Table
      of Contents


**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**




**FORM
        10-Q**




þ
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d)**
              **OF
                THE SECURITIES EXCHANGE ACT OF 1934**
              **For
                  the Quarterly Period Ended June 30,
                  2006****OR**o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d)**
              **OF
                THE SECURITIES******EXCHANGE
                ACT OF 1934****




**For
        the transition period
        from  to**


**Commission
        file number: 0-29625**




**OASYS
      MOBILE, INC.**


**(Exact
      name of Registrant as Specified in its Charter)**





Delaware
            65-0185306**(State
                of incorporation)**
            **(I.R.S.
                Employer Identification No.)**434
                Fayetteville Street, Suite 600Raleigh,
                North Carolina 27601(919)
                807-5600**(Address,
                including zip code, and telephone number (including area code)
                of****Registrant’s
                principal executive offices)**





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





Indicate
      by checkmark whether the Registrant is a large accelerated filer, an accelerated
      filer or a non-accelerated filer. See definition of “accelerated filer” and
“large accelerated filer” in Rule 12b-2 of the Exchange Act.





Large
      Accelerated Filer  ̈ Accelerated
      Filer  ̈ Non-Accelerated
      Filer þ




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





The
      number of shares outstanding of the Registrant’s common stock, par value $.001
      per share, as of August 10, 2006 was 13,543,038.










**OASYS
      MOBILE, INC.**




**FORM
      10-Q**




**FOR
      THE QUARTERLY PERIOD ENDED JUNE 30, 2006**




**TABLEOF
      CONTENTS**




**Page**
              **No.****PART
                I**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                Statements (Unaudited)Balance
                Sheetsas of June 30, 2006
              and
                December 31, 2005
            **3**Statements
                of Operations for the Three-Month
              Periods
                Ended June 30, 2006 and 2005
            **4**Statementsof Operations for the Six-Month
              Periods
                Ended June 30, 2006 and 2005
            **5**Statementof  Stockholders’ Equity for the
              Six-Month
                Period Ended June 30, 2006
            **6**Statements
                of  Cash Flows for the Six-Month
              Periods
                Ended June 30, 2006 and 2005
            **8**Notes
                to Financial Statements
            **9**Item
                2.
            Management's
                Discussion and Analysisof
                Financial Condition
              and
                Results of Operations
            **20**Item
                3.
            Quantitative
                and Qualitative
                DisclosuresAbout Market
              Risk
            **36**Item
                4.
            Controls
                and Procedures
            **37****PART
                II**
            **OTHER
                INFORMATION**Item
                6.
            Exhibits
            **37**




2




**PART
        I.**
 **FINANCIALINFORMATION**


**Item
        1.** ***FinancialStatements***


**OASYS
      MOBILE, INC.**


**BALANCE** **SHEETS
        (UNAUDITED)**


**June
                30,**
            
            **December
                31,****2006**
            
            **2005****Assets**Current
                assets:Cash
            
            $
            5,198,770
            
            $
            8,985,158Accounts
                receivable
            
            
            1,482,674
            
            
            1,072,615Prepaids
                and other current assets
            
            
            219,559
            
            
            36,172Total
                current assets
            
            
            6,901,003
            
            
            10,093,945Equipment,
                software and furniture, net
            
            
            164,200
            
            
            125,839Total
                assets
            
            $
            7,065,203
            
            $
            10,219,784**Liabilities
                and stockholders’ equity**Current
                liabilities:Accounts
                payable
            
            $
            2,165,380
            
            $
            2,319,754Accrued
                salaries and related costs
            
            
            223,039
            
            
            205,076Accrued
                interest
            
            
            381,416
            
            
            151,500Current
                portion of notes payable
            
            
            77,500
            
            
            77,500Current
                portion of capital lease obligations
            
            
            12,311
            
            
            -Convertible
                notes payable
            
            
            8,000,000
            
            
            -Discount
                on convertible notes payable
            
            
            (4,957,556
            )
            
            -Total
                current liabilities
            
            
            5,902,090
            
            
            2,753,830Long-term
                liabilities:Capital
                lease obligations
            
            
            22,604
            
            
            -Convertible
                notes payable
            
            
            -
            
            
            8,000,000Discount
                on convertible notes payable
            
            
            -
            
            
            (7,415,960
            )Total
                liabilities
            
            
            5,924,694
            
            
            3,337,870Stockholders’
                equity:Series
                A convertible preferred stock, $0.001 par value; 10,000
              shares
                designated, 2,407 shares issued and outstanding at
              June
                30, 2006 and December 31, 2005 (liquidation
              preference
                of $2,760,027 as of June 30, 2006)
            
            
            2,407,295
            
            
            2,407,295Common
                stock, $.001 par value, 185,000,000 shares authorized;
              13,546,888
                issued and 13,543,038 outstanding at June
              30,
                2006 and 13,523,554 issued and 13,519,704 outstanding at December
                31,
                2005
            
            
            13,543
            
            
            13,520Additional
                paid-in capital
            
            
            65,974,094
            
            
            65,369,259Deferred
                compensation
            
            
            -
            
            
            (85,578
            )Accumulated
                deficit
            
            
            (67,026,804
            )
            
            (60,594,963
            )Treasury
                stock, at cost (3,850 shares)
            
            
            (227,619
            )
            
            (227,619
            )Total
                stockholders’ equity
            
            
            1,140,509
            
            
            6,881,914Total
                liabilities and stockholders’ equity
            
            $
            7,065,203
            
            $
            10,219,784




*The
      accompanying notes constitute an integral part of these financial
      statements.*




3







**OASYS
      MOBILE, INC.**




**STATEMENTSOF** **OPERATIONS** **(UNAUDITED)**




**Three-Month
                Period****Ended****June
                30, 2006**
            
            **June
                30, 2005**Revenues:Wireless applications and contracts
            
            $
            1,806,376
            
            $
            1,792,686Wireless license fees
            
            
            2,100
            
            
            1,500Total revenues
            
            
            1,808,476
            
            
            1,794,186Cost
                of revenues:Wireless applications and contracts
            
            
            966,618
            
            
            883,428Total cost of revenues
            
            
            966,618
            
            
            883,428Gross
                profit
            
            
            841,858
            
            
            910,758Operating
                expenses:General
                and administrative
            
            
            613,235
            
            
            708,156Research and development
            
            
            902,648
            
            
            677,114Sales and marketing
            
            
            759,950
            
            
            355,965Non-cash compensation
            
            
            341,353
            
            
            9,666Non-cash consulting expense
            
            
            -
            
            
            5,199Total operating
                expenses
            
            
            2,617,186
            
            
            1,756,100Loss from
                operations
            
            
            (1,775,328
            )
            
            (845,342
            )Interest
                expense
            
            
            (60,035
            )
            
            (1,492
            )Amortization
                of discount on debt and beneficial
              conversion feature
            
            
            (1,235,993
            )
            
            -Net
                loss
            
            $
            (3,071,356
            )
            $
            (846,834
            )Net
                loss applicable to common stockholders:Net loss
            
            $
            (3,071,356
            )
            $
            (846,834
            )Preferred stock dividends
            
            
            (48,140
            )
            
            (48,140
            )Net
                loss applicable to common stockholders
            
            $
            (3,119,496
            )
            $
            (894,974
            )Per
                share amounts (basic and diluted)
            
            $
            (0.23
            )
            $
            (0.07
            )Weighted
                average shares of common stock outstanding
            
            
            13,536,884
            
            
            13,484,362




*The
      accompanying notes constitute an integral part of these financial
      statements.*




4






**OASYS
      MOBILE, INC.**




**STATEMENTSOF
      OPERATIONS (UNAUDITED)**




**Six-Month
                Period Ended****June
                30, 2006**
            
            **June
                30, 2005**Revenues:Wireless applications and contracts
            
            $
            3,902,891
            
            $
            3,779,033Wireless license fees
            
            
            22,750
            
            
            5,200Total revenues
            
            
            3,925,641
            
            
            3,784,233Cost
                of revenues:Wireless applications and contracts
            
            
            2,077,408
            
            
            1,839,615Total cost of revenues
            
            
            2,077,408
            
            
            1,839,615Gross
                profit
            
            
            1,848,233
            
            
            1,944,618Operating
                expenses:General
                and administrative
            
            
            1,430,507
            
            
            1,435,259Research and development
            
            
            1,720,526
            
            
            1,321,690Sales and marketing
            
            
            1,910,510
            
            
            639,264Non-cash compensation
            
            
            657,769
            
            
            20,734Non-cash consulting expense
            
            
            -
            
            
            10,401Non-cash settlements
            
            
            -
            
            
            58,750Total operating
                expenses
            
            
            5,719,312
            
            
            3,486,098Loss from
                operations
            
            
            (3,871,079
            )
            
            (1,541,480
            )Interest
                expense
            
            
            (102,358
            )
            
            (44,829
            )Amortization
                of discount on debt and beneficial
              conversion feature
            
            
            (2,458,404
            )
            
            (851,332
            )Net
                loss
            
            $
            (6,431,841
            )
            $
            (2,437,641
            )Net
                loss applicable to common stockholders:Net loss
            
            $
            (6,431,841
            )
            $
            (2,437,641
            )Preferred stock dividends
            
            
            (96,280
            )
            
            (96,280
            )Net
                loss applicable to common stockholders
            
            $
            (6,528,121
            )
            $
            (2,533,921
            )Per
                share amounts (basic and diluted)
            
            $
            (0.48
            )
            $
            (0.19
            )Weighted
                average shares of common stock outstanding
            
            
            13,528,341
            
            
            13,119,890




*The
      accompanying notes constitute an integral part of these financial
      statements.*




5






**OASYS
      MOBILE, INC.**




**STATEMENTOF
      STOCKHOLDERS'** **EQUITY** **(UNAUDITED)**




**Preferred
                Stock**
            
            
            
            
            
            **Additional****Series
                A**
            
            **Common
                Stock**
            
            **Paid-In****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital****Balance
                at December 31, 2005**
            
            
            2,407
            
            $
            2,407,295
            
            
            13,519,704
            
            $
            13,520
            
            $
            65,369,259Reversal
                of deferred
              compensation
                to additional
              paid-in
                capital
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (85,578
            )Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            657,769Common
                stock issued for accrued
              expenses
            
            
            -
            
            
            -
            
            
            23,334
            
            
            23
            
            
            32,644Net
                loss for the period
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -**Balance
                at June 30, 2006**
            
            
            2,407
            
            $
            2,407,295
            
            
            13,543,038
            
            $
            13,543
            
            $
            65,974,094








*The
      accompanying notes constitute an integral part of these financial
      statements.*




6






**OASYS
      MOBILE, INC.**




**STATEMENT
      OF STOCKHOLDERS' EQUITY (UNAUDITED)**




**Deferred**
              **Compensation**
            
            **Accumulated**
              **Deficit**
            
            **Treasury**
              **Stock**
            
            **Total**
              **Stockholders’**
              **Equity****Balance
                at December 31, 2005**
            
            $
            (85,578
            )
            $
            (60,594,963
            )
            $
            (227,619
            )
            $
            6,881,914Reversal
                of deferred
              compensation
                to additional
              paid-in
                capital
            
            
            85,578
            
            
            -
            
            
            -
            
            
            -Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            657,769Common
                stock issued for accrued
              expenses
            
            
            -
            
            
            -
            
            
            -
            
            
            32,667Net
                loss for the period
            
            
            -
            
            
            (6,431,841
            )
            
            -
            
            
            (6,431,841
            )**Balance
                at June 30, 2006**
            
            $
            -
            
            $
            (67,026,804
            )
            $
            (227,619
            )
            $
            1,140,509











*The
      accompanying notes constitute an integral part of these financial
      statements.*




7






**OASYS
      MOBILE, INC.**




**STATEMENTSOF** **CASH
      FLOWS** **(UNAUDITED)**




**Six-Month
                Period Ended****June
                30, 2006**
            
            **June
                30, 2005****Operating
                activities**Net
                loss
            
            $
            (6,431,841
            )
            $
            (2,437,641
            )Adjustments
                to reconcile net loss to net cash used in operatingactivities:Depreciation and amortization
            
            
            30,561
            
            
            22,703Stock-based compensation
            
            
            657,769
            
            
            20,734Common stock, options and warrants issued for services
            
            
            -
            
            
            86,237Amortization of discount on debt and beneficial conversion
                feature
            
            
            2,458,404
            
            
            851,332Non-cash settlements
            
            
            -
            
            
            58,750Changes
                in operating assets and liabilities:Accounts receivable
            
            
            (410,059
            )
            
            (111,372
            )Prepaid and other assets
            
            
            (183,387
            )
            
            17,940Accounts payable and other accrued expenses
            
            
            (121,707
            )
            
            424,867Accrued
                interest
            
            
            229,916
            
            
            -Accrued salaries and related costs
            
            
            17,963
            
            
            10,390Net
                cash used in operating activities
            
            
            (3,752,381
            )
            
            (1,056,060
            )**Investing
                activities**Purchases
                of equipment, software and furniture
            
            
            (28,007
            )
            
            (31,717
            )Net
                cash used in investing activities
            
            
            (28,007
            )
            
            (31,717
            )**Financing
                activities**Proceeds
                from exercise of stock options and warrants
            
            
            -
            
            
            4,332,878Proceeds
                from issuance of convertible debt
            
            
            -
            
            
            215,000Payments
                of convertible debt
            
            
            -
            
            
            (1,640,000
            )Principal
                payments on capital lease obligations
            
            
            (6,000
            )
            
            -Principal
                payments on notes payable and short-term borrowings
            
            
            -
            
            
            (59,084
            )Net
                cash (used in) provided by financing activities
            
            
            (6,000
            )
            
            2,848,794Net
                (decrease) increase in cash
            
            
            (3,786,388
            )
            
            1,761,017Cash
                at beginning of period
            
            
            8,985,158
            
            
            1,405,788Cash
                at end of period
            
            $
            5,198,770
            
            $
            3,166,805**Supplemental
                disclosures of cash flow information**Cash
                paid for interest
            
            $
            17,064
            
            $
            47,469




*The
      accompanying notes constitute an integral part of these financial
      statements.*




8






**Oasys
      Mobile, Inc.**




**Notes** **to
      Financial Statements**






**1.**  **Business
      and Basis of Presentation**




*Business*




Oasys
      Mobile, Inc. ("Oasys Mobile” or the "Company") is engaged primarily in the
      development of applications that optimize the consumer wireless experience.
      The
      core of the Company's business plan is to focus on the emerging wireless market
      and partner with leading content brands to bring branded products to mobile
      phones. Our content brands include Mattel, Sony BMG, The Associated Press,
      The
      Wall Street Journal, Phil Hellmuth, Howard Lederer, Golf Digest, Hooters, The
      Grateful Dead and others.





Oasys
      Mobile has developed software, technology and applications to enable information
      processing and resource management to include, but not be limited to, the
      creation, transmission, playing and management of content over wireless
      networks. We currently offer products in various categories, including games,
      messaging, personalization and entertainment. The Company's technology, which
      provides the foundation for its current products, is designed to address the
      usability constraints of the existing wireless network infrastructure. This
      technology will enable more efficient use of existing and future bandwidth
      allocations, resulting in a perceived bandwidth increase by the mobile
      end-user.





Oasys
      Mobile builds end-user applications for most major mobile platforms, including
      QUALCOMM’s Binary Runtime Environment for WirelessTM (BREWTM), JavaTM 2 Platform,
      Micro Edition (J2METM), SymbianTM OS and Wireless Application Protocol (WAP). We
      distribute our applications through major wireless carriers who make our
      products available to their customers. Oasys Mobile currently has relationships
      with carriers that account for 97% of all U.S. wireless subscribers. We also
      have relationships with international carriers covering Europe, Asia, Canada,
      Latin America, Australia, Israel, the U.K and China.





We
      have
      completed the development and deployment of more than thirty-four (34) wireless
      applications on a total of seventy-five (75) wireless carriers and distribution
      partners. Some of our United States based wireless carriers include Alltel,
      Cingular, Sprint PCS, T-Mobile, US Cellular and Verizon Wireless. These
      applications can be purchased by the end-user as a one-time purchase, or a
      monthly subscription, depending on content, product function, and/or carrier
      preferences.





The
      majority of the applications completed and deployed by the Company, as well
      as
      planned future applications, have been developed by the Company through a
      process that involves securing agreements with content providers and carriers,
      and developing and launching the applications. The Company outsources the
      infrastructure needed to host and deliver the transactions for its application
      end-users.





*Future
      Operations*





As
      shown
      in the financial statements for the three-month period and six-month period
      ended June 30, 2006, the Company incurred a net loss of $ 3,071,356
      and $6,431,841, respectively and
      experienced negative cash flows from operations. The Company’s operations are
      dependent on its ability to generate sufficient cash flow to meet its
      obligations on a timely basis, to obtain additional financing, and ultimately
      to
      attain profitability. The Company is actively promoting and expanding its
      product line. Management expects to be able to attract additional capital,
      if
      necessary, to expand operations and also expects that increased revenues will
      reduce its operating losses in future periods. However, there can be no
      assurance that management’s plan will be executed as anticipated.




9






**1.**  **Business
      and Basis of Presentation (continued)**




*Basis
      of Presentation*




The
      accompanying unaudited financial statements have been prepared in accordance
      with accounting principles generally accepted in the United States for interim
      financial information and with the instructions to Form 10-Q and Article 10
      of
      Regulation S-X. Accordingly, these financial statements do not include all
      of
      the information and notes required by accounting principles generally accepted
      in the United States. In the opinion of management, all adjustments (consisting
      of normal recurring accruals) considered necessary for a fair presentation
      of
      financial condition and results of operations have been included. Operating
      results for the three-month period ended June 30, 2006, are not necessarily
      indicative of the results that may be attained for the entire year. For further
      information, refer to the financial statements and notes thereto included in
      the
      Company’s Form 10-K for the year ended December 31, 2005.




**2.**  **Summary
      of Significant Accounting Policies**




*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
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenue and expenses during the reporting
      period. Actual results could differ from those estimates.




*Revenue
      Recognition and Related Costs*




Wireless
      applications and contracts




Revenues
      earned from wireless applications are recognized upon delivery and acceptance
      by
      the end-user either as a one-time purchase or a monthly subscription. For
      content delivery partner arrangements, whereby the Company remits a portion
      of
      the revenues earned through the sale of the Company’s applications, revenue is
      recorded on a gross basis in accordance with EITF 99-19. The Company recognizes
      the cost of payments to the content providers as a cost of revenues. Wireless
      applications and contracts cost of revenues also includes all third-party
      hosting fees. These costs are incurred on a monthly basis and are primarily
      fixed in nature regardless of the revenue generated by the related applications.





Periodically,
      we enter into non-recurring engineering arrangements with our content partners.
      Generally, under the terms of these agreements, we receive funding upfront
      to
      complete projects. The funding we receive upfront is recorded as deferred
      revenue and is recognized as revenue under the terms of the individual
      arrangements. Deferred revenue represents amounts received for which the Company
      has not yet completed its contractual obligations.




10






**2.**  **Summary
      of Significant Accounting Policies (continued)**




Wireless
      License Fees





We
      recognize revenue from licensee fees for wireless software applications in
      accordance with the provisions of AICPA Statement of Position 97-2,
“ *Software
      Revenue Recognition* ”,
      as
      amended by AICPA Statement of Position 98-9 “ *Modification
      of SOP No. 97-2 Software Revenue Recognition with Respect to Certain
      Transactions* .”
      Revenue from software license fees is generally recognized upon delivery
      provided that a contract has been executed, the vendor fee is fixed or
      determinable, no significant vendor obligations or uncertainties surrounding
      customer acceptance remain, and collection of the resulting receivable is deemed
      probable.




There
      were no costs related to the wireless license fee revenue generated during the
      six-month periods ended June 30, 2006 and 2005, as the license fee revenue
      related to technology that had been previously developed by the Company, and
      there were no costs for installation, delivery or customization, or other
      related costs.




Contracts
      and license fees




We
      derive
      certain revenues from research and development contracts for governmental
      agencies and the commercial licensing of our technology. We recognize revenue
      on
      these contracts at the time services are rendered based upon the terms of
      individual contracts. Regarding the commercial licensing of our technology,
      we
      follow the provisions of AICPA Statement of Position 97-2, “Software Revenue
      Recognition”, as amended by AICPA Statement of Position 98-9 “Modification of
      SOP No. 97-2 Software Revenue Recognition with Respect to Certain Transactions.”
Revenue from software license fees is generally recognized upon delivery
      provided that a contract has been executed, the vendor fee is fixed or
      determinable, no significant vendor obligations or uncertainties surrounding
      customer acceptance remain, and collection of the resulting receivable is deemed
      probable. **




*Segments*




Management
      has structured the Company's internal organization as one business segment
      from
      which all operating decisions are made and all operating results are
      evaluated.




*Equipment,
      Software and Furniture*




Equipment,
      software and furniture is stated at cost. Depreciation is computed over the
      estimated useful lives of the assets (generally three to seven years) using
      the
      straight-line method. Amortization of capital lease assets is included in
      depreciation expense.




*Software
      Development Costs*




Capitalization
      of software development costs begins with the establishment of technological
      feasibility of new or enhanced software products. Technological feasibility
      of a
      computer software product is established when the Company has completed all
      planning, designing, coding and testing that is necessary to establish that
      the
      software product can be produced to meet design specifications including
      functions, features and technical performance requirements. All costs incurred
      prior to establishing technological feasibility of a software product are
      charged to research and development expense as incurred. No capitalized software
      development costs were incurred during the six-month periods ended June 30,
      2006
      and 2005.




11






**2.**  **Summary
      of Significant Accounting Policies (continued)**




*Income
      Taxes*




Income
      taxes are accounted for using the liability method in accordance with Statement
      of Financial Accounting Standards ("SFAS") No. 109, *"Accounting
      for Income Taxes."* Under
      SFAS 109, deferred tax assets or liabilities are computed based upon the
      difference between the financial statement and income tax basis of assets and
      liabilities using the enacted marginal tax rate applicable when the related
      asset or liability is expected to be realized or settled. Deferred income tax
      expenses or benefits are based on the changes in the asset or liability from
      period to period. If available evidence suggests that it is more likely than
      not
      that some portion or all of the deferred tax assets will not be realized, a
      valuation allowance is required to reduce the deferred tax assets to the amount
      that is more likely than not to be realized. Future changes in such valuation
      allowance would be included in the provision for deferred income taxes in the
      period of change.




S *tock-Based
      Compensation*




On
      January 1, 2006, the Company adopted SFAS No. 123(R), *Share-Based
      Payment* ,
      which
      requires us to account for share-based payment transactions using a fair
      value-based method and recognize the related expense in our results of
      operations. Prior to our adoption of SFAS No. 123(R), as permitted by SFAS
      No. 123, we accounted for share-based payments to employees using the
      Accounting Principles Board Opinion No. 25 (“APB 25”), *Accounting
      for Stock Issued to Employees* ,
      intrinsic value method. Accordingly, prior to January 1, 2006 we generally
      did not recognize compensation cost for employee stock options, as all such
      options had an exercise price equal to the market value of the underlying common
      stock on the date of the grant. SFAS No. 123(R) allows companies to choose
      one of two transition methods: the modified prospective transition method or
      the
      modified retrospective transition method. We chose to use the modified
      prospective transition methodology. Under this transition method, our
      compensation cost recognized includes compensation costs for all share-based
      payments granted prior to, but not yet vested as of, January 1, 2006 based
      on the grant date fair value estimated in accordance with the original
      provisions of SFAS No. 123, and compensation cost for all share-based
      payments granted subsequent to January 1, 2006 based on the grant date fair
      value estimated in accordance with the provisions of SFAS No. 123(R).
      Accordingly, we have not restated our financial results for prior periods.





Under
      the
      fair value recognition provisions of SFAS No. 123(R), stock-based
      compensation cost is estimated at the grant date based on the fair value of
      the
      award and is recognized as expense over the requisite service period of the
      award. Consistent with the valuation method we used for disclosure-only purposes
      under the provisions of SFAS No. 123, we use the Black-Scholes model to
      value option awards under SFAS No. 123(R). The Company currently has awards
      outstanding with only service conditions and graded-vesting features. We
      recognize compensation cost on a straight-line basis over the requisite service
      period.




The
      adoption of SFAS No. 123(R) had a material impact on our results of
      operations. Our statement of operations for the three months and six months
      ended June 30, 2006 included stock-based compensation expense of $341,353 and
      $657,769, respectively.




Unrecognized
      stock-based compensation expense expected to be recognized over an estimated
      weighted-average amortization period of 1.12 years was approximately $2.1
      million at June 30, 2006. Unrecognized stock-based compensation expense expected
      to be recognized over the period ending December 31, 2006 was approximately
      $612,000 at June 30, 2006.




12






**2.**  **Summary
      of Significant Accounting Policies (continued)**




Stock
      Plan




During
      2000, the Company established a stock option plan to provide for the issuance
      of
      stock options to employees and directors. The plan provides for the issuance
      of
      stock options to employees, directors, advisors and consultants of the Company.
      Options granted generally have a ten-year term and vest over three years from
      the date of grant. Certain of the stock options granted under the Plan have
      been
      granted pursuant to various stock option agreements. Each stock option agreement
      contains specific terms. On May 23, 2005, the Board of Directors authorized
      an
      increase in the number of options available for grant under the Plan to
      3,000,000.




Time-Based
      Stock Awards




The
      fair
      value of each time-based award is estimated on the date of grant using the
      Black-Scholes option valuation model, which uses the assumptions described
      below. Our weighted-average assumptions used in the Black-Scholes valuation
      model for equity awards with time-based vesting provisions granted during the
      three months and six months ended June 30, 2006 are shown in the following
      table:




Expected
                volatility
            96.89
            %Expected
                dividends
            0
            %Expected
                terms
            5.77
                Years for Employees
              and
                10 Years for DirectorsRisk-free
                interest rate
            4.31
                –
                5.23
            %





The
      expected volatility rate was estimated based on historical volatility of the
      Company’s common stock over approximately a five year period. The expected term
      for employees was estimated based on a simplified method, as allowed under
      SEC
      Staff Accounting Bulletin No. 107, averaging the vesting term and original
      contractual term. The expected term for directors was estimated based on
      historical experience and specific terms in the option agreements. The risk-free
      interest rate for periods within the contractual life of the option is based
      on
      U.S. Treasury securities. The pre-vesting forfeiture rate used for the three
      and
      six months ended June 30, 2006 was based on historical rates. As required under
      SFAS No. 123(R), we will adjust the estimated forfeiture rate to our actual
      experience. Management will continue to assess the assumptions and methodologies
      used to calculate estimated fair value of share-based compensation.
      Circumstances may change and additional data may become available over time,
      which could result in changes to these assumptions and methodologies, and
      thereby materially impact our fair value determination.




A
      summary
      of the time-based stock awards as of June 30, 2006, and changes during the
      six
      months ended June 30, 2006, is as follows:




**Shares**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Average**
              **Remaining**
              **Contractual**
              **Term**
              **(years)**
            
            **Aggregate**
              **Intrinsic**
              **Value**Outstanding
                at January 1, 2006
            
            
            1,836,215
            
            $
            6.53Granted
            
            
            428,200
            
            
            1.55Forfeited
                or expired
            
            
            (87,673
            )
            
            12.27Outstanding
                at June 30, 2006
            
            
            2,176,742
            
            $
            5.08
            
            
            7.98
            
            $
            973Exercisable
                at June 30, 2006
            
            
            1,272,043
            
            $
            7.19
            
            
            7.08
            
            $
            758




13






**2.**  **Summary
      of Significant Accounting Policies (continued)**




The
      aggregate intrinsic value represents the pretax value (the period’s closing
      market price, less the exercise price, times the number of in-the-money options)
      that would have been received by all option holders had they exercised their
      options at the end of the period. The exercise price of stock options granted
      during the six months ended June 30, 2006 was equal to the market price of
      the
      underlying common stock on the grant date.




Second
      Quarter Fiscal 2005




The
      following table illustrates the effect on net loss and net loss per share for
      the three months and six months ended June 30, 2005, if we had accounted for
      all
      employee stock-based compensation during that period based on the fair value
      method as prescribed by SFAS No. 123(R).







**Three-Month**
              **Period
                Ended**
              **June
                30**
              **(Unaudited)**
            
            **Six-Month**
              **Period
                Ended**
              **June
                30**
              **(Unaudited)****2005**
            
            **2005**Net
                loss applicable to common shareholders
            
            $
            (894,974
            )
            $
            (2,533,921
            )Non-cash
                compensation charges included in net loss applicable to common
                shareholders
            
            
            9,666
            
            
            20,734Stock-based
                employee compensation cost that would have been included in net loss
                applicable tocommon
                stockholders under the fair value method
            
            
            (103,508
            )
            
            (230,001
            )Adjusted
                net loss applicable to common stockholders
            
            $
            (988,816
            )
            $
            (2,743,188
            )Basic
                and diluted loss per share:Reported
                net loss applicable to common stockholders
            
            $
            (0.07
            )
            $
            (0.19
            )Non-cash
                compensation charges included in net loss applicable to common
                stockholders
            
            
            0.00
            
            
            0.00Stock-based
                employee compensation cost that would have been included in net loss
                applicable tocommon stockholders under the fair value
                method
            
            
            (0.00
            )
            
            (0.02
            )Adjusted
                net loss applicable to common stockholders
            
            $
            (0.07
            )
            $
            (0.21
            )




For
      the
      purpose of the above table, the fair value of each option grant was estimated
      as
      of the date of grant by using the Black-Scholes option pricing model with the
      following weighted-average assumptions used for grants in the first quarter
      of
      fiscal 2005: dividend yield of 0%; volatility of 1.2936; risk-free interest
      rate
      ranging from 3.64% to 4.46%; and expected option lives of 5 years for employees
      and 10 years for Board members. The weighted-average fair value of options
      granted in the six months ended June 30, 2005 was $2.91.




14






**2.**  **Summary
      of Significant Accounting Policies (continued)**




*Net
      Loss Per Share*




Loss
      per
      share has been calculated in accordance with SFAS No. 128, *"Earnings
      Per Share."* Basic
      loss per share was computed by dividing the net loss for each period presented
      by the weighted average number of shares of common stock outstanding for such
      period, as adjusted for the recapitalization. Although the Company has potential
      common stock equivalents related to its outstanding stock options, warrants
      and
      preferred stock, these potential common stock equivalents were not included
      in
      diluted loss per share for each period presented because the effect would have
      been antidilutive.




*New
      Accounting Pronouncements*




In
      December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
      No. 123(R), *Share-Based
      Payment* ,
      which
      is a revision of SFAS Statement No. 123, *Accounting
      for Stock-Based Compensation* (“SFAS
      No. 123”). SFAS No. 123(R) supersedes ABP No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      amends FASB Statement No. 95, *Statement
      of Cash Flows* .
      Generally, the approach in SFAS No. 123(R) is similar to the approach
      described in SFAS No. 123. However, SFAS No. 123(R) requires all
      share-based payments to employees, including grants of employee stock options,
      to be recognized in the income statement based on their fair values. Pro forma
      disclosure is no longer an alternative. The Company adopted SFAS No. 123(R)
      on January, 2006. SFAS No. 123(R) requires us to account for share-based
      payment transactions using a fair value-based method and recognize the related
      expense in our results of operations. Prior to our adoption of SFAS
      No. 123(R), as permitted by SFAS No. 123, we accounted for share-based
      payments to employees using the APB 25 intrinsic value method and, therefore
      we
      generally recognized compensation expense for restricted stock awards and did
      not recognize compensation cost for employee stock options as such options
      had
      an exercise price equal to the market price of the underlying common stock
      on
      the date of grant. SFAS No. 123(R) allows companies to choose one of two
      transition methods: the modified prospective transition method or the modified
      retrospective transition method. We chose to use the modified prospective
      transition methodology. We have not restated our financial results from prior
      periods as a result of our adoption of SFAS No. 123(R).




In
      May
      2005, the FASB issued SFAS No. 154, “ *Accounting
      Changes and Error Corrections”* (“SFAS
      No. 154”), a replacement of APB Opinion No. 20 and SFAS No. 3. SFAS No. 154
      requires retrospective application to prior periods’ financial statements of a
      voluntary change in accounting principles unless it is impracticable. APB
      Opinion No. 20, “ *Accounting
      Changes”* ,
      previously required that most voluntary changes in accounting principle be
      recognized by including in net income of the period of the change the cumulative
      effect of changing to the new accounting principle. This statement was effective
      beginning on January 1, 2006. The adoption of SFAS No. 154 did not have a
      material impact on the Company’s financial statements.





15






**3. Convertible
      Notes Payable**




*November
      2005 Convertible Notes Payable*




In
      November 2005, the Company entered into senior debt agreements with certain
      investors for $8,000,000 of financing in the form of notes payable (the "Senior
      Secured Debentures"). The Senior Secured Debentures bear interest at 6% and
      mature on June 30, 2007 (“Maturity Date”). The Senior Secured Debentures are
      convertible into shares of the Company’s common stock at the option of the
      holder at a conversion price of $2.00 per share. The Senior Secured Debentures
      are also subject to automatic conversion if the Company meets certain revenue
      or
      trading stock price milestones. The Senior Secured Debentures are secured by
      all
      of the assets of the Company.





At
      the
      closing of the Senior Secured
      Debentures ,
      the
      investors received certain
      A
      Warrants, B Warrants and C-1 Warrants. The A Warrants provide the right to
      purchase an aggregate of 2,000,000 units at an exercise price of $2.00 per
      unit,
      each unit consisting of one share of the Company’s common stock and a warrant to
      purchase 4/10 of a share of the Company’s common stock (the “C-2 Warrant”). The
      A Warrants are exercisable at any time until June 29, 2006. The B Warrants
      are
      exercisable at any time for a period of two years from the date of issuance
      for
      1,355,392 shares of the Company’s common stock and have an exercise price of
      $2.71 per share. The C-1 Warrants are exercisable at any time for a period
      of 5
      years from the date of issuance for an additional 1,355,392 shares of the
      Company’s common stock and have an exercise price of $3.54 per share. The C-2
      Warrant has substantially the same terms and conditions as the C-1 Warrant.





The
      Company allocated the $8,000,000 of proceeds received in connection with the
      financing between the Senior Secured  Debentures and the
      warrants on a relative fair value basis. Accordingly, the Company allocated
      $4,307,906 to the Senior Secured  Debentures and
      $3,692,094 to the warrants issued. Since the Senior Secured  Debentures were
      issued at a discount to the principal balance, the effective conversion price
      of
      the Senior Secured  Debentures was less
      than the fair value of the Company's common stock on the date of issuance.
      In
      accordance with EITF 98-5, " *Accounting
      for Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios* ,"
      a
      beneficial conversion feature of $4,307,906 was recorded as a discount to the debt and a
      corresponding credit to additional paid-in capital on the date of issuance.





The
      discount on the debt is being amortized to interest expense over the term of
      the
      Senior Secured  Debentures beginning on the date of issuance. Amortization of the discount of the
      Senior  Secured  Debentures was
      $1,235,993 and $2,458,404 for the three-month and six-month periods ended June
      30, 2006, respectively.





The
      principal balance of the Senior Secured Debentures is $8,000,000 as of June
      30,
      2006 and matures on June 30, 2007. The discount related to the Senior Secured
      Debentures is $4,957,556 as of June 30, 2006, and is shown as a contra-liability
      on the balance sheet.




On
      July
      27, 2006, the Company entered into a Modification and Waiver Agreement (the
      "Modification Agreement") in which the investors agreed to waive certain of
      their rights under the documents and instruments entered into in connection
      with
      the Senior Secured Debentures. See Note 7 for a discussion of this Modification
      Agreement.




16






**3.**  **Convertible
      Notes Payable (continued)**




*December
      2004 and January 2005 Convertible Notes Payable*




In
      December 2004, the Company entered into senior debt agreements with certain
      investors for $1,425,000 of financing in the form of notes payable (the "Senior
      Notes"). The Senior Notes bore interest at 12% and were to mature on the earlier
      of when the Company closed on at least $3,000,000 in financing or May 15, 2005
      (“Maturity Date”). The Senior Notes had an optional conversion feature in that
      the Senior Notes were convertible into shares of the Company’s common stock at
      the option of the holder, in the event the Senior Notes were not repaid prior
      to
      or on the Maturity Date. The conversion price was to be the lower of 90% of
      the
      closing price of the Company’s common stock on the Maturity Date or 90% of the
      average closing prices of the Company’s common stock for the five days prior to
      optional conversion.





At
      the
      closing of the Senior Notes, the investors received warrants to purchase 279,413
      shares of the Company’s common stock. The warrants were exercisable upon
      issuance, have a term of five years and have an exercise price of $5.60 per
      share.





In
      January 2005, the Company received an additional investment of $215,000 of
      Senior Notes, on the same terms as those sold by the Company in the December
      2004 Senior Notes Financing. The holder was granted warrants to purchase a
      total
      of 42,157 shares of the Company’s common stock on the same terms as the warrants
      issued in the December 2004 Senior Notes Financing.





Due
      to
      the financing received by the Company in February and March 2005, the maturity
      of the 12% Senior Notes accelerated from the original maturity date of May
      15,
      2005. The Company repaid the principal balance of $1,640,000 of the Senior
      Notes, plus interest at the rate of 12% per annum. Since the Senior Notes were
      paid off in accordance with their terms, they have no rights of conversion
      into
      the Company’s common stock.





The
      Company allocated the $1,640,000 of proceeds received in connection with the
      financing in December 2004 and January 2005 between the Senior Notes and the
      warrants on a relative fair value basis. Accordingly, the Company allocated
      $735,319 to the Senior Notes and $904,681 to the warrants issued. Since the
      Senior Notes were issued at a discount to the principal balance, which is the
      basis for the optional conversion, the effective conversion price of the Senior
      Notes was less than the fair value of the Company's common stock on the date
      of
      issuance. In accordance with EITF 98-5, " *Accounting
      for Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios* ,"
      a
      beneficial conversion feature of $735,319 was measured at the date of issuance
      and would have been recognized and recorded as a discount on debt and a
      corresponding credit to additional paid-in capital if the Senior Notes had
      not
      been repaid prior to or on the Maturity Date.





The
      discount on the debt of $904,681 related to the warrants was being amortized
      to
      interest expense over the term of the Senior Notes beginning on the date of
      issuance. Amortization of the discount of the Senior Notes was $0 and $851,332
      in the three-month and six-month periods ended June 30, 2005, respectively.
      The
      discount was fully amortized in 2005.




17






**4.**  **Common
      Stock and Warrants**




As
      of
      June 30, 2006, the Company had reserved shares of its authorized 185,000,000
      shares of common stock for future issuance as follows:




Conversion
                of convertible debt
            
            
            4,000,000Series
                A convertible preferred stock and related dividends
            
            
            19,382Outstanding
                common stock warrants
            
            
            7,682,926Outstanding
                stock options
            
            
            2,176,742Possible
                future issuance under stock option plans
            
            
            659,952Total
            
            
            14,539,002




**5.**  **Preferred
      Stock**




***Series
      A Convertible Preferred Stock***




The
      Company has 2,407 shares of Series A convertible preferred stock (“Series A
      preferred stock”) outstanding as of June 30, 2006. These shares are valued based
      upon the liquidation preference (the “Liquidation Preference”) of Series A
      preferred stock of $1,000 per share.




The
      holders of the Series A preferred stock are entitled to receive cumulative
      cash
      dividends at a rate of 8% per annum of the initial liquidation preference of
      $1,000 per share. The Company, at its election, can provide for the payment
      of
      dividends on the Series A preferred stock through the issuance of additional
      shares of Series A preferred stock having an aggregate initial liquidation
      preference equal to the amount of cash dividends otherwise payable. Dividends
      are cumulative from the date of issuance and are payable, when, as and if
      declared by the Board of Directors. The Company is restricted from paying
      dividends on common stock until dividends are paid on Series A preferred in
      full. No dividends have been paid in 2005 or 2006. Cumulative unpaid dividends
      at June 30, 2006 were $353,027.




The
      holders of the outstanding shares of Series A preferred stock are not entitled
      to vote on matters submitted to the Company’s stockholders for voting. However,
      approval of holders of a majority of the outstanding shares of Series A
      preferred stock is required prior to the issuance of a new series of preferred
      stock that ranks senior to the Series A preferred stock. Each share of the
      Series A preferred stock is convertible at the option of the holder, at any
      time
      after the date of issuance, into shares of common stock equal to the Liquidation
      Preference divided by the initial conversion price of $142.40. The conversion
      price is subject to adjustment in accordance with the Company’s articles of
      incorporation.  At the Company’s election, it has the right to redeem any
      outstanding shares of the Series A preferred stock at the Liquidation Preference
      of $1,000 per share.




18






**6.**  **Commitments
      and Contingencies**




***Cancellation
      of warrants***




On
      July
      19, 2002, the Company entered into an irrevocable common stock equity line
      that
      was intended to provide funding to the Company in amounts up to $10.0 million.
      The Company filed a registration statement on Form S-1 with the Securities
      and
      Exchange Commission (“SEC”) on July 31, 2002 relating to this common stock
      equity line agreement. Based on comments received from the Securities and
      Exchange Commission and related communications with the SEC, the Company
      understood that the terms of the equity line financing arrangement were such
      that it would not be able to resolve the staff’s comments in a timely manner and
      seek effectiveness of the registration statement in a timely manner. Due to
      these developments, the length of time involved in completing the transaction,
      and other factors, the Company determined that it was in its best interest
      to
      withdraw the registration statement and not proceed with the equity line.
      Accordingly, on September 17, 2002, the Company submitted to the SEC a request
      to withdraw the registration statement and cancelled all agreements associated
      with the common stock equity line.




In
      connection with the cancellation of the agreements associated with the common
      stock equity line, Talisman, the intended purchaser under the equity line,
      indicated to the Company its intention to retain ownership of the warrants
      to
      purchase 50,000 shares of the Company’s unregistered common stock at an exercise
      price of $4.70 per share that were issued to Talisman upon the execution of
      the
      equity line agreements. It is management’s position, with the advice of legal
      counsel, that the cancellation of these warrants became effective with the
      cancellation of the equity line agreements and that no loss contingency exists.
      Therefore, the Company has not recorded the issuance of these 50,000 warrants
      in
      its financial statements nor disclosed them as part of outstanding warrants.
      The
      Company has sent correspondence to Talisman stating its position that the
      warrants have been cancelled. To date, the Company has not received
      correspondence back from Talisman indicating their concurrence.




**7.**  **Subsequent
      Event**




On
      July
      27, 2006, the Company entered into a Modification Agreement with certain
      investors in which the investors agreed to waive certain of their rights under
      the Securities Purchase Agreement, dated as of November 18, 2005 (the "Purchase
      Agreement"), and all of the other documents and instruments entered into in
      connection with the Purchase Agreement.




In
      consideration for entering into the Modification Agreement, each of the
      investors was issued amended A Warrants (the "Amended A Warrants"). The Amended
      A Warrants, which expire on June 30, 2007, subject to extension under certain
      circumstances, (i) decreased the purchase price of the original A Warrants
      (the
      "Original A Warrants") issued in connection with the Purchase Agreement from
      $2.00 per Unit to $1.10 per Unit, and (ii) increased the number of Units
      underlying the Amended A Warrants to a total of 2,800,000 Units from 2,000,000
      Units underlying the Original A Warrants. Although the number of Units
      increased, the shares issuable upon the exercise of the C-2 Warrants underlying
      such Units remained unchanged at 800,000 shares in the aggregate. The investors
      agreed to waive their right to cause the Company to redeem the 6% Senior Secured
      Debentures issued in connection with the Purchase Agreement in the event that
      the Company engages in a financing transaction or a series of related
      transactions in which 50% or more of the voting power of the Company is disposed
      of.




Beginning
      on July 31, 2006, for each twenty (20) consecutive trading day period in which
      (i) the daily volume weighted average price of the Company’s common stock equals
      or exceeds $1.65 per share and (ii) the daily volume of the Company’s common
      stock traded equals or exceeds 150,000 shares, then the total number of Units
      issuable upon exercise of the Amended A Warrants shall be reduced by twenty-five
      percent (25%), subject to extension as set forth in the Amended A Warrant.




19






**Item
      2.** ***Management'sDiscussion
      and Analysis*** ***of Financial Condition and Results of Operations***




***Forward-Looking
      Statements***




This Form 10-Q contains certain forward-looking statements that we believe
      are
      within the meaning of Section 27A of the Securities Act of 1933 and Section
      21E
      of the Securities Exchange Act of 1934, which are intended to be covered by
      the
      safe harbors created by such acts. For this purpose, any statements that are
      not
      statements of historical fact may be deemed to be forward-looking statements,
      including the statements under "Management's Discussion and Analysis of
      Financial Condition and Results of Operations" regarding our strategy, future
      operations, future expectations or future estimates, financial position and
      objectives of management. Those statements in this Form 10-Q containing the
      words "believes," "anticipates," "plans," "expects" and similar expressions
      constitute forward-looking statements, although not all forward-looking
      statements contain such identifying words. These forward-looking statements
      are
      based on our current expectations and are subject to a number of risks,
      uncertainties and assumptions relating to our operations, results of operations,
      competitive factors, shifts in market demand and other risks and uncertainties.
      The most important factors that could prevent us from achieving our stated
      goals
      include, but are not limited to, the following:




·
            our
                ability to generate sufficient working capital to meet our operating
                requirements;


·
            our
                future expense levels (including cost of revenues, research and
                development, sales and marketing, and general and administrative
                expenses);


·
            our
                future revenue opportunities;


·
            our
                ability to develop and enter into strategic relationships with wireless
                service providers, wirelesssoftware developers, semiconductor and device designers, mobile and
                wireless device manufacturers and contentproviders;


·
            timely
                deployment by wireless service providers, semiconductor and device
                designers, and wireless devicemanufacturers
                of our wireless applications in their networks and mobile information
                devices;


·
            the
                continued growth in demand for wireless and mobile
                usage;


·
            our
                new product development and acceleration of commercial deployment
                of such
                products;


·
            the
                future adoption of our current and future products, services and
                technologies;


·
            the
                future growth of our customer base;


·
            technological
                competition, which creates the risk of our technology being rendered
                obsolete ornoncompetitive;


·
            the
                lack of patent protection with respect to the Company's technology;


·
            potential
                infringement of the patent rights of third parties;
                and


·
            evolving
                technology trends.




Although we believe that the assumptions underlying our forward-looking
      statements are reasonable, any of the assumptions could be inaccurate and actual
      results may differ from those indicated by the forward-looking statements
      included in this Form 10-Q. In light of the significant uncertainties inherent
      in the forward-looking statements included in this Form 10-Q, you should not
      consider the inclusion of such information as a representation by us or anyone
      else that we will achieve such results. Moreover, we assume no obligation to
      update these forward-looking statements to reflect actual results, changes
      in
      assumptions or changes in other factors affecting such forward-looking
      statements.




20






**Overview**




Oasys’
      predecessor company, High Speed Net Solutions, Inc., was founded in 1984.
      Summus, Ltd. was merged into High Speed in February 2001 and High Speed changed
      its name in February 2002 to Summus, Inc. (USA). On March 11, 2005, Summus,
      Inc.
      (USA) was reincorporated into the State of Delaware as Summus, Inc. On January
      30, 2006, we amended our Certificate of Incorporation to change our corporate
      name to Oasys Mobile, Inc.




Oasys
      Mobile does business in three key areas in the mobile media applications
      market:





·
            OasysMobile.com
                - Our Mobile Lifestyle Portal.


·
            Branded
                Mobile Applications.


·
            White
                Label Services.




*OasysMobile.com*





In
      January 2006, we launched our new web portal OasysMobile.com, a leading-edge
      mobile lifestyle portal that is directed at the teen and young adult market
      that
      allows users to access content outside of the distribution decks of the wireless
      carriers. OasysMobile.com also allows consumers to buy, own, and keep their
      mobile content beyond the life of their cell phone.





Through
      OasysMobile.com, we can distribute our own proprietary mobile content and vast
      amounts of third party mobile content and offer creative pricing and bundling
      of
      content and services directly to mobile consumers. Oasys Mobile built its mobile
      portal after seeing the opportunity to create additional distribution channels.
      By leveraging our experience in the mobile media space, Oasys Mobile is able
      to
      offer a comprehensive suite of services that add tremendous value to the mobile
      data consumer.





*Branded
      Mobile Applications*





Oasys
      Mobile is a leading provider of premium mobile media content, products and
      services that are distributed through top-tier wireless carriers in the United
      States and abroad, as well as through our OasysMobile.com portal. We develop,
      publish and distribute more than 34 branded mobile applications in four major
      categories:





·
            Games;


·
            Messaging;


·
            Personalization;
                and


·
            Entertainment.





We
      currently have relationships with wireless carriers that account for 97% of
      all
      wireless subscribers in the United States. We also have relationships with
      international carriers covering Europe, Asia, Canada, Latin America, Australia,
      Israel, the United Kingdom, Ireland, Italy and China.





In
      2005,
      Oasys Mobile announced nine new products, thirteen new carriers or distribution
      partners and six new content partnerships. Oasys Mobile's partner and product
      portfolio includes such household names as Sony BMG, Mattel, Churchill
      Downs, Golf Digest, Phil Hellmuth, The Wall Street Journal, Howard Lederer
      and
      The Associated Press. Mobile media applications based on these brands, and
      other
      popular consumer applications, are deployed across 75 major wireless carriers
      and distribution partners in the United States and abroad.




21






Oasys
      Mobile builds its consumer applications for most major mobile platforms,
      including QUALCOMM’s Binary Runtime Environment for WirelessTM (BREWTM), JavaTM 2
      Platform, Micro Edition (J2METM), SymbianTM OS and Wireless Application Protocol
      (WAP). We currently distribute our branded applications primarily through major
      wireless carriers who make our products available to their customers on their
      distribution decks. Users typically purchase and download our applications
      through a wireless carrier's branded mobile data service accessed directly
      from
      their mobile handsets, which are enabled by technologies such as BREW, J2ME,
      Symbian and WAP. These wireless carrier services include, among others, Verizon
      Wireless' *Get
      It Now* ,
      Cingular’s *Media
      Mall* ,
      Sprint’s PCS *Vision,* Alltel’s *Axcess,* US
      Cellular’s *Easy
      Edge* and
      T-Mobile’s *t-zones* .





Users
      are
      charged a one-time or monthly subscription fee for the application which is
      billed to them on their mobile phone bills. The wireless carriers retain a
      percentage of the fee and remit the balance to us. We then pay the entities
      from
      which we license content a portion of this amount. The wireless distribution
      of
      our applications eliminates traditional publishing complexities, including
      physical production, packaging, shipping, inventory management and return
      processing.




*White
      Label Services*





The
      new
      Oasys Mobile white label products and services leverage the same content and
      functionality as OasysMobile.com and gives wireless carriers and content
      providers access to alternate distribution channels which allows them to offer
      their mobile offerings outside of the wireless carriers’ distribution decks and
      reach more customers. For maximum impact, our web and WAP portals can be branded
      under a white-label partner’s brand, creating an outsourced mobile storefront or
      additional content source.





In
      addition, Oasys Mobile can quickly and easily provide a content brand or carrier
      its own back-end photo-sharing platform. The photo platform has a user-friendly
      interface that makes it easy for subscribers to save and share photos and order
      prints of all their camera and online album pictures right from their camera
      phone. Oasys Mobile has created back-end photo-sharing platforms for Boost
      Mobile and Sprint/Nextel, which are currently both available.




*Other
      Matters*




To
      date,
      the Company has experienced significant operating losses as we have made
      investments in application development. The Company is focused on the
      development and delivery of applications and the marketing of those applications
      to make substantial progress in revenue generation. We plan to expand our market
      presence by partnering with additional wireless carriers as well as increasing
      subscriber adoption of our applications. Our ability to generate profits and
      positive cash flow from operations will depend primarily on increasing revenues
      as well as continuing cost control measures.




22






**Results
      of Operations**




**Three-Month
      Period Ended June 30, 2006 Compared to Three-Month Period Ended June 30,
      2005**




*Revenues*




***Three
                Months Ended June 30*****2006**
            
            **%
                  of Total**
              **Revenues**
            
            **2005**
            
            **%
                  of Total**
              **Revenues**
            
            **$
                Change**
            
            **%
                Change**Revenues
                by category:Wireless
                applicationsand contracts
            
            $
            1,806,376
            
            
            99.9
            %
            $
            1,792,686
            
            
            99.9
            %
            $
            13,690
            
            
            0.8
            %Wireless
                license fees
            
            
            2,100
            
            
            0.1
            
            
            1,500
            
            
            0.1
            
            
            600
            
            
            40.0
            %Total
                revenues
            
            $
            1,808,476
            
            
            100.0
            %
            $
            1,794,186
            
            
            100.0
            %
            $
            14,290
            
            
            0.8
            %




*Wireless
      Applications and Contracts.* Revenue
      from wireless applications and contracts increased $13,690 to $1,806,376 in
      the
      three-month period ended June 30, 2006, up 0.8% from $1,792,686 in the
      three-month period ended June 30, 2005. The increase in revenue from wireless
      applications and contracts resulted from the increase in sales of existing
      wireless applications and additional wireless applications developed by Oasys
      Mobile, launched by several wireless carriers and purchased by end-users. We
      continue to increase our subscriber base as well as expanding to new carriers.
      The Company recently released several products, including Mattel’s UNO®
Challenge and Mobile Graffiti, which both have shown strong growth. Our contract
      with Sports Illustrated expired March 14, 2006. Excluding revenues generated
      from Sports Illustrated, our revenues from wireless subscriptions and downloads
      in the three-month period ended June 30, 2006 increased 32.1% over the
      three-month period ended June 30, 2005.




Revenue
      earned from wireless applications is recognized upon delivery and acceptance
      by
      the end-user either as a one-time purchase or a monthly
      subscription.




*Wireless
      License Fees.* Revenue
      earned from wireless license fees totaled $2,100 and $1,500 in the three-month
      periods ended June 30, 2006 and 2005, respectively.




23






*Costs
      of Revenues*




**Three
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**Cost
                of revenues by category:Wireless applications and contracts
            
            $
            966,618
            
            $
            883,428
            
            $
            83,190
            
            
            9.4
            %Total
                cost of revenues
            
            $
            966,618
            
            $
            883,428
            
            $
            83,190
            
            
            9.4
            %




*Wireless
      Applications and Contracts.* Costs
      of
      wireless applications and contracts increased $83,190 to $966,618 in the
      three-month period ended June 30, 2006, up 9.4% from $883,428 in the three-month
      period ended June 30, 2005. The increase in costs of wireless applications
      and
      contracts resulted from the increase in sales of existing wireless applications
      and additional wireless applications developed by the Company, launched by
      several wireless carriers and purchased by end-users. These costs are direct
      costs associated with the sale and delivery of wireless applications and
      primarily consist of third-party hosting fees and fees associated with content
      information provided by our content providers for wireless applications which
      were deployed during the three-month period ended June 30, 2006. The costs
      related to third-party hosting are incurred on a monthly basis and are primarily
      fixed in nature regardless of the revenue generated by the related applications.
      Our contracts with our content partners have various cost structures. Certain
      content partner arrangements have minimum payment requirements regardless of
      revenues. Therefore, our costs of revenues could vary depending on the products
      sold in a given period. **




*Gross
      Profit*




**Three
                Months Ended June
                30****2006**
            
            **2005**
            
            **$
                  Change**
            
            **%
                  Change**Gross
                profit by category:Wireless
                applications and contracts
            
            $
            839,758
            
            $
            909,258
            
            $
            (69,500
            )
            
            (7.6
            )%Wireless
                license fees
            
            
            2,100
            
            
            1,500
            
            
            600
            
            
            40.0
            %Total
                gross profit
            
            $
            841,858
            
            $
            910,758
            
            $
            (68,900
            )
            
            (7.6
            )%




*Wireless
      Applications and Contracts.* Gross
      profit resulting from the development and deployment of wireless applications
      decreased $69,500 to $839,758 for the three-month period ended June 30, 2006,
      a
      decrease of 7.6% over the gross profit for the three-month period ended June
      30,
      2005 of $909,258. The decrease in gross profit resulting from these activities
      is due primarily to certain new content partner arrangements with fixed royalty
      payments. Our contracts with our content partners have various cost structures.
      Certain content partner arrangements have minimum payment requirements
      regardless of revenues. Therefore, our gross profit could vary depending on
      the
      products sold in a given period. The costs for these revenues include costs
      that
      are primarily fixed in nature, consisting mostly of third-party hosting fees
      and
      content information provided by certain of our content providers, and costs
      that
      are primarily variable in nature, consisting mostly of third-party content
      information.






*Wireless
      License Fees.* Gross
      profit resulting from wireless license fees totaled $2,100 and $1,500 for the
      three-month periods ended June 30, 2006 and 2005, respectively. The Company
      did
      not incur any specific direct costs associated with the sale, delivery, or
      installation of the software underlying the license agreements consummated
      during the period. Additionally, the Company does not expect to incur any future
      obligations relating to these license fees.




24






*General
      and Administrative Expenses*




**Three
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**General
                and administrative
            
            $613,235
            
            $708,156
            
            $(94,921)
            
            
            (13.4)%




General
      and administrative expenses consist primarily of salaries, consulting fees,
      office operations, administrative and general management activities, including
      legal, accounting, investor relations and other professional fees. General
      and
      administrative expenses for the three-month period ended June 30, 2006 were
      $613,235, compared to $708,156 for three-month period ended June 30, 2005.
      The
      decrease in general and administrative expenses was due to fees associated
      with
      the Qualcomm QuickPay program during the three-month period ended June 30,
      2005,
      as well as decreases in general office expenses. The Company terminated its
      participation in the Qualcomm QuickPay program in early 2006.




Res *earch
      and Development Expenses*




**Three
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**Research
                and development
            
            $902,648
            
            $677,114
            
            $225,534
            
            33.3%




Research
      and development expenses for the three-month period ended June 30, 2006 were
      $902,648 compared to $677,114 for the three-month period ended June 30, 2005.
      The increase in research and development expenses is due to the increase in
      the
      number of applications that the Company is developing for future revenue
      generation, as well as continual development for the Oasys Mobile portal. We
      currently have several new products in development. The Oasys Mobile portal
      launched during the first quarter of 2006 and we are continuing to add new
      functionality. We are focusing our resources on the development of new products
      for rapid deployment.




*Sales
      and Marketing Expenses*




**Three
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**Sales
                and marketing
            
            $759,950
            
            $355,965
            
            $403,985
            
            113.5%




Sales
      and
      marketing expenses consist primarily of salaries, consulting fees, marketing
      agency fees, marketing programs, collateral and other professional fees. Sales
      and marketing expenses for the three-month period ended June 30, 2006 were
      $759,950 compared to $355,965 for the three-month period ended June 30, 2005.
      The increase in sales and marketing expenses during the current period as
      compared to the prior period was primarily due to the launch of the new Oasys
      Mobile portal in 2006 and certain carrier and portal marketing campaigns. The
      increase in sales and marketing expenses reflects our focus to deploy and market
      new products in order to continue increasing revenues in a cost effective
      manner.




25






*Non-Cash
      Compensation Expenses*




**Three
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**Non-cash
                compensation
            
            $341,353
            
            $9,666
            
            $331,687
            
            3,431.5%




Non-cash
      compensation for the three-month period ended June 30, 2006 was $341,353
      compared to $9,666 for the three-month period ended June 30, 2005. The increase
      in non-cash compensation expense was due to new accounting requirements for
      the
      expensing of stock options issued to employees. Non-cash compensation for the
      three-month period ended June 30, 2006 reflects the fair value of employee
      stock
      options earned during the period. Non-cash compensation for the three-month
      period ended June 30, 2005 reflects the amortization for three months of
      deferred compensation resulting from stock options granted in prior years,
      at
      prices below the fair value of the underlying common stock.




*Non-Cash
      Consulting Expenses*




**Three
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**Non-cash
                consulting expense
            
            $-
            
            $5,199
            
            $(5,199)
            
            (100.0)%




Non-cash
      consulting expense for the three-month period ended June 30, 2005, in the amount
      of $5,199 is attributable to 1,649 stock warrants granted to consultants for
      services, valued using the Black-Scholes option-pricing model.




There
      was
      no non-cash consulting expense for the three-month period ended June 30,
      2006.




*Interest
      Expense, net*




**Three
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**Interest,
                net
            
            $60,035
            
            $1,492
            
            $58,543
            
            3,923.8%




Interest
      expense, net, for the three-month period ended June 30 2006, was $60,035
      compared to interest expense of $1,492 for three-month period ended June 30,
      2005. Interest expense for the three-month period ended June 30, 2006 primarily
      related to interest costs associated with convertible notes. There were no
      convertible notes outstanding during the three-month period ended June 30,
      2005.
      The interest expense for the three-month period ended June 30, 2006 is net
      of
      interest income earned on cash.




26






*Amortization
      of discount on debt and beneficial conversion feature*




**Three
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**Amortization
                of discount on debt and
              beneficial
                conversion feature
            
            $1,235,993
            
            $-
            
            $1,235,993
            
            100.0%




Amortization
      of discount on debt and beneficial conversion feature for the three-month period
      ended June 30, 2006 was $1,235,993. This related to amortization of the
      discounts on the convertible notes payable entered into in November 2005. There
      were no convertible notes outstanding during the three-month period ended June
      30, 2005.




*Net
      Loss*




**Three
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**Net
                loss
            
            $3,071,356
            
            $846,834
            
            $2,224,522
            
            262.7%




As
      a
      result of the factors discussed above, the net losses for the three-month
      periods ended June 30, 2006 and 2005 were $3,071,356 and $846,834, respectively.






**Six-Month
      Period Ended June 30, 2006 Compared to Six-Month Period Ended June 30,
      2005**




*Revenues*




**Six
                Months Ended June 30****2006**
            
            **%
                  of Total**
              **Revenues**
            
            **2005**
            
            **%
                  of Total**
              **Revenues**
            
            **$
                Change**
            
            **%
                Change**Revenues
                by category:Wireless
                applicationsand contracts
            
            $
            3,902,891
            
            
            99.4
            %
            $
            3,779,033
            
            
            99.9
            %
            $
            123,858
            
            
            3.3
            %Wireless
                license fees
            
            
            22,750
            
            
            0.6
            
            
            5,200
            
            
            0.1
            
            
            17,550
            
            
            337.5
            %Total
                revenues
            
            $
            3,925,641
            
            
            100.0
            %
            $
            3,784,233
            
            
            100.0
            %
            $
            141,408
            
            
            3.7
            %




*Wireless
      Applications and Contracts.* Revenue
      from wireless applications and contracts increased $123,858 to $3,902,891 in
      the
      six-month period ended June 30, 2006, up 3.3% from $3,779,033 in the six-month
      period ended June 30, 2005. The increase in revenue from wireless applications
      and contracts resulted from the increase in sales of existing wireless
      applications and additional wireless applications developed by Oasys Mobile,
      launched by several wireless carriers and purchased by end-users. We continue
      to
      increase our subscriber base as well as expanding to new carriers. The Company
      recently released several products, including Mattel’s UNO® Challenge and Mobile
      Graffiti, which both have shown strong growth. Our contract with Sports
      Illustrated expired March 14, 2006. Excluding revenues generated from Sports
      Illustrated, our revenues from wireless subscriptions and downloads in the
      six-month period ended June 30, 2006 increased 28.8% over the six-month period
      ended June 30, 2005.




27






Revenue
      earned from wireless applications is recognized upon delivery and acceptance
      by
      the end-user either as a one-time purchase or a monthly
      subscription.




*Wireless
      License Fees.* Revenue
      earned from wireless license fees totaled $22,750 and $5,200 in the six-month
      periods ended June 30, 2006 and 2005, respectively.




*Costs
      of Revenues*




**Six
                  Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**Cost
                of revenues by category:Wireless applications and contracts
            
            $
            2,077,408
            
            $
            1,839,615
            
            $
            237,793
            
            
            12.9Total
                cost of revenues
            
            $
            2,077,408
            
            $
            1,839,615
            
            $
            237,793
            
            
            12.9




*Wireless
      Applications and Contracts.* Costs
      of
      wireless applications and contracts increased $237,793 to $2,077,408 in the
      six-month period ended June 30, 2006, up 12.9% from $1,839,615 in the six-month
      period ended June 30, 2005. The increase in costs of wireless applications
      and
      contracts resulted from the increase in sales of existing wireless applications
      and additional wireless applications developed by the Company, launched by
      several wireless carriers and purchased by end-users. These costs are direct
      costs associated with the sale and delivery of wireless applications and
      primarily consist of third-party hosting fees and fees associated with content
      information provided by our content providers for wireless applications which
      were deployed during the six-month period ended June 30, 2006. The costs related
      to third-party hosting are incurred on a monthly basis and are primarily fixed
      in nature regardless of the revenue generated by the related applications.
      Our
      contracts with our content partners have various cost structures. Certain
      content partner arrangements have minimum payment requirements regardless of
      revenues. Therefore, our costs of revenues could vary depending on the products
      sold in a given period. **




*Gross
      Profit*




**Six
                Months Ended June
                30****2006**
            
            
            **2005**
            
            
            **$
                  Change**
            
            
            **%
                  Change**Gross profit
              by
              category:Wireless
                applications and contracts
            
            $
            1,825,483
            
            $
            1,939,418
            
            $
            (113,935
            )
            
            (5.9
            )%Wireless
                license fees
            
            
            22,750
            
            
            5,200
            
            
            17,550
            
            
            337.5
            %Total
                gross profit
            
            $
            1,848,233
            
            $
            1,944,618
            
            $
            (96,385
            )
            
            (5.0
            )%




*Wireless
      Applications and Contracts.* Gross
      profit resulting from the development and deployment of wireless applications
      decreased $113,935 to $1,825,483 for the six-month period ended June 30, 2006,
      a
      decrease of 5.9% over the gross profit for the six-month period ended June
      30,
      2005 of $1,939,418. The decrease in gross profit resulting from these activities
      is due primarily to certain new content partner arrangements with fixed royalty
      payments. Our contracts with our content partners have various cost structures.
      Certain content partner arrangements have minimum payment requirements
      regardless of revenues. Therefore, our gross profit could vary depending on
      the
      products sold in a given period. The costs for these revenues include costs
      that
      are primarily fixed in nature, consisting mostly of third-party hosting fees
      and
      content information provided by certain of our content providers, and costs
      that
      are primarily variable in nature, consisting mostly of third-party content
      information.




28






*Wireless
      License Fees.* Gross
      profit resulting from wireless license fees totaled $22,750 and $5,200 for
      the
      six-month periods ended June 30, 2006 and 2005, respectively. The Company did
      not incur any specific direct costs associated with the sale, delivery, or
      installation of the software underlying the license agreements consummated
      during the period. Additionally, the Company does not expect to incur any future
      obligations relating to these license fees.




*General
      and Administrative Expenses*




**Six
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**General
                and administrative
            
            $1,430,507
            
            $1,435,259
            
            $(4,752)
            
            (0.3)%




General
      and administrative expenses consist primarily of salaries, consulting fees,
      office operations, administrative and general management activities, including
      legal, accounting, investor relations and other professional fees. General
      and
      administrative expenses for the six-month period ended June 30, 2006 were
      $1,430,507, compared to $1,435,259 for six-month period ended June 30,
      2005.




Res *earch
      and Development Expenses*




**Six
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**Research
                and development
            
            $1,720,526
            
            $1,321,690
            
            $398,836
            
            30.2%




Research
      and development expenses for the six-month period ended June 30, 2006 were
      $1,720,526 compared to $1,321,690 for the six-month period ended June 30, 2005.
      The increase in research and development expenses is due to the increase in
      the
      number of applications that the Company is developing for future revenue
      generation, as well as continual development for the Oasys Mobile portal. We
      currently have several new products in development. The Oasys Mobile portal
      launched during the first quarter of 2006 and we are continuing to add new
      functionality. We are focusing our resources on the development of new products
      for rapid deployment.




*Sales
      and Marketing Expenses*




**Six
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**Sales
                and marketing
            
            $1,910,510
            
            $639,264
            
            $1,271,246
            
            198.9%




Sales
      and
      marketing expenses consist primarily of salaries, consulting fees, marketing
      agency fees, marketing programs, collateral and other professional fees. Sales
      and marketing expenses for the six-month period ended June 30, 2006 were
      $1,910,510 compared to $639,264 for the six-month period ended June 30, 2005.
      The increase in sales and marketing expenses during the current period as
      compared to the prior period was primarily due to the launch of the new Oasys
      Mobile portal in 2006 and certain carrier and portal marketing campaigns. The
      increase in sales and marketing expenses reflects our focus to deploy and market
      new products in order to continue increasing revenues in a cost effective
      manner.




29






*Non-Cash
      Compensation Expenses*




**Six
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**Non-cash
                compensation
            
            $657,769
            
            $20,734
            
            $637,035
            
            3,072.4%




Non-cash
      compensation for the six-month period ended June 30, 2006 was $657,769 compared
      to $20,734 for the six-month period ended June 30, 2005. The increase in
      non-cash compensation expense was due to new accounting requirements for the
      expensing of stock options issued to employees. Non-cash compensation for the
      six-month period ended June 30, 2006 reflects the fair value of employee stock
      options earned during the period. Non-cash compensation for the six-month period
      ended June 30, 2005 reflects the amortization for six months of deferred
      compensation resulting from stock options granted in prior years, at prices
      below the fair value of the underlying common stock.




*Non-Cash
      Consulting Expenses*




**Six
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**Non-cash
                consulting expense
            
            $-
            
            $10,401
            
            $(10,401)
            
            (100.0)%




Non-cash
      consulting expense for the six-month period ended June 30, 2005, in the amount
      of $10,401 is attributable to 2,767 stock warrants granted to consultants for
      services, valued using the Black-Scholes option-pricing model.




There
      was
      no non-cash consulting expense for the six-month period ended June 30,
      2006. **




*Non-Cash
      Settlements*




**Six
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**Non-cash
                settlements
            
            $-
            
            $58,750
            
            $(58,750)
            
            (100.0)%




Non-cash
      settlements totaling $58,750 for the six months ended June 30, 2005 resulted
      from the settlement of the remaining amount of a note payable with Holland
&
Knight LLP (“H&K”) of $184,382 with the issuance to H&K of 47,673 shares
      of the Company’s common stock. The fair value of the 47,673 shares of common
      stock was estimated at $243,132, based on the traded value of the Company’s
      common stock on the date of the settlement agreement. The difference between
      the
      estimated fair value of the 47,673 common shares and the recorded value of
      the
      liability of $184,382, totaling $58,750, was recorded as settlement
      loss.




The
      Company did not enter into any non-cash settlements during the six-month period
      ended June 30, 2006.




30






*Interest
      Expense, net*




**Six
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**Interest,
                net
            
            $102,358
            
            $44,829
            
            $57,529
            
            128.3%




Interest
      expense, net, for the six-month period ended June 30 2006, was $102,358 compared
      to interest expense of $44,829 for six-month period ended June 30, 2005.
      Interest expense for the six-month periods ended June 30, 2006 and 2005
      primarily related to interest costs associated with convertible notes. The
      Senior Notes outstanding in 2005 were repaid in March 2005. The interest expense
      for the six-month period ended June 30, 2006 is net of interest income earned
      on
      cash.




*Amortization
      of discount on debt and beneficial conversion feature*




**Six
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**Amortization
                of discount on debt and
              beneficial
                conversion feature
            
            $2,458,404
            
            $851,332
            
            $1,607,072
            
            188.8%




Amortization
      of discount on debt and beneficial conversion feature for the six-month period
      ended June 30, 2006 was $2,458,404. This related to amortization of the
      discounts on the convertible notes payable entered into in November 2005.




Amortization
      of discount on debt and beneficial conversion feature for the six-month period
      ended June 30, 2005 was $851,332. This related to amortization of the discounts
      on the convertible notes payable entered into in December 2004. These notes
      were
      repaid in March 2005 and the discount was fully amortized as interest expense
      in
      the six-month period ended June 30, 2005.




*Net
      Loss*




**Six
                Months Ended June 30****2006**
            
            **2005**
            
            **$
                Change**
            
            **%
                Change**Net
                loss
            
            $6,431,841
            
            $2,437,641
            
            $3,994,200
            
            163.9%




As
      a
      result of the factors discussed above, the net losses for the six-month periods
      ended June 30, 2006 and 2005 were $6,431,841 and $2,437,641, respectively.




31






**Liquidity
      and Capital Resources**




As
      of
      June 30, 2006 we had $5,198,770 of cash on hand, working capital of $998,913,
      and approximately $5.9 million in current liabilities, including $3.04 million
      in convertible notes payable.




In
      November 2005, Oasys Mobile entered into senior debt agreements with certain
      investors for $8,000,000 of financing in the form of notes payable (the "Senior
      Secured Debentures"). The Senior Secured Debentures bear interest at 6% and
      mature on June 30, 2007 (“Maturity Date”). The Senior Secured Debentures are
      convertible into shares of Oasys Mobile’s common stock at the option of the
      holder at a conversion price of $2.00 per share. The Senior Secured Debentures
      are also subject to automatic conversion if Oasys Mobile meets certain revenue
      or trading stock price milestones. The Senior Secured Debentures are secured
      by
      all of the assets of Oasys Mobile.




On
      July
      27, 2006, the Company entered into a Modification Agreement in which the
      investors agreed to waive certain of their rights under the documents and
      instruments entered into in connection with the Senior Secured Debentures.




In
      consideration for entering into the Modification Agreement, each of the
      investors was issued Amended A Warrants. The Amended A Warrants, which expire
      on
      June 30, 2007, subject to extension under certain circumstances, (i) decreased
      the purchase price of the Original A Warrants issued in connection with the
      Purchase Agreement from $2.00 per Unit to $1.10 per Unit, and (ii) increased
      the
      number of Units underlying the Amended A Warrants to a total of 2,800,000 Units
      from 2,000,000 Units underlying the Original A Warrants. Although the number
      of
      Units increased, the shares issuable upon the exercise of the C-2 Warrants
      underlying such Units remained unchanged at 800,000 shares in the aggregate.
      The
      investors agreed to waive their right to cause the Company to redeem the Senior
      Secured Debentures issued in connection with the Purchase Agreement in the
      event
      that the Company engages in a financing transaction or a series of related
      transactions in which 50% or more of the voting power of the Company is disposed
      of.




Beginning
      on July 31, 2006, for each twenty (20) consecutive trading day period in which
      (i) the daily volume weighted average price of the Company’s common stock equals
      or exceeds $1.65 per share and (ii) the daily volume of the Company’s common
      stock traded equals or exceeds 150,000 shares, then the total number of Units
      issuable upon exercise of the Amended A Warrants shall be reduced by twenty-five
      percent (25%), subject to extension as set forth in the Amended A Warrant.




*Other
      Matters*




From
      inception through our 2005 fiscal year, our primary source of funding for our
      operations came from the issuance of shares of our common stock in private
      placements to investors. We believe that we have enough working capital to
      fund
      and sustain our business operations through 2006. However, business
      opportunities, such as product or geographic expansion, or the acquisition
      of
      product lines or companies may present themselves. If we were to pursue these
      opportunities, they may require that we raise additional capital through the
      issuance of our equity securities or that we issue shares of our common stock
      or
      other equity securities in connection with acquisitions. If we have to raise
      additional funding, we cannot guarantee that we will be able to raise the
      necessary capital or that, if we do so, it will be on favorable terms. We may
      have to sell equity at below market rates, and any future sales of our capital
      stock to finance our business plan will dilute our existing stockholders'
      ownership.




32






Subject
      to our liquidity constraints (including our need to dedicate cash flow to meet
      our obligations on a timely basis), we intend to invest a larger portion of
      our
      working capital on:




·
            increasing
                subscriber adoption of our applications through marketing and
                promotions;


·
            securing
                top-tier brands;


·
            the
                development and delivery of new wireless
                applications;


·
            the
                marketing of applications to lay the foundation of future substantial
                revenue generation; and


·
            the
                marketing of our Oasys Mobile portal to build and retain subscriber
                base.




*Cash
      Flow Information*




**Six
                Months EndedJune 30****2006**
            
            **2005**Cash
                used in operating activities
            
            $
            (3,752,381
            )
            $
            (1,056,060
            )Cash
                used in investing activities
            
            $
            (28,007
            )
            $
            (31,717
            )Cash
                (used in) provided by financing activities
            
            $
            (6,000
            )
            $
            2,848,794




*Cash
      Flow used in Operating Activities.* Net
      cash
      used in operating activities was $3,752,381 in the six-month period ended June
      30, 2006, compared to $1,056,060 in the corresponding period of the prior year.
      The increase in net cash used in operating activities was due to the following:




·
            investments
                in the development and marketing planning for the new Oasys Mobile
                portal
                launched in the first quarter of 2006;
                and


·
            marketing
                expenses related to several carrier and portal marketing
                campaigns;


·
            a
                two-month lag on payments from Qualcomm due to our ending our
                participation in the Qualcomm Quick Pay Program early in 2006;


·
            increases
                in payments to service providers in preparation for the launch of
                the
                portal.




*Cash
      Flow used in Investing Activities.* Net
      cash
      used in investing activities was $28,007 and $31,717 in the six-month periods
      ended June 30, 2006 and 2005, respectively, representing computer equipment
      purchases.




*Cash
      Flow (used in) provided by Financing Activities.* Cash
      flow
      used in financing activities in the six-month period ended June 30, 2006 related
      to payments on capital lease obligations. Net cash provided by financing
      activities was $2,848,794 in the six-month period ended June 30, 2005 and
      consisted of the following:




·
            proceeds
                from issuance of Senior Notes of
                $215,000.


·
            proceeds
                from the exercise of 1,264,296 stock warrants and 58,960 stock options
                of
                $4,332,878.


·
            principal
                payments on Senior Notes of
                ($1,640,000).


·
            principal
                payments on note payable obligations of
                ($59,084).




**Contractual
      Obligations**




At
      June
      30, 2006, we did not have any material commitments for capital expenses. Our
      principal commitments consisted of obligations under operating leases, notes
      payable and content partner arrangements.




33






The
      following table summarizes our contractual obligations at June 30, 2006 and
      the
      effect these obligations are expected to have on our liquidity and cash flows
      in
      future periods.




**Total**
            
            **Operating**
              **Leases**
            
            **Notes**
              **Payable**
            
            **Purchase**
              **Obligations**
            
            **Capital**
              **Leases**Six
                months ending December 31, 2006
            
            $
            292,673
            
            $
            122,767
            
            $
            77,500
            
            $
            84,000
            
            $
            8,406Year
                ending December 31, 2007
            
            
            8,189,528
            
            
            4,716
            
            
            8,000,000
            
            
            168,000
            
            
            16,812Year
                ending December 31, 2008
            
            
            21,405
            
            
            4,716
            
            
            -
            
            
            -
            
            
            16,689Year
                ending December 31, 2009
            
            
            2,362
            
            
            1,965
            
            
            -
            
            
            -
            
            
            397Total
                contractual obligations
            
            $
            8,505,968
            
            $
            134,164
            
            $
            8,077,500
            
            $
            252,000
            
            $
            42,304




**New
      Accounting Pronouncements**




In
      December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
      No. 123(R), *Share-Based
      Payment* ,
      which
      is a revision of SFAS Statement No. 123, *Accounting
      for Stock-Based Compensation* (“SFAS
      No. 123”). SFAS No. 123(R) supersedes APB No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      amends FASB Statement No. 95, *Statement
      of Cash Flows* .
      Generally, the approach in SFAS No. 123(R) is similar to the approach
      described in SFAS No. 123. However, SFAS No. 123(R) requires all
      share-based payments to employees, including grants of employee stock options,
      to be recognized in the income statement based on their fair values. Pro forma
      disclosure is no longer an alternative. We adopted SFAS No. 123(R) on
      January, 2006. SFAS No. 123(R) requires us to account for share-based
      payment transactions using a fair value-based method and recognize the related
      expense in our results of operations. Prior to our adoption of SFAS
      No. 123(R), as permitted by SFAS No. 123, we accounted for share-based
      payments to employees using the APB 25 intrinsic value method and, therefore
      we
      generally recognized compensation expense for restricted stock awards and did
      not recognize compensation cost for employee stock options as such options
      had
      an exercise price equal to the market price of the underlying common stock
      on
      the date of grant. SFAS No. 123(R) allows companies to choose one of two
      transition methods: the modified prospective transition method or the modified
      retrospective transition method. We chose to use the modified prospective
      transition methodology. We have not restated our financial results from prior
      periods as a result of our adoption of SFAS No. 123(R).




Under
      the
      fair value recognition provisions of SFAS No. 123(R), stock-based
      compensation cost is estimated at the grant date based on the fair value of
      the
      award and is recognized as expense over the requisite service period of the
      award. The fair value of restricted stock awards is determined by reference
      to
      the fair market value of our common stock on the date of grant. Consistent
      with
      the valuation method we used for disclosure-only purposes under the provisions
      of SFAS No. 123, we use the Black-Scholes model to value service condition
      and performance condition option awards under SFAS No. 123(R). For awards
      with only service conditions and graded-vesting features, we recognize
      compensation cost on a straight-line basis over the requisite service period.




Determining
      the appropriate fair value model and related assumptions requires judgment,
      including estimating stock price volatility, forfeiture rates, and expected
      terms. The expected volatility rates are estimated based on historical
      volatilities of our common stock. The expected term represents the average
      time
      that options that vest are expected to be outstanding based on the vesting
      provisions and our historical exercise, cancellation and expiration patterns.
      We
      estimate pre-vesting forfeitures when recognizing compensation expense based
      on
      historical rates. Management will continue to assess the assumptions and
      methodologies used to calculate estimated fair value of share-based
      compensation. Circumstances may change and additional data may become available
      over time, which could result in changes to these assumptions and methodologies,
      and thereby materially impact our fair value determination.




34






During
      the quarter ended June 30, 2006, we recognized stock-based compensation expense
      related to employee stock options of approximately $341,000. As of June 30,
      2006, we had unrecognized stock-based compensation of $2.1 million related
      to
      non-vested employee stock options awards, which is expected to be recognized
      over an estimated weighted average period of 1.12 years.





In
      May
      2005, the FASB issued SFAS No. 154, “ *Accounting
      Changes and Error Corrections”* (“SFAS
      No. 154”), a replacement of APB Opinion No. 20 and SFAS No. 3. SFAS No. 154
      requires retrospective application to prior periods’ financial statements of a
      voluntary change in accounting principles unless it is impracticable. APB
      Opinion No. 20, “ *Accounting
      Changes”* ,
      previously required that most voluntarychanges in accounting principle be
      recognized by including in net income of the period of the change the cumulative
      effect of changing to the new accounting principle. This statement was effective
      beginning on January 1, 2006. The adoption of SFAS No. 154 did not have a
      material impact on our financial statements.




**Description
      of Critical Accounting Policies**




The
      preparation of our financial statements in conformity with accounting principles
      generally accepted in the United States requires us to make estimates and
      judgments that affect our reported amounts of assets and liabilities, revenues
      and expenses. We have identified the following critical accounting policies
      that
      affect the more significant estimates and judgments used in the preparation
      of
      our financial statements. On an ongoing basis, we evaluate our estimates,
      including those related to the matters described below. These estimates are
      based on the information that is currently available to us and on various other
      assumptions that we believe to be reasonable under the circumstances. Actual
      results could vary from those estimates under different assumptions or
      conditions.




*Revenue
      Recognition and Related Costs*




Wireless
      applications and contracts




Revenues
      earned from wireless applications are recognized upon delivery and acceptance
      by
      the end-user either as a one-time purchase or a monthly subscription. For
      content delivery partner arrangements, whereby the Company remits a portion
      of
      the revenues earned through the sale of the Company’s applications, revenue is
      recorded on a gross basis in accordance with EITF 99-19. The Company recognizes
      the cost of revenue share payments to the content providers as a cost of
      revenues. Wireless applications and contracts cost of revenues also includes
      all
      third-party hosting fees. These costs are incurred on a monthly basis and are
      primarily fixed in nature regardless of the revenue generated by the related
      applications.




Periodically,
      we enter into non-recurring engineering arrangements with our content partners.
      Generally, under the terms of these agreements, we receive funding upfront
      to
      complete projects. The funding we receive upfront is recorded as deferred
      revenue and is recognized as revenue under the terms of the individual
      arrangements. Deferred revenue represents amounts received for which the Company
      has not yet completed its contractual obligations.




35






Wireless
      License Fees




We
      recognize revenue from licensee fees for wireless software applications in
      accordance with the provisions of AICPA Statement of Position 97-2, “Software
      Revenue Recognition”, as amended by AICPA Statement of Position 98-9
“Modification of SOP No. 97-2 Software Revenue Recognition with Respect to
      Certain Transactions.” Revenue from software license fees is generally
      recognized upon delivery provided that a contract has been executed, the vendor
      fee is fixed or determinable, no significant vendor obligations or uncertainties
      surrounding customer acceptance remain, and collection of the resulting
      receivable is deemed probable.




There
      were no costs related to the wireless license fee revenue generated during
      the
      six months ended June 30, 2006 and 2005 as the license fee revenue related
      to
      technology that had been previously developed by the Company, and there were
      no
      costs for installation, delivery or customization, or other related
      costs.




Contracts
      and license fees




We
      derive
      certain revenues primarily from research and development contracts for
      governmental agencies and the commercial licensing of our technology. We
      recognize revenue on these contracts at the time services are rendered based
      upon the terms of individual contracts. Regarding the commercial licensing
      of
      our technology, we follow the provisions of AICPA Statement of Position 97-2,
      “Software Revenue Recognition”, as amended by AICPA Statement of Position 98-9
“Modification of SOP No. 97-2 Software Revenue Recognition with Respect to
      Certain Transactions.” Revenue from software license fees is generally
      recognized upon delivery provided that a contract has been executed, the vendor
      fee is fixed or determinable, no significant vendor obligations or uncertainties
      surrounding customer acceptance remain, and collection of the resulting
      receivable is deemed probable.




*Valuation
      of Equity Instruments*




We
      have
      utilized our equity securities, including unregistered common stock and
      options/warrants to purchase unregistered common stock, to pay for services
      and
      to settle obligations owed to or claimed by creditors. The issuance of equity
      instruments as payment for services rendered to Oasys results in the recording
      of non-cash compensation or consulting expense as the services are performed.
      We
      utilize the Black-Scholes option-pricing model to determine the value of options
      or warrants issued as payment for services. Underlying the Black-Scholes
      option-pricing model are several assumptions that are evaluated by management
      and include: (1) a dividend yield; (2) a common stock volatility factor; (3)
      the
      risk-free interest rate; and (4) the expected life of the option or warrant.
      Management evaluates each of these assumptions on a periodic basis in order
      to
      determine the value of the equity instruments used as payment for services
      as
      well as to record the associated expense. As conditions change, our evaluation
      of the assumptions underlying the Black-Scholes option-pricing model may change
      resulting in differing values of equity instruments issued for services between
      reporting periods.




**Item
      3.** ***Quantitative*** ***and
      Qualitative Disclosures About Market Risk***




We
      do not
      use any derivative financial instruments for hedging, speculative or trading
      purposes. Our exposure to market risk is currently immaterial.




36










**Item
      4.** ***Controls*** ***and
      Procedures***




Within the 90-day period prior to the filing of this report, an evaluation
      was
      carried out under the supervision and with the participation of the Company's
      management, including the Chief Executive Officer ("CEO") and Chief Financial
      Officer ("CFO"), of the effectiveness of our disclosure controls and procedures.
      Based on that evaluation, the CEO and CFO have concluded that the Company's
      disclosure controls and procedures are effective to ensure that information
      required to be disclosed by the Company in reports that it files or submits
      under the Securities Exchange Act of 1934 is recorded, processed, summarized
      and
      reported within the time periods specified in Securities and Exchange Commission
      rules and forms. Subsequent to the date of their evaluation, there were no
      significant changes in the Company's internal controls or in other factors
      that
      could significantly affect the disclosure controls, including any corrective
      actions with regard to significant deficiencies and material weaknesses.






**PARTII.**
 **OTHER
        INFORMATION**




**Item
      6.** ***Exhibits*** ***and
      Reports on Form 8-K***




(a)
      Exhibits:




Exhibit
                31.1
            
            Rule
                13a-14(a)/15a-14(a) Certification of Gary E. Ban, Chief Executive
                OfficerExhibit
                31.2
            
            Rule
                13a-14(a)/15a-14(a) Certification of Tracy T. Jackson, Chief Financial
                OfficerExhibit
                32.1
            
            Section
                1350 Certification of Gary E. Ban, Chief Executive
                OfficerExhibit
                32.2
            
            Section
                1350 Certification of Tracy T. Jackson, Chief Financial
                Officer






**SIGNATURES** ****




Pursuant to the requirements of the Securities and Exchange Act of 1934, the
      registrant has duly caused this report to be signed on its behalf by the
      undersigned thereunto duly authorized.




OASYS
              MOBILE, INC.Date: August
              14, 2006
            By:
            /s/   GARY
              E.
              BANGary
                E.
                Ban
              *Chief
                Executive Officer*






Date: August
              14, 2006
            By:
            /s/  TRACY
              T.
              JACKSONTracy
                T. Jackson
              *Chief
                Financial
                Officer*














37