06Exercised
            
            
            (329,535)
            
            $
            .10Cancelled
            
            
            (2,635,355)
            
            $
            .26Outstanding
      as of December 31, 2008
            
            
            27,399,032
            
            $
            .09
            
            
            3.6
            
            $
            --








A summary
of the status of the nonvested options for the year ended December 31, 2008 is
presented below:








Number of
                Shares
              
              Weighted-
                Average
                Grant
      Date
                Fair
      ValueNonvested
      as of December 31, 2007
              
              
              7,270,870
              
              $
              .38Granted
              
              
              12,265,000
              
              $
              .06Vested
              
              
              (7,019,592)
              
              $
              .11Cancelled
              
              
              (2,333,839)
              
              $
              .20Nonvested
      as of December 31, 2008
              
              
              10,182,439
              
              $
              .09





Information
regarding the weighted-average remaining contractual life and weighted-average
exercise price of options outstanding and options exercisable at December 31,
2008, for selected price ranges is as follows:





Options
      Outstanding                           Options
      ExercisableExercise
                              Prices
                            
                            
                            Number
                              Outstanding
                            
                            
                            Weighted
                              Average
                              Remaining
                              Contractual
                              Life
      (in years)
                            
                            
                            Weighted
      Average
                              Exercise
                              Price
                              per
      Share
                            
                            
                            Number
                              Exercisable
                            
                            
                            Weighted
      Average
                              Exercise
                              Price
                              per
      Share$
      .04 - .18
                            
                            
                            23,829,032
                            
                            
                            3.6
                            
                            
                            $  
      .06
                            
                            
                            15,805,343
                            
                            
                            $  
      .07$
      .18 - .27
                            
                            
                            3,570,000
                            
                            
                            3.7
                            
                            
                            $  
      .27
                            
                            
                            1,411,250
                            
                            
                            $   .2727,399,032
                            
                            
                            
                            
                            
                            
                            
                            
                            17,216,593





Warrants





In
conjunction with the $767,000 raised pursuant to the 2007 Convertible Notes, the
Company issued warrants to purchase an aggregate of 1,917,500 shares of common
stock of the Company at an exercise price of $0.50 per share that expire five
years from the date of issuance (See Note 7).





In
November 2007, pursuant to an investor relations fee agreement, the Company
agreed to grant warrants to purchase up to 3,000,000 common shares of the
Company.  As of December 31, 2007, the Company had issued warrants to
purchase an aggregate of 1,000,000 shares of common stock of the Company at an
exercise price of $1.20 per share that expire in May 2008.  In January
2008, these warrants were cancelled and the Company granted new warrants to
purchase up to an aggregate of 4,600,000 shares of common stock of the Company
at an exercise price of $0.65 per share that expire in May 2008.  In
accordance with FAS 123R, the Company recognized an expense of $223,000 for the
incremental fair value of the revised award on the modification
date.  In May 2008, these warrants were cancelled and the Company
granted new warrants to purchase up to an aggregate of 6,600,000 shares of
common stock of the Company at an exercise price of $0.45 per share that expired
unexercised in July 2008.  In accordance with FAS 123R, the Company
recognized an expense of $268,000 for the incremental fair value of the revised
award on the modification date.





In April
2008, pursuant to a marketing partnership agreement, the Company agreed to issue
a warrant to purchase up to an aggregate of 2,025,000 shares of common stock at
an exercise price of $0.32 per share.  These warrants vest based upon
certain sales targets achieved and expire April 2013.  As of December
31, 2008, no warrant shares are vested and the Company recognized $5,300 of
non-cash expense during the year ended December 31, 2008 related to this
warrant.


F-17





In April
2008, a warrant to purchase 350,000 common shares issued in October 2007
pursuant to a financial advisory agreement were cancelled pursuant to a new
financial advisory agreement entered into by the Company which obligated the
Company to issue 10% of any related proceeds raised by the financial advisor and
10% of any other consideration received by the investor.  Pursuant to
this new agreement, during the year ended December 31, 2008, the Company issued
warrants to purchase up to 320,001 shares of common stock at an exercise price
of $.25 per share, 29,091 shares of common stock at an exercise price of $0.30
per share, 75,000 shares of common stock at an exercise price of $0.15 per
share, and, 221,341 shares of common stock at an exercise price of $.123 per
share.  As of December 31, 2008, 920,000 warrant shares are vested and
the Company recognized $192,000 of non-cash expense during the year ended
December 31, 2008 related to these warrants.




In May
2008, in conjunction with the issuance of The 2008 Convertible Notes (See Note
7) the Company issued warrants to purchase shares of up to 357,143 shares of
common stock at an exercise price of $0.14 per share that expire five years from
the date of issuance.





In May
2008, in conjunction with the issuance of The AOI Fund Convertible Promissory
Notes (See Note 7) the Company issued “Series A Warrants" to purchase 96,969
shares of common stock at an exercise price of $0.25 per share that expire five
years from the date of issuance and “Series B Warrants” to purchase 96,969
shares of common stock at an exercise price of $0.30 per share that expire five
years from the date of issuance.  The Series A Warrants also have a put
option in the amount of $60,000.  The Series B Warrants have no put
option.





In May
2008 and June 2008, the Company entered into subordination agreements with the
holders of the 2007 Convertible Notes.  As a result, the Company
issued to the holders warrants to purchase up to an aggregate 500,000 shares of
the Company’s common stock at an exercise price of $.18 per share in exchange
for the holders to subordinate their convertible promissory notes. An executive
officer of the Company is one of the holders of the 2007 Convertible Notes, as a
result, a warrant to purchase up to 29,335 shares of the 500,000 warrants shares
were issued to the officer.   As of December 31, 2008, 250,000
warrant shares are vested and the Company recognized $90,000 of non-cash expense
during the year ended December 31, 2008 related to these warrants.





In June
2008, in conjunction with the second issuance of The AOI Fund Convertible Notes
(See Note 7) the Company issued “Series A Warrants" to purchase 96,969 shares of
common stock at an exercise price of $0.25 per share that expire five years from
the date of issuance and “Series B Warrants” to purchase 96,969 shares of common
stock at an exercise price of $0.30 per share that expire five years from the
date of issuance.  The Series A Warrants also have a put option in the
amount of $60,000.  The Series B Warrants have no put
option.





In July
2008, in conjunction with the second issuance of The AOI Fund Convertible Notes
(See Note 7) the Company issued “Series A Warrants" to purchase 96,969 shares of
common stock at an exercise price of $0.25 per share that expire five years from
the date of issuance and “Series B Warrants” to purchase 96,969 shares of common
stock at an exercise price of $0.30 per share that expire five years from the
date of issuance.  The Series A Warrants also have a put option in the
amount of $60,000.  The Series B Warrants have no put
option.





In
September 2008, in conjunction with the second issuance of The AOI Fund
Convertible Notes (See Note 7) the Company issued “Series C Warrants" to
purchase 750,000 shares of common stock at an exercise price of $.123 per share
that expire five years from the date of issuance and “Series D Warrants” to
purchase 750,000 shares of common stock at an exercise price of $0.15 per share
that expire five years from the date of issuance.  The Series D Warrants
also have a put option in the amount of $45,000.  The Series C
Warrants have no put option.





In
September 2008, the Company entered into waiver agreements with the holders of
the 2007 Convertible Notes.  As a result, the Company issued to the
holders warrants to purchase up to an aggregate 500,000 shares of the Company’s
common stock at an exercise price of $.07 per share in exchange for the holders
to enter into the waiver agreements.  An executive officer of the
Company is one of the holders of the 2007 Convertible Notes, as a result, a
warrant to purchase up to 29,335 shares of the 500,000 warrants shares were
issued to the officer. As of December 31, 2008, 250,000 warrant shares are
vested and the Company recognized $29,900 of non-cash expense during the year
ended December 31, 2008 related to these warrants.

















F-18


A summary
of warrant activity for the year ended December 31, 2008 is as
follows:





Number of
              Shares
            
            Weighted-
              Average
              Exercise
              Price
            
            Weighted-
              Average
              Remaining
              Contractual
              Term
            
            Aggregate
              Intrinsic
              ValueOutstanding
      as of December 31, 2007
            
            
            3,267,500
            
            $
            .74
            
            
            3.5
            
            $
            -Granted
            
            
            19,109,396
            
            
            .41Cancelled
            
            
            (13,050,000)
            
            
            .59Outstanding
      as of December 31, 2008
            
            
            9,326,896
            
            $
            .22
            
            
            2.9
            
            $
            -





A summary
of the status of the non-vested warrants for the year ended December 31, 2008 is
presented below:





Number of
                      Shares
                    
                    Weighted-
                      Average
                      Grant
      Date
                      Fair
      ValueNon-vested
      as of December 31, 2007
                    
                    
                    958,750
                    
                    $
                    .37Granted
                    
                    
                    19,109,396
                    
                    $
                    .27Vested
                    
                    
                    (4,284,396)
                    
                    $
                    .14Cancelled
                    
                    
                    (11,700,000)
                    
                    $
                    .29Non-vested
      as of December 31, 2008
                    
                    
                    4,083,750
                    
                    $
                    .29








9.           RELATED
PARTY TRANSACTIONS





As of
December 31, 2008 the Company owed an executive officer $36,600 (see further
discussion in Note 6).





In July
2008, pursuant to a consulting agreement, the Company granted an option to
purchase 50,000 shares of common stock of the Company to a consultant who is
also a sibling of an executive officer of the Company.





In May
2008 and June 2008, the Company entered into subordination agreements with the
holders of the 2007 Convertible Notes and an executive officer was a party to
those agreements.  Also, in September 2008, the Company entered into
waiver agreements with the holders of the 2007 Convertible Notes and an
executive officer was also party to those agreements (see further discussion in
Note 8).





On May
13, 2008, the Board of Directors approved the re-pricing of compensation options
granted in 2007 to purchase up to 3,355,000 shares (for all
employees/consultants) of our common stock from a weighted average exercise
price of $0.70 per share to a weighted average price of $0.27 per share;
included in this re-price event were 875,000 options owned by an executive
officer.  The option to purchase up to 875,000 shares of the Company
was originally granted on October 4, 2007,  at an exercise price of
$0.70 per share. The same option now has an amended exercise price of $0.27 per
share. All other terms of the option remains the same. The company incurred an
incremental excess non-cash compensation expense related to this re-pricing in
the amount of $1,500 for the year ended December 31, 2008.





In
September 2008, $100,000 of the aggregate $256,000 cash proceeds received by the
Company from a private placement was provided by two executive officers of the
Company and 3,333,333 restricted shares were issued to them as part of the
private placement (see further discussion in Note 8).








10.           COMMITMENTS





In
February 2007, the Company entered into a two year lease for its principal
offices. Monthly rent is $8,400 under this lease. Rent expense during the years
ended December 31, 2008 and 2007 was $100,800 and $86,400,
respectively.


F-19


Pursuant
to the office lease agreement, as of December 31, 2008 total remaining rental
payments of $16,800 are due through February 2009, the end of the lease
agreement.





During
February 2009, the Company entered into a new two year lease for its new
principal offices which the monthly rent is $3,500.  Total payments of
$35,000, $42,000, and $7,000 are due through the December 31, 2009, 2010 and
2011, respectively.





11.           INCOME
TAXES





Due to
operating losses, there is no federal tax provision and $1,600 California
minimum franchise state provision for income taxes is due annually.





Deferred
income tax benefits result from the recognition of temporary differences between
financial statements and income tax reporting of income and expenses and the
recognition of net operating losses in the approximate amount of $2.8 million
and $800,000 and stock option expense of approximately $1.1 million and
$200,000, as of December 31, 2008 and 2007, respectively. These deferred tax
benefits have been fully offset by a valuation allowance, as management could
not determine that it was “more likely than not” that the deferred tax assets
would be realized. The gross deferred tax asset and related valuation allowance
was approximately $2.6 million and $1 million at December 31, 2008 and
2007.





As of
December 31, 2008, federal and state net operating loss carry-forwards amount to
approximately $6.6 million and begin to expire in the year 2027 and 2017,
respectively.





Pursuant
to Section 382 of the Internal Revenue Code, use of the Company’s net operating
loss and credit carry-forwards may be limited if the Company experiences a
cumulative change in ownership of greater than 50% in a moving three-year
period. Ownership changes could impact the Company’s ability to utilize net
operating losses and credit carry-forwards remaining at the ownership change
date.








12.           RECENT
ACCOUNTING PRONOUNCEMENTS





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
This statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosure about
fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurement, the FASB having
previously concluded in those accounting pronouncement that fair value is the
relevant measurement attribute. This statement does not require any new fair
value measurements. This statement was effective on January 1, 2008, with
respect to financial assets and liabilities and its adoption did not have a
material effect on our financial statements.  With respect to
non-financial assets and liabilities, this statement is effective for financial
statements issued for fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years.The Company is currently reviewing the
effect, if any, that these provisions will have on its consolidated financial
statements.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of SFAS No.115,
Accounting for Certain Investments in Debt and Equity Securities”, which
applies to all entities with available-for-sale and trading securities. This
Statement permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. This Statement is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. The adoption of SFAS No. 159 did not have a
material impact on the Company’s consolidated financial statements.





In
December 2007, FASB issued SFAS No. 141R, "Business Combinations"(SFAS 141R), which retains the underlying concepts of SFAS 141
in that all business combinations are still required to be accounted for at fair
value under the acquisition method of accounting but SFAS 141R changed the
method of applying the acquisition method in a number of significant aspects.
Acquisition costs will generally be expensed as incurred; noncontrolling
interests will be valued at fair value at the acquisition date; in-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset at the acquisition date; restructuring costs associated with a
business combination will generally be expensed subsequent to the acquisition
date; and changes in deferred tax asset valuation allowances and income tax
uncertainties after the acquisition date generally will affect income tax
expense. The provisions of SFAS 141R are effective for fiscal years
beginning after December 15, 2008 and its adoption will not materially
impact our financial statements.


F-20





On
January 1, 2007, the Company adopted FASB Interpretation ("FIN")
No. 48, "Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement109"  ("FIN No. 48"). FIN
No. 48 clarifies the accounting for uncertainty in income taxes by
prescribing rules for recognition, measurement and classification in financial
statements of tax positions taken or expected to be taken in a tax return. FIN
No. 48 prescribes a two-step process for the financial statement
measurement and recognition of a tax position. The first step involves the
determination of whether it is more likely than not (greater than
50 percent likelihood) that a tax position will be sustained upon
examination, based on the technical merits of the position. The second step
requires that any tax position that meets the more-likely-than-not recognition
threshold be measured and recognized in the financial statements at the largest
amount of benefit that is greater than 50 percent likelihood of being
realized upon ultimate settlement. FIN No. 48 also provides guidance on the
accounting for related interest and penalties, financial statement
classification and disclosure. The Company has determined that there is no
material impact on the consolidated financial position, results of operations or
cash flows from the adoption of FIN No. 48.


F-21