**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington, D.C.
      20549**





**Form 10-QSB**




**(Mark
      One)**




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




For
      the
      quarterly period ended September 30, 2007




OR




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




For
      the
      transition period from

      to




Commission
      file number: 000-52707





**SPIRALFROG,
      INC.**


**(Exact
      name of registrant as specified in its charter)**




**Delaware**
            
            **14-1928717****(State
                or other jurisdiction of**
              **incorporation
                or organization)**
            
            **(I.R.S.
                Employer**
              **Identification
                No.)**




**95
      Morton Street**


**New
      York, New York 10014**


**(Address
      of principal executive offices, including ZIP Code)**




**(718) 839-0941**


**(Registrant’s
      telephone number, including area code)**







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




Indicate
      by check mark whether the registrant is a shell
      company    Yes   ̈    No  x




As
      of
      November16, 2007, the registrant had 29,302,054 shares of Common Stock
      outstanding.




Transitional
      Small Business Disclosure Format (Check one): Yes   ̈    No  x









**SpiralFrog,
      Inc.**




**TABLE
      OF CONTENTS**




**Page****PART
                I – FINANCIAL INFORMATION****Item 1.**
            
            **FINANCIAL
                STATEMENTS****CONDENSED
                BALANCE
                SHEET** (Unaudited)
            
            **F-1****CONDENSED
                STATEMENT OF
                OPERATIONS** (Unaudited)
            
            **F-2****CONDENSED
                STATEMENT OF
                CASH FLOWS** (Unaudited)
            
            **F-3****NOTES
                TO CONDENSED
                FINANCIAL STATEMENTS**(Unaudited)
            
            **F-6****Item 2.**
            
            **MANAGEMENT’S
                DISCUSSION AND
                ANAYSIS OR PLAN OF OPERATIONS**
            
            **3****Item 3.**
            
            **CONTROLS
                AND
                PROCEDURES**
            
            **11****PART
                II – OTHER INFORMATION**
            
            **12****Item 1.**
            
            **LEGAL
                PROCEEDINGS**
            
            **12****Item 2.**
            
            **UNREGISTERED
                SALES OF EQUITY
                SECURITIES AND USE OF PROCEEDS**
            
            **12****Item 3.**
            
            **DEFAULTS
                UPON SENIOR
                SECURITIES**
            
            **12****Item 4.**
            
            **SUBMISSION
                OF MATTERS TO A VOTE
                OF SECURITY HOLDERS**
            
            **12****Item 5.**
            
            **OTHER
                INFORMATION**
            
            **12****Item 6.**
            
            **EXHIBITS**
            
            **13**




2




**SPIRALFROG,
      INC.**


**(Development
      Stage Enterprise)**


**CONDENSED
      BALANCE SHEET**


**September
      30, 2007**


**(Unaudited)**




ASSETS





Current
                assets:Cash
            
            $
            $ 2,345,644Accounts
                Receivable
            
            
            19,845Prepaid
                expenses
            
            
            298,826Other
                current assets
            
            
            160,977Total
                current assets
            
            
            2,825,292Property
                and equipment, net
            
            
            739,432Deferred
                licenses and other fees, net
            
            
            3,754,827Deferred
                financing costs
            
            
            787,544Security
                deposits
            
            
            62,500Total
                assets
            
            $
            $ 8,169,595





LIABILITIES
      AND STOCKHOLDERS' DEFICIENCY





Current
                liabilities:Accounts
                payable and accrued
                expenses
            
            $
            1,017,012Senior
                secured exchangeable
                note, net of
                unamortized discount of $9,000
            
            
            4,946,000Accrued
                minimum
                royalties
            
            
            2,415,440Total
                current liabilities
            
            
            8,378,452Long
                term liabilities:Senior
                secured exchangeable
                note, net of
                unamortized discount of $28,000
            
            
            5,972,000Total
                liabilities
            
            
            14,350,452Stockholders'
                deficiency:Preferred
                Stock, $0.01 par value;40,000,000
                shares authorized; -0- shares issued and outstanding
            
            
            --Common
                stock, $.001 par value;
                150,000,000 shares authorized;29,202,054
                shares  issued and outstanding
            
            
            29,202Additional
                paid-in capital
            
            
            9,104,009Deficit
                accumulated during the
                development stage
            
            
            (15,278,418)Less:
                treasury stock, 1,840,000
                shares at cost
            
            
            (35,650)Total
                stockholders' deficiency
            
            
            (6,180,857)Total
                liabilities and stockholders' deficiency
            
            $
            8,169,595





The
      accompanying notes are an integral part of these condensed financial
      statements****




F-1




**SPIRALFROG,
      INC.**


**(A
      Development Stage Enterprise)**


**CONDENSED
      STATEMENTS OF OPERATIONS**


**September
      30, 2007**


**(Unaudited)**





**For
                the Period****From****February
                5,****2004****(Inception)****For
                the Three Months Ended**
            
            
            **For
                the Nine Months Ended**
            
            
            **To****September
                30,**
            
            
            **September
                30,**
            
            
            **September
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**
            
            
            **2007**Income
            
            $
            20,403
            
            
            $
            --
            
            
            $
            23,505
            
            
            $
            --
            
            
            
            23,505Cost
                of sales
            
            
            13,464
            
            
            
            --
            
            
            
            15,511
            
            
            
            --
            
            
            
            15,511Gross
                Profit
            
            
            6,939
            
            
            
            --
            
            
            
            7,994
            
            
            
            --
            
            
            
            7,994OPERATING
                EXPENSES:Selling
                and marketing expenses
            
            
            499,284
            
            
            
            551,050
            
            
            
            901,426
            
            
            
            847,736
            
            
            
            2,428,470Research
                and development expenses
            
            
            616,595
            
            
            
            427,471
            
            
            
            1,415,959
            
            
            
            551,596
            
            
            
            2,302,688Royalty
                and license expenses
            
            
            627,779
            
            
            
            577,500
            
            
            
            1,782,779
            
            
            
            861,667
            
            
            
            3,222,779General
                and administrative expenses
            
            
            1,668,578
            
            
            
            456,806
            
            
            
            3,472,817
            
            
            
            863,569
            
            
            
            7,922,124TOTAL
                OPERATING EXPENSES
            
            
            3,412,336
            
            
            
            2,012,827
            
            
            
            7,572,981
            
            
            
            3,124,568
            
            
            
            15,876,061LOSS
                FROM OPERATIONS
            
            
            (3,405,397
            )
            
            
            (2,012,827
            )
            
            
            (7,564,987
            )
            
            
            (3,124,568
            )
            
            
            (15,860,069
            )Other
                income (expense)
            
            
            12,789
            
            
            
            (314
            )
            
            
            31,707
            
            
            
            (3,050
            )
            
            
            48,649NET
                LOSS
            
            $
            (3,392,608
            )
            
            $
            (2,013,141
            )
            
            $
            (7,533,280
            )
            
            $
            (3,127,618
            )
            
            $
            (15,819,418
            )Basic
                and diluted loss per common share
            
            $
            (0.26
            )
            
            $
            (0.22
            )
            
            $
            (.76
            )
            
            $
            (0.34
            )Weighted
                average number of shares
              outstanding:Basic
                and diluted
            
            
            12,884,665
            
            
            
            9,347,200
            
            
            
            9,934,872
            
            
            
            9,347,200




The
      accompanying notes are an integral part of these condensed financial
      statements.





F-2




**SPIRALFROG,
      INC.**


**(A
      Development Stage Enterprise)**


**CONDENSED
      STATEMENTS OF STOCKHOLDERS’ DEFICIENCY**


**September
      30, 2007**


**(Unaudited)**




**Deficit****Accumulated****Series
                  A convertible**
              
              
              **Additional**
              
              
              **during
                  the**
              
              
              
              
              **Total****Common
                  Stock**
              
              
              **Preferred
                  Stock**
              
              
              **Paid-in**
              
              
              **Development**
              
              
              **Treasury
                  Stock**
              
              **Stockholders’****Shares**
              
              
              **Amount**
              
              
              **Shares**
              
              
              **Amount**
              
              
              **Capital**
              
              
              **Stage**
              
              
              **Shares**
              
              
              **Amount**
              
              **Deficiency**Balance,
                  February 5, 2004 (inception)
              
              
              --
              
              
              $
              --
              
              
              
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              
              --
              
              
              $
              --
              
              $
              --Issuance
                  of stock to founders at $0.01 for services, compensation and
                  fees;February
                  5 – March 31, 2004
              
              
              --
              
              
              
              --
              
              
              
              8,650,000
              
              
              
              86,500
              
              
              
              11,558
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              98,058Issuance
                  of stock for cash at $.50; February 24, 2004
              
              
              --
              
              
              
              --
              
              
              
              50,000
              
              
              
              500
              
              
              
              24,500
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              25,000Issuance
                  of stock for cash at $.1.00; May 12, 2004
              
              
              --
              
              
              
              --
              
              
              
              100,000
              
              
              
              1,000
              
              
              
              99,000
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              100,000Issuance
                  of stock for cash at $.04; July 8, 2004
              
              
              --
              
              
              
              --
              
              
              
              240,000
              
              
              
              2,400
              
              
              
              7,600
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              10,000Issuance
                  of stock for cash at $.04; September 29, 2004
              
              
              --
              
              
              
              --
              
              
              
              24,000
              
              
              
              240
              
              
              
              760
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              1,000Distributions
                  to series A preferred stockholders
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (161,277
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (161,277)Issuance
                  of stock at $0.01 for services, compensation and fees;February
                  5- March 31, 2004
              
              
              2,567,200
              
              
              
              2,567
              
              
              
              --
              
              
              
              --
              
              
              
              23,105
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              25,672Issuance
                  of stock to founders at $0.01 for services, compensation and fees;
                  April
                  1- June 30, 2004
              
              
              120,000
              
              
              
              120
              
              
              
              --
              
              
              
              --
              
              
              
              1,080
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              1,200Contributed
                  capital from waiver of accrued compensation (Note 6)
              
              
              --
              
              
              
              --
              
              
              
              
              
              
              
              
              
              
              
              360,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              360,000Net
                  loss
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (462,911
              )
              
              
              --
              
              
              
              --
              
              
              (462,911)Balance,
                  December 31, 2004
              
              
              2,687,200
              
              
              
              2,687
              
              
              
              9,064,000
              
              
              
              90,640
              
              
              
              366,326
              
              
              
              (462,911
              )
              
              
              --
              
              
              
              --
              
              
              (3,258)




F-3




Issuance
                  of stock for cash
                at
                  $.16; January 18, 2005
              
              
              --
              
              
              
              
              --
              
              
              
              38,000
              
              
              
              380
              
              
              
              
              5,735
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              6,115Issuance
                  of stock for cash at $.33; February 28, 2005
              
              
              --
              
              
              
              
              --
              
              
              
              30,000
              
              
              
              300
              
              
              
              
              9,700
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              10,000Issuance
                  of stock for cash at $.50; March 23, 2005
              
              
              --
              
              
              
              
              --
              
              
              
              120,000
              
              
              
              1,200
              
              
              
              
              58,800
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              60,000Issuance
                  of stock for cash at $.50; April 8, 2005
              
              
              --
              
              
              
              
              --
              
              
              
              70,000
              
              
              
              700
              
              
              
              
              34,300
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              35,000Issuance
                  of stock for cash at $.46; May 16, 2005
              
              
              --
              
              
              
              
              --
              
              
              
              85,000
              
              
              
              850
              
              
              
              
              38,347
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              39,197Issuance
                  of stock for cash at $.93; July 19, 2005
              
              
              --
              
              
              
              
              --
              
              
              
              2,133
              
              
              
              21
              
              
              
              
              1,979
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              2,000Issuance
                  of stock for cash at $.50; August 9, 2005
              
              
              --
              
              
              
              
              --
              
              
              
              30,000
              
              
              
              300
              
              
              
              
              14,700
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              15,000Issuance
                  of stock for cash at $.94; October 1, 2005
              
              
              --
              
              
              
              
              --
              
              
              
              1,067
              
              
              
              11
              
              
              
              
              989
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,000Distributions
                  to series A preferred stockholders
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (107,543
              )
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (107,543Issuance
                  of stock at $0.05 for services, compensation and fees; January
                  1- March
                  31, 2005
              
              
              200,000
              
              
              
              
              200
              
              
              
              --
              
              
              
              --
              
              
              
              
              9,800
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              10,000Issuance
                  of stock at $0.05 for services, compensation and fees; April 1-
                  June 30,
                  2005
              
              
              6,460,000
              
              
              
              
              6,460
              
              
              
              --
              
              
              
              --
              
              
              
              
              316,540
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              323,000Recapitalization
                  of Mohen’s accumulated deficit at time of merger
              
              
              --
              
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              
              (541,000
              )
              
              
              541,000
              
              
              
              --
              
              
              
              --
              
              
              
              --Contributed
                  capital from waiver of accrued compensation (Note 6)
              
              
              --
              
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              
              110,500
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              110,500Net
                  loss
              
              
              --
              
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              
              --
              
              
              
              (1,079,925
              )
              
              
              --
              
              
              
              --
              
              
              
              (1,079,925)Balance,
                  December 31, 2005
              
              
              9,347,200
              
              
              
              
              9,347
              
              
              
              9,440,200
              
              
              
              94,402
              
              
              
              
              319,173
              
              
              
              (1,001,836
              )
              
              
              --
              
              
              
              --
              
              
              
              (578,914Stock
                  based compensation expense related to employee stock
                  options
              
              
              --
              
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              
              1,188
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,188Stock
                  based compensation expense related to issuance of restricted stock
                  units
              
              
              --
              
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              
              1,650
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,650Contributed
                  capital from waiver of accrued compensation (Note 6)
              
              
              --
              
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              
              166,332
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              166,332Net
                  loss
              
              
              --
              
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              
              --
              
              
              
              (6,743,302
              )
              
              
              --
              
              
              
              --
              
              
              
              (6,743,302Balance,
                  December 31, 2006
              
              
              9,347,200
              
              
              
              
              9,347
              
              
              
              9,440,200
              
              
              
              94,402
              
              
              
              
              488,343
              
              
              
              (7,745,138
              )
              
              
              --
              
              
              
              --
              
              
              
              (7,153,046Reacquired
                  690,000 shares @ $0.05 per share
                January
                  12, 2007
              
              
              --
              
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              
              
              
              
              
              --
              
              
              
              (690,000
              )
              
              
              (34,500
              )
              
              
              (34,500Reacquired
                  1,150,000 shares @ $.001 per share, March 2,2007
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,150,000
              )
              
              
              (1,150
              )
              
              
              (1,150
              )Stock
                  based compensation expense related to employee stock
                  options
              
              
              --
              
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              
              4,135
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              4,135Stock
                  based compensation expense related to issuance of restricted stock
                  units
              
              
              --
              
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              
              188,528
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              188,528Conversion
                  of Series A Preferred Stock to Common from August 14 to September
                  14,2007
              
              
              9,440,200
              
              
              
              
              9440
              
              
              
              (9,440,200
              )
              
              
              (94,402
              )
              
              
              
              84,962
              
              
              
              --Conversion
                of Series B Preferred Stock, including redeemable warrants,  to
                Common August 28, 2007
              
              
              10,414,654
              
              
              
              
              10,415
              
              
              
              
              
              
              
              
              
              
              
              
              8,282,041
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,292,456Fair  value
                  of warrants
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              19,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              19,000Fair  value
                  of warrants
              
              
              --
              
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              
              37,000
              
              
              
              
              
              
              
              --
              
              
              
              --
              
              
              
              37,000Net
                  loss
              
              
              --
              
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              
              --
              
              
              
              (7,533,280
              )
              
              
              
              
              
              
              --
              
              
              
              (7,533,280)Balance,
                  September 30 , 2007
              
              
              29,202,054
              
              
              
              $
              29,202
              
              
              
              -
              
              
              
              -
              
              
              
              $
              9,104,009
              
              
              $
              (15,278,418
              )
              
              
              (1,840,000
              )
              
              $
              (35,650
              )
              
              
              $(6,180,857)


The
          accompanying notes are an integral part of these condensed financial
          statements.
  
 F-4




**SPIRALFROG,
      INC.**


**(A
      Development Stage Enterprise)**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


**September
      30, 2007**


**(Unaudited)**




**For
                the Period****from****For
                the Nine Months Ended**
            
            
            **February
                  5, 2004****September
                30,**
            
            
            **(Inception)****to
                September 30,****2007**
            
            
            **2006**
            
            
            **2007**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (7,533,280
            )
            
            $
            (3,127,618
            )
            
            $
            (15,819,418Adjustments
                to reconcile net loss to net cash used inoperating
                activities:Depreciation
            
            
            119,913
            
            
            
            11,032
            
            
            
            141,413Amortization
                deferred licenses
            
            
            1,782,779
            
            
            
            --
            
            
            
            3,222,779Amortization
                of deferred financing costs
            
            
            233,456
            
            
            
            --
            
            
            
            233,456Bad
                debts
            
            
            --
            
            
            
            --
            
            
            
            35,658Common
                stock issued for compensation and services
            
            
            --
            
            
            
            --
            
            
            
            457,930Stock
                based compensation expense related to employee stock
                options
            
            
            4,135
            
            
            
            --
            
            
            
            5,323Stock
                based compensation expense related to issuance of restricted
              stock
                units
            
            
            188,528
            
            
            
            --
            
            
            
            190,178Changes
                in operating assets:Prepaid
                expenses and other current assets
            
            
            (288,446
            )
            
            
            143,080
            
            
            
            (459,802Accounts
                receivable
            
            
            (19,845
            )
            
            
            
            
            
            
            (19,845Deferred
                licensing fees
            
            
            (1,477,606
            )
            
            
            
            
            
            
            (1,477,606Security
                deposits
            
            
            (28,478
            )
            
            
            (34,400
            )
            
            
            (62,500Due
                to Shareholder
            
            
            (30,000
            )
            
            
            (35,658
            )
            
            
            (65,658Changes
                in operating liabilities:Accounts
                payable and accrued expenses
            
            
            372,514
            
            
            
            (14,972
            )
            
            
            1,683,842Accrued
                minimum royalties
            
            
            (650,000
            )
            
            
            (2,184,560
            )
            
            
            (3,084,560TOTAL
                ADJUSTMENTS
            
            
            206,950
            
            
            
            (2,115,478
            )
            
            
            800,608NET
                CASH USED IN OPERATING ACTIVITIES
            
            
            (7,326,330
            )
            
            
            (5,243,096
            )
            
            
            (15,018,810CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchases
                of property and equipment
            
            
            (743,385
            )
            
            
            (133,442
            )
            
            
            (880,845CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from borrowings – senior secured exchangeable note
            
            
            10,955,000
            
            
            
            --
            
            
            
            10,955,000Repurchase
                of common stock
            
            
            (35,650
            )
            
            
            
            
            
            
            (35,650Deferred
                financing costs
            
            
            (1,002,000
            )
            
            
            
            
            
            
            (1,002,000Proceeds
                from issuance of Series A preferred stock
            
            
            --
            
            
            
            
            
            
            
            304,312Distributions
                to Series A stockholders
            
            
            --
            
            
            
            
            
            
            
            (268,819Proceeds
                from issuance of Series B preferred stock
            
            
            --
            
            
            
            8,852,456
            
            
            
            8,852,456Costs
                associated with private placement offering
            
            
            
            
            
            
            (560,000
            )
            
            
            (560,000NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            9,917,350
            
            
            
            8,292,456
            
            
            
            18,245,299NET
                INCREASE IN CASH
            
            
            1,847,635
            
            
            
            2,915,918
            
            
            
            2,345,644CASH
                - BEGINNING
            
            
            498,009
            
            
            
            36
            
            
            
            --CASH
                – ENDING
            
            $
            2,345,644
            
            
            $
            2,915,954
            
            
            $
            2,345,644NON-CASH
                INVESTING AND FINANCING TRANSACTIONS:Contributed
                capital from waiver of accrued compensation and consulting
              fees
            
            $
            --
            
            
            $
            --
            
            
            $
            632,832Minimum
                royalty obligations
            
            $
            --
            
            
            $
            --
            
            
            $
            3,065,440Conversion
                of Series A preferred stock into common shares
            
            $
            94,402
            
            
            $
            --
            
            
            $
            94,402Conversion
                of Series B preferred stock  and warrants into common
                shares
            
            $
            8,292,456
            
            
            $
            --
            
            
            $
            8,292,456Debt
                discount in connection with senior secured exchangeable
                note
            
            $
            37,000
            
            
            $
            --
            
            
            $
            37,000Deferred
                finance fees (fair value of warrants issued to placement
                agent)
            
            $
            19,000
            
            
            
            
            
            
            $
            19,000




The
      accompanying notes are an integral part of these condensed financial
      statements.




F-5




**(1)
      Organization and Basis of
      Preparation**




*Nature
      of
      Business*




Mohen
      Inc. or Spiralfrog, Inc. (the “Company”)
      commenced operations as a development stage company on February 5,
      2004. While the Company filed its Articles of Organization in October,
      2003, operations did not commence until February 2004. Mohen, Inc. is the
      surviving entity from a common control merger between Mohen Entertainment
      Portals, LLC and Mohen Entertainment Portals, Inc., which changed its name
      to
      Mohen, Inc. The merger was consummated on May 12, 2005. The accompanying
      financial statements reflect the merger of the two entities for all periods
      presented since the president of Mohen Inc. owned 72% of the voting interest
      of
      each entity at the time of the merger. The Company is seeking to establish
      an
      advertising-funded, free and legal music download internet site. In 2004 and
      2005, the Company had limited business operations, whereby the primary focus
      was
      the development of its business model. In 2006, with the hiring of its
      technology team, the Company accelerated its technological development
      activities.




On
      August 6, 2007, the Company amended its Certificate
      of Designation to reflect the Company’s name change from Mohen, Inc. to
      Spiralfrog, Inc.




*Going
      Concern and Management’s
      Plans*




The
      Company's principal business activity consists of
      the development of its in-house music technology. The Company is developing
      a
      music technology-internet based service, which will provide consumers the
      ability at no charge to download music files legally. This free service will
      allow a consumer to play the ad-supported music files only on the computer
      such
      consumer uses to download music files as well as a portable playback device.
      In
      addition, the website will be able to offer online e-tailers, advertising,
      media
      and marketing companies the ability to provide highly targeted advertising,
      promotional and other marketing information to consumers who may have a strong
      interest in such advertisers' products.




The
      Company’s principal activities, to date, have
      been in the research and development of its website technology as well as the
      securing of licensed content. The accompanying financial statements have been
      prepared in accordance with Statement of Financial Accounting Standards (“SFAS”)
      No. 7, “Development Stage Enterprises.”




On
      September 17, 2007 the Company launched its
      digital music web site in North America and Canada and has entered into license
      agreements with UMG Recording Inc., Universal Music Canada, The Orchard
      Enterprises, Inc., Independent Online Distribution Alliance, Inc.
      (IODA),  INgrooves and other music companies. In addition on October
      16, 2007 the Company entered into a licensing agreement with SONY/ATV Music
      Publishing for the right to use the underlying musical compositions of the
      songwriters and composers represented by SONY ATV.




F-6




While
      there can be no assurance, management believes
      the Company has the ability to raise adequate capital to keep the Company
      operational for the next twelve months. For the nine months ended September
      30,
      2007, the Company raised approximately $11,000,000 through the issuance of
      senior secured exchangeable notes.  However, no assurance can be given
      that such funds will be sufficient. If the Company is unable to raise additional
      funds, it may be forced to change or delay its contemplated marketing and
      business plans.




Being
      a development stage company, the Company is
      subject to all the risks inherent in the establishment of a new enterprise
      and
      the marketing and design of a new product, many of which risks are beyond the
      control of the Company.




The
      accompanying financial statements have been
      prepared assuming that the Company will continue as a going concern. The Company
      is currently a development stage enterprise and the Company’s continued
      existence is dependent upon its ability to obtain additional debt and/or equity
      financing. The Company has yet to generate a positive cash flow from operations,
      and until commercially viable products are developed and revenue generated,
      the
      Company is totally dependent upon debt and equity funding to finance the
      Company’s operations. The Company does not have any patents or copyrights
      protecting its intellectual property.




These
      factors raise substantial doubt about the
      Company’s continued existence as a going concern. These financial statements do
      not include any adjustments that might result from the outcome of this
      uncertainty.




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




*Basis
      of
      Presentation*




These
      unaudited condensed financial statements have
      been prepared in accordance with accounting principles generally accepted for
      interim financial information. Accordingly, they do not include all the
      information and footnotes required by accounting principles generally accepted
      in the United States of America for complete financial statements. In the
      opinion of management, all adjustments (which include only normal recurring
      adjustments) necessary to present fairly the financial position, results of
      operations and cash flows for all periods presented have been made. The results
      of operations for the nine month period ended September 30, 2007 are not
      necessarily indicative of the operating results that may be expected for the
      year ending December 31, 2007. These condensed financial statements should
      be
      read in conjunction with the audited financial statements and related audited
      footnotes for the year ended December 31, 2006, included in the Company’s
      Registration of Securities of Small Businesses Issuers Report on Form-10SB,
      Amendment No. 3.




*Use
      of Estimates*




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




*Revenue
      Recognition*




The
      Company expects that it will derive substantially
      all of its revenue from the sale of advertising on its website.  The
      Company anticipates to have four major advertising revenues
      streams:  Click Ad revenues will be recognized when an ad that is
      placed in its website is successfully ‘Clicked’ and linked to another website or
      area; Video revenues will be recognized when ads are played within the website;
      Banner revenues will be recognized when an ad is displayed in the Company’s
      website; and Imprint revenues will be recognized once the established number
      of
      times an ad is to be shown is displayed.  Any prepaid advertising
      payments received will be treated as deferred revenues.




F-7




Revenue
      will be recognized when it is
      realizable and earned, considering: the existence/proof of an arrangement;
      delivery has occurred or the services have been rendered; the price is fixed
      or
      determinable; and collectibility is reasonably assured.




*Net
      Income/Loss Per Common
      Share*




Basic
      net income (loss) per share of common stock is
      computed by dividing net income (loss) available to common stockholders by
      the
      weighted average number of shares of common stock outstanding during the periods
      presented.




Diluted
        net income (loss) per share reflects per share amounts that result if dilutive
        common stock equivalents are converted to common stock.
  Common
        stock equivalents, consisting of convertible notes, convertible preferred
        stock,
        restricted stock, stock options and warrants were not included in the
        calculation of diluted loss per share as of September 30, 2007 and 2006 because
        their inclusion would have had been anti-dilutive. As of September 30, 2007,
        all
        outstanding convertible preferred shares were converted into common
        stock.


Total
        common stock equivalents outstanding related to convertible notes, restricted
        stock, stock options and warrants were 27,225,698 as of September 30,
        2007.




*Income
      Taxes*




Effective
      January 1, 2007, the Company adopted the provisions of FASB Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of
      FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition
      threshold and a measurement attribute for the financial statement recognition
      and measurement of tax positions taken or expected to be taken in a tax return.
      For those benefits to be recognized, a tax position must be more-likely-than-not
      to be sustained upon examination by taxing authorities. Differences between
      tax
      positions taken or expected to be taken in a tax return and the benefit
      recognized and measured pursuant to the interpretation are referred to as
“unrecognized benefits”. No liability was required to be recorded (or amount of
      net operating loss carry forward or amount of tax refundable is reduced) for
      any
      unrecognized tax benefits for potential future obligations to the taxing
      authority for tax positions as a result of applying the provisions of FIN
      48.




In
      accordance with FIN 48, interest costs related to
      unrecognized tax benefits are required to be calculated (if applicable) and
      would be classified as “Interest expense, net” in the condensed statements of
      operations. Penalties would be recognized as a component of “General and
      administrative expenses”. No penalties or interest costs were recognized during
      the nine months ended September 30, 2007.




The
      Company files income tax returns in the United
      States (federal) and in various state and local jurisdictions. The Company
      is
      still subject to federal, state and local income tax examinations by tax
      authorities for years since inception to December 31, 2006.




The
      adoption of the provisions of FIN 48 did not have a
      material impact on the Company’s financial position and results of operations.
      At January 1, 2007 and September 30, 2007, no liability for unrecognized tax
      benefits was required to be recorded.




F-8




The
      Company recognized a deferred tax asset of
      approximately $6.3 million as of September 30, 2007, primarily relating to
      net
      operating loss carryforwards of approximately $15.8 million, available to offset
      future taxable income through 2026.




The
      ultimate realization of deferred tax assets is
      dependent upon the generation of future taxable income during the periods in
      which those temporary differences become deductible. The Company considers
      projected future taxable income and tax planning strategies in making this
      assessment. At present, the Company does not have a sufficient history of income
      to conclude that it is more likely than not that the Company will be able to
      realize all of its tax benefits in the near future and therefore a valuation
      allowance was established for the full value of the deferred tax
      asset.




A
        valuation allowance will be maintained until sufficient positive evidence
        exists
        to support the reversal of any portion or all of the valuation allowance
        net of
        appropriate reserves. Should the Company continue to be profitable in future
        periods with supportable trends, the valuation allowance will be reversed
        accordingly.




***Common
      Stock Purchase
      Warrants***




The
      Company accounts for the issuance of common stock
      purchase warrants issued in connection with capital financing transactions
      in
      accordance with the provisions of Emerging Issues Task Force (“EITF”) Issue No.
      00-19 "Accounting for Derivative Financial Instruments Indexed to, and
      Potentially Settled in, a Company's Own Stock." Based on the provisions of
      EITF
      Issue No. 00-19, the Company classifies as equity any contracts that (i) require
      physical settlement or net-share settlement or (ii) gives the company a choice
      of net-cash settlement or settlement in its own shares (physical settlement
      or
      net-share settlement).  The
      Company  classifies  as assets or  liabilities any
      contracts  that (i) require net-cash  settlement (including
      a requirement  to net-cash settle the contract if an event occurs and
      if that event is outside the control  of the  Company) or
      (ii) gives the counterparty  a choice of  net-cash
      settlement or settlement in shares (physical settlement or net-share
      settlement).




The
      Company assessed the classification of its
      derivative financial instruments as of September 30, 2007, which consist of
      common stock purchase warrants, and determined that such derivatives meet the
      criteria for equity classification under EITF 00-19




***Convertible
      Instruments***




The
        Company evaluates and accounts for conversion options embedded in its
        convertible instruments in accordance with SFAS No. 133 “Accounting
        for Derivative Instruments and Hedging Activities” (“SFAS 133”) and EITF
        00-19 “Accounting for Derivative Financial Instruments Indexed to, and
        Potentially Settled in, a Company’s Own Stock” (“EITF
        00-19”).




SFAS 133
        generally provides three criteria that, if met, require companies to bifurcate
        conversion options from their host instruments and account for them as free
        standing derivative financial instruments in accordance with EITF 00-19.
        These
        three criteria include circumstances in which (a) the economic
        characteristics and risks of the embedded derivative instrument are not clearly
        and closely related to the economic characteristics and risks of the host
        contract, (b) the hybrid instrument that embodies both the embedded
        derivative instrument and the host contract is not remeasured at fair value
        under otherwise applicable generally accepted accounting principles with
        changes
        in fair value reported in earnings as they occur and (c) a separate
        instrument with the same terms as the embedded derivative instrument would
        be
        considered a derivative instrument subject to the requirements of SFAS 133.
        SFAS 133 and EITF 00-19 also provide an exception to this rule when the
        host instrument is deemed to be conventional (as that term is described in
        the
        implementation guidance to SFAS 133 and further clarified in EITF 05-2 “The
        Meaning of “Conventional Convertible Debt Instrument” in Issue
        No. 00-19).




F-9




The
          Company accounts for convertible instruments (when it has determined that
          the
          embedded conversion options should not be bifurcated from their host
          instruments) in accordance with the provisions of EITF 98-5 “Accounting for
          Convertible Securities with Beneficial Conversion Features,” (“EITF 98-5”) and
          EITF 00-27 “Application of EITF 98-5 to Certain Convertible Instruments.”
Accordingly, the Company records, when necessary, discounts to convertible
          notes
          for the intrinsic value of conversion options embedded in debt instruments
          based
          upon the differences between the fair value of the underlying common stock
          at
          the commitment date of the note transaction and the effective conversion
          price
          embedded in the note. Debt discounts under these arrangements are amortized
          over
          the term of the related debt.




The
        Company evaluated the conversion option embedded in the Exchangeable Notes
        and
        concluded no liability for an embedded conversion option was required to
        be
        recorded.




(3)Royalty/License
        Agreements




The
      Company has entered into five (5) Royalty and
      License Agreements. The Company has made various payments and is obligated
      to
      make additional non-refundable recoupable prepayments. At September 30, 2007
      such fees aggregated as follows:




AmountDeferred
                license and other fees
            
            $
            6,977,602Less,
                accumulated amortization
            
            
            (3,222,775
            )$
            3,754,827




Royalty/license
        payments are accounted for in accordance with statement of Financial Accounting
        Standard ("SFAS") No. 50 "Financial Reporting for the Record and Music
        Industry". The Company reports such minimum guaranteed license payments as
        an asset and amortizes such cost to expense in accordance with the terms
        of the
        license agreements.  The costs of licensing agreements are amortized
        to expense on a straight-line basis over the shorter of the life of the
        respective agreement or the period of recoverability of the related revenue
        stream under such agreement.  Amortization expense for future periods
        is as follows:




Period
              
              Amount2007
              
              $
              641,9032008
              
              
              2,549,9052009
              
              
              563,019$
              3,754,827


The
        Company evaluates recoverability of such assets based on expected future
        revenues.  Any portion of advances that appear not to be fully
        recoverable from future expected revenues shall be charged to expense during
        the
        period in which the loss becomes evident.
  The
        Company entered into an agreement with UMG Recordings, Inc. (“Universal”),
        effective May 20, 2006 through November 15, 2008, for certain limited,
        non-exclusive, non-transferable rights to Universal’s active digital catalog of
        music and video recordings for the United States and Canada. The agreement
        includes varying rights for streaming, downloading and related
        artwork.




F-10




In
        consideration of these rights, the Company paid a recoupable advance
        (non-refundable) to Universal for US and Canadian rights. The Company will
        pay
        Universal royalties based on a percentage of revenues in connection with
        its
        service, including advertising, net sales of products and services, access
        to
        the use of the service, banners or click-through royalties and other web
        site
        programs. However, the aforementioned royalty advances to Universal are first
        recoupable before any additional payments are due for the first contract
        year
        ending November 15, 2007, at which time further advances of identical amounts
        are required under the Universal contract.
  On
        August
        1, 2007, the Company entered into an Amendment to the agreement with UMG
        Recordings, Inc. (“Universal”) whereby both parties have agreed to extend the
        term of the agreement for two additional years through August 1,
        2009.
  The
        Company entered into a similar agreement with EMI Entertainment, Inc. for
        the US
        music and video rights effective April 1, 2006 through March 31, 2008. The
        Company paid a recoupable advance (non-refundable) in consideration of the
        rights, which are similar to the Universal Agreement.
  The
        Company also entered into an agreement with The Orchard Enterprises, Inc.,
        effective November 15, 2006 through December, 2008, for worldwide music and
        music video rights.
  On
        August
        16, 2007 the Company entered into an agreement with BMG with terms consistent
        with those secured with UMG. The Agreement expires December 31,
        2008.
  On
        August
        21, 2007 the Company also entered into an agreement with Independent Online
        Distribution Alliance, Inc., which allows the Company to reproduce and
        distribute content solely in connection with the Service. The Agreement expires
        October 31, 2008.
  As
        of
        September 30, 2007, the Company is obligated to make minimum license and
        other
        payments in connection with various music label and music publishing contracts
        totaling approximately $2,415,440.
  **(4)
        Senior Secured Exchangeable Notes**
  On
        April
        19, 2007, the Company entered into a purchase agreement (the “Agreement”) to
        sell to interested parties, Senior Secured Exchangeable Notes up to an aggregate
        amount of $5,000,000, whereby such notes can be exchanged into the Company’s
        Class A common stock, par value $0.001.
  On
        April
        23, 2007, in connection with the Agreement, the Company issued $5.0 million
        Senior Secured Exchangeable Notes (the “Notes”) to an investor group which
        provided financing of $4.5 million, net of expenses and closing costs of
        $460,000. The Note bears interest at 12% per annum, with interest payable
        monthly, commencing October 1, 2007. The entire principal amount is due on
        April
        19, 2008. The Note is exchangeable into 5,813,953 common shares at the
        Exchange Price of $0.86, subject to certain adjustments. The shares can only
        be
        exchanged once a registration is filed by the Company to register such
        underlying common shares. These funds were received by the Company in April,
        2007.
  On
        August
        7, 2007, the Company amended and restated its April 19, 2007 Agreement to
        authorize the Company to sell to interested parties, an additional $6,000,000
        of
        senior exchangeable secured notes (in aggregate, $11,000,000). On such date,
        the
        Company issued to an investor, $5,000,000 of senior secured exchangeable
        notes
        that bears interest at 12% per annum, payable monthly commencing October
        1,
        2007, maturing August 7, 2012, and is also exchangeable into 5,813,953 shares
        of
        common stock, at a rate of $0.86 per share. The terms and conditions are
        similar
        to the April 23, 2007 notes. These funds were received by the Company in
        August
        2007. In connection with the Agreement, the Company issued to the placement
        agent 550,000 warrants to purchase common stock at an exercise price of $0.86
        per share, with a term of five years. The fair value of the warrants (based
        on
        the Black-Sholes Model) was estimated to be approximately $19,000. Such amount
        was recorded as deferred financing fees and will be amortized to expense
        over
        the life of the related debt obligation. Closing costs associated with such
        notes were $462,000.
  F-11




All
        of
        these senior secured exchangeable notes are collateralized by 3,734,847 shares
        of Series A Convertible Preferred Stock and 2,930,000 shares of common stock
        owned by certain of the Company’s shareholders and directors. In addition, the
        Company executed a security agreement in favor of the investors granting
        them a
        first priority security interest in all of the Company’s goods, inventory,
        contractual rights and general intangibles, receivables, documents, instruments,
        chattel paper, and intellectual property.  The security agreement
        states that if an event of default occurs under the secured convertible
        debentures or security agreements, the investor has the right to take possession
        of the collateral, to operate the Company’s business using the collateral, and
        have the right to assign, sell, lease or otherwise dispose of and deliver
        all or
        any part of the collateral, at public or private sale or otherwise to satisfy
        the Company’s obligations under these agreements.
  Between
        August 14 and September 14, 2007, the Company issued to various investors
        an
        additional $1,000,000 of exchange notes maturing on September 14, 2012, under
        identical terms of the aforementioned. Closing costs associated with such
        notes
        were $80,000.
  The
        Amended and Restated agreement of August 7, 2007 also provides for the issuance
        of up to 6,000,000 warrants to purchase common stock with an exercise price
        of
        $1.00 per share, exchangeable on a one-for-one basis into 6,000,000 shares
        of
        common stock. The fair value of the warrants (based on the Black-Sholes Model)
        was estimated to be approximately $37,000. Such amount was recorded as a
        debt
        discount and will be amortized to expense over the life of the related debt
        obligation.
  In
        connection with the above notes, the Company entered into a registration
        rights
        agreement requiring a registration statement to be filed with the Securities
        and
        Exchange Commission registering the common stock issuable upon exchange of
        the
        senior secured exchangeable notes.  The Company is required to file a
        registration statement within 45 days after the senior secured exchangeable
        notes become exchangeable, if ever. The notes become exchangeable after the
        Company’s outstanding common stock has been registered with the Securities and
        Exchange Commission. The Company is obligated to use the its best efforts
        to
        cause the registration statement to be declared effective no later than 90
        days
        after such registration statement is filed and to insure that the registration
        statement remains in effect until the earlier of (i) all of the shares of
        common
        stock issuable upon conversion of the secured exchangeable debentures have
        been
        sold or (ii) such shares may be sold without restriction pursuant to Rule
        144(k).  In the event of a default of the Company’s obligations under
        the registration rights agreement, the Company is required to pay to the
        investors, as liquidated damages, (i) a cash amount equal to 1.5% of the
        aggregate purchase of the senior secured convertible notes, and (ii) for
        each 30
        day period that the registration statement has not been filed or declared
        effective, as the case may be, a cash amount equal to 2% of the aggregate
        purchase of the senior secured convertible notes.
  **(5)
        Equity Transactions**
  ***Treasury
        Stock***
  During
        March 2007, the Company reacquired 1,840,000 shares of common stock from
        its
        former Chief Executive Officer, as a result of violations of his non-compete
        agreement with the Company.
  ***Common
        Stock - par value $0.001***
  During
        the quarter ended March 31, 2004, the Company issued 2,567,200 shares of
        common
        stock, valued at $0.01 per share, to its founders for compensation and services
        rendered.




F-12




During
        the quarter ended June 30, 2004, the Company issued 120,000 shares of common
        stock, valued at $0.01 (representative of the fair value of such services)
        per
        share, to a consultant for services rendered.
  During
        the quarter ended March 31, 2005, the Company issued 200,000 shares of common
        stock, valued at $0.05 (representative of the fair value of such services)
        per
        share, to a consultant for services rendered.
  During
        the quarter ended June 30, 2005, the Company issued 6,460,000 shares of common
        stock, valued at $0.05 per share ($323,000 representative of the fair value
        of
        such services), to employees, board members and consultants for compensation
        and
        services rendered.
  During
        the year ended December 31, 2006, the Company issued 387,000 common stock
        options to employees.
  During
        the year ended December 31, 2006, the Company issued 270,000 restricted stock
        units to employees and consultants.
  During
        the quarter ended March 31, 2007, the Company issued 5,580,000 shares of
        restricted stock units to employees and consultants.
  During
        the quarter ended March 31, 2007, the Company issued 340,000 common stock
        options to employees.
  During
        the quarter ended June 30, 2007, the Company issued 970,000 shares of restricted
        stock units to various employees pursuant to employee agreements.
  During
        the quarter ended June 30, 2007, the Company issued 250,000 common stock
        options
        to employees.
  From
        August 14, 2007 through September 14, 2007, the holders of the Series A
        Convertible Preferred Stock converted, in the aggregate, 9,440,200 shares
        of
        Series A Preferred Stock, on a one for one basis, into 9,440,200 shares of
        the
        Company’s Common Stock.
  On
        August
        28, 2007, the holders of the Series B Redeemable Convertible Preferred Stock
        converted 10,414,654 shares of Series B Preferred Stock, on a one for one
        basis,
        into 10,414,654 shares of the Company’s Common Stock.
  During
        September 30, 2007 the Company granted 100,000 restricted stock units to
        one
        employee.
  ***Convertible
        Preferred Stock - Series A - Par Value $0.01***
  In
        February, 2004, the Board of Directors authorized the issuance of up to
        12,000,000 shares of  Series A Convertible Preferred Stock at a
        conversion rate of one share of common stock for each share of Series A
        Convertible Preferred Stock. The Company issued 8,650,000 shares to its founders
        upon the formation of the Company. The Series A Preferred Stock provides
        certain
        rights to its holders which include dividends (if declared), optional conversion
        rights, anti-dilution protection and voting rights. The Series A Preferred
        Stock
        is not redeemable.
  During
        2004, the Company issued 414,000 shares of Series A Convertible Preferred
        stock
        for prices ranging between $.04 and $1.00 per share, or $136,000.
  During
        2004, the Company distributed (pre-incorporation distributions) $161,277
        to
        preferred Series A shareholders.




F-13






During
        2005, the Company issued 376,200 shares of preferred stock for prices ranging
        between $.16 and $.94 per share, or $76,115.
  During
        2005, the Company distributed (pre-incorporation distributions) $107,543
        to
        preferred Series A shareholders.
  ***Redeemable Convertible Preferred Stock - Series B - par value
        $0.01***
  On
        April
        19, 2006, the Board of Directors authorized the issuance of up to 24,000,000
        shares of Series B Redeemable Convertible Preferred Stock (“Series B Preferred
        Stock”), which may be converted into common stock at a rate of one share of
        common stock for each share of Series B Preferred Stock. In April 2006, the
        Company issued 10,414,654 shares of Series B Preferred Stock for $0.85 per
        share, or $8,852,456, through a private placement offering. The Redeemable
        Preferred Stock was recorded at its fair value ($7,901,456) at the date of
        issuance, net of transaction fees. In connection with the private placement,
        the
        Company paid $560,000 in transaction fees and also issued a warrant to purchase
        460,000 shares of Series B Preferred Stock, which may be converted into common
        stock at the same conversion rate of one-for-one, to the financial advisers
        who
        brokered the transaction. The warrant expires in June, 2011 and has an exercise
        price of $0.85.
  The
        warrants were recorded as a liability in accordance with SFAS No. 150,
*Accounting for Certain Financial Instruments with Characteristics of
        both
        Liabilities and Equity,* at its fair value of $391,000. This amount
        represents a fixed value (the difference between the redemption value and
        the
        proceeds to be received from the exercise of the warrants) as defined in
        accordance with the terms of the Series B Redeemable Convertible Preferred
        Stock
        agreement, for which the Company, (until August 28, 2007), was subject to
        certain redemption provisions related to these securities, as further discussed
        below. The offset was recorded (as stock issuance costs) as a reduction to
        the proceeds of the Series B Redeemable Convertible Preferred Stock in
        accordance with EITF Topic D-98.
  The
        Series B shares are automatically converted into shares of common stock upon
        the
        earlier of (i) the completion of a public offering raising gross proceeds
        of at
        least $20 million or an offering price greater than 200% of the applicable
        conversion price, (ii) common stock becoming Publicly listed, as defined
        below,
        or (iii) written consent of two-thirds (2/3rd) of Series B holders. In addition,
        the Series B carries preferential liquidation rights ahead of common shares,
        at
        a specified conversion price, subject to certain adjustments.  Holders
        of Series B shares are also entitled to liquidated damages of 2% of the
        liquidating preference, for each share outstanding, for the months of August
        through September 2007, if by July 31, 2007, common shares are (i) not
        registered under Regulation 12 (b) or (g) of the Securities and Exchange
        Act of
        1934 or (ii) the Company is not listed on the AIM Branch of the London Exchange
        (“Publicly Listed”). The liquidated damages continue to accrue each month for
        August through September 30, 2007.  After such date the Series B
        holders are entitled to mandatory redemption at two (2) times the liquidation
        price, as specified. The Series B shares carry certain anti-dilution provisions
        and are only entitled to dividends if common shareholders receive
        dividends.
  In
        accordance with EITF-D-98, “Classification and Measurement of Redeemable
        Securities”, the Company has classified the Series B Preferred Stock outside of
        permanent equity since the securities contained contingent redemption features
        that are not solely within the control of the Company.  The securities
        are carried at their face value (representing fair value) since the contingency
        has not been met and it is not probable.  If the redemption were
        considered likely to occur, the carrying value would be adjusted to its
        liquidation value.




F-14


On
        August
        28, 2007, the registration statement filed by the Company for its common
        stock
        to become Publicly Listed, became effective, at which time all of the Series
        B
        Redeemable Convertible Preferred Stock was converted to common stock and
        the
        value of the warrants were reclassified to additional paid-in capital since
        the
        cash redemption feature was no longer available to the holders of such
        securities.
   *Authorized
        Shares*
  On
        August
        6, 2007, the Company amended its Certification of Incorporation to increase
        its
        authorized stock to 150,000,000 shares of common stock, $.001 par value and
        40,000,000 shares of preferred stock, $.01 par value per share.
  **(6)
        Share Based Arrangements- Stock Award Plan**
  At
        September 30, 2007, the Company has a Stock Award Plan (the “Plan”) which
        provides for the issuance of common stock options and restricted stock units
        for
        certain employees, directors and outside consultants as further described
        below.
  The
        Plan,
        approved by the board of directors and amended in January, 2007, permits
        the
        grant of options and restricted stock up to a maximum of 7,449,308 shares.
        As of
        September 30, 2007, there were 24,308 options and restricted shares available
        for future awards. The options and restricted shares vest annually, based
        on
        employee anniversary, over four (4) years and three (3) years, respectively,
        for
        those granted through December 31, 2006 and vest quarterly for those granted
        after January 1, 2007. As of September 30, 2007, there were approximately
        $
        21,142 and $ 552,332 of total unrecognized compensation costs related to
        non-vested options and restricted stock, respectively to be expensed ratably
        over the period January, 2007 through June, 2010. No options have been exercised
        under the Plan.
  A
        summary
        of the activity of the Stock Award Plan is as follows:


****
              
              ****
              ****
              
              ****
              ****
              
              ****
              ****
              **Weighted******
              
              ****
              ****
              **Weighted**
              ****
              ****
              **Aggregate**
              ****
              ****
              **Average******
              **Shares**
              ****
              ****
              **Average**
              ****
              ****
              **Intrinsic**
              ****
              ****
              **Remaining******
              **Underlying**
              ****
              ****
              **Exercise**
              ****
              ****
              **Value**
              ****
              ****
              **Contractual
                  Life******
              **Awards**
              ****
              ****
              **Price**
              ****
              ****
              **$**
              **(000**
              **)**
              ****
              **(In
                  Years)******
              
              ****
              ****
              
              ****
              ****
              ****
              ****
              ****
              ****Awards
                  outstanding, December 31, 2006
              ****
              ****
              657,000
              ****
              ****
              $
              0.11
              ****
              ****
              ****
              **-**
              ****
              ****
              ****
              **-******
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****Options
                  granted
              ****
              ****
              590,000
              ****
              ****
              $
              0.11
              ****
              ****
              ****
              **-**
              ****
              ****
              ****
              10****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****Restricted
                  stock units granted
              ****
              ****
              6,650,000
              ****
              ****
              $
              0.11
              ****
              ****
              ****
              **-**
              ****
              ****
              ****
              **-******
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****Forfeitures
                  of options and restricted stock units
              ****
              ****
              (472,000
              )
              ****
              $
              0.11
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ********
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              **-**
              ****
              ****
              ****
              **-******
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****Awards
                  outstanding, September 30, 2007
              ****
              ****
              7,425,000
              ****
              ****
              $
              0.11
              ****
              ****
              ****
              **-**
              ****
              ****
              ****
              10****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****Awards
                  vested at September 30, 2007
              ****
              ****
              1,877,222
              ****
              ****
              $
              0.11
              ****
              ****
              ****
              **-**
              ****
              ****
              ****
              **-******
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****Options
                  exercisable at September 30, 2007
              ****
              ****
              148,333
              ****
              ****
              $
              0.11
              ****
              ****
              ****
              **-**
              ****
              ****
              ****
              10****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****Options
                  unvested at September 30, 2007
              ****
              ****
              526,667
              ****
              ****
              $
              0.11
              ****
              ****
              ****
              **-**
              ****
              ****
              ****
              **-******
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****Restricted
                  stock units exercisable at
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****September
                  30, 2007
              ****
              ****
              1,728,889
              ****
              ****
              $
              0.11
              ****
              ****
              ****
              **-**
              ****
              ****
              ****
              **-**
  F-15
 A
          summary
          of the status of the Company’s unvested share-based payment awards (restricted
          stock awards) as of September 30, 2007 and changes in the nine months then
          ended
          is as follows:
  ****
                
                ****
                ****
                **Weighted******
                
                ****
                ****
                **Average
                    Grant******
                **Awards**
                ****
                ****
                **Date
                    Fair Value******
                
                ****
                ****Shares
                    underlying awards unvested at January 1, 2007
                ****
                ****
                255,000
                ****
                ****
                **$**
                0.11****
                ****
                ****
                ****
                ****
                ****
                ****Shares
                    underlying restricted stock units granted
                ****
                ****
                6,650,000
                ****
                ****
                ****
                0.11****
                ****
                ****
                ****
                ****
                ****
                ****Forfeitures of
                    restricted stock units
                ****
                ****
                (155,000
                )
                ****
                ****
                0.11****
                ****
                ****
                ****
                ****
                ****
                ****Shares
                    underlying restricted stock units vested
                ****
                ****
                (1,728,889
                )
                ****
                ****
                0.11****
                ****
                ****
                ****
                ****
                ****
                ****Shares
                    underlying awards unvested at September  30,
                    2007
                ****
                ****
                5,021,111
                ****
                ****
                **$**
                0.11
  At
          September 30, 2007, the total fair value of share-based awards vested was
          $190,178.
  The
          Company recognizes stock-based compensation costs on a straight-line basis
          over
          the requisite service period of the award, which is generally the vesting
          term
          of the award. Total stock-based compensation expense included in the statements
          of operations was $192,663 and $-0- for the period ended September 30,
          2007 and
          2006, respectively.
  The
          fair
          value of the stock options granted is estimated on the date of grant using
          the
          Black-Scholes option valuation model. The Black-Scholes option valuation
          model
          was developed for use in estimating the fair value of traded options that
          have
          no vesting restrictions and are fully transferable. Option valuation models
          require the input of highly subjective assumptions, including expected
          life
          (using the plain vanilla method) and stock price volatility. The following
          weighted-average assumptions were used:
  ****
                **Nine
                    Months Ended**
                  **September 30,**
                  **2007**
                ****Dividend
                    Yield
                ****
                ****
                0
                %Expected
                    life (years)
                ****
                ****
                7.0
                ****Risk-free
                    interest rate
                ****
                ****
                4.7
                %Volatility
                ****
                ****
                52
                %
  The
          weighted average grant date fair value of options granted in 2007 calculated
          using the Black-Scholes pricing model was $0.04 per option.


F-16




The
        following table summarizes warrant activity for the nine months ended September
        30, 2007:
  Number
                  of Warrants
              
              
              Exercise
                  Price
              
              
              Weighted
                  Average Remaining Contractual Life (in years)Balance
                  outstanding, December 31, 2006
              
              
              460,000
              
              
              $
              0.85
              
              
              
              4Warrants
                  issued (a)
              
              
              6,550,000
              
              
              $
              0.86-
                  $1.00
              
              
              
              5Warrants
                  exercised
              
              
              --
              
              
              
              -
              
              
              
              -Warrants
                  expired
              
              
              --
              
              
              
              -
              
              
              
              -Warrants
                  cancelled
              
              
              --
              
              
              
              -
              
              
              
              -Balance
                  outstanding, September 30, 2007
              
              
              7,010,000
              
              
              $
              0.85- $1.00
              
              
              
              4-5Warrants
                  exercisable, September 30, 2007
              
              
              460,000
              
              
              $
              0.85
              
              
              
              4
  (a)
        In accordance with the warrant agreement these
        warrants are exercisable upon the registration of the related underlying
        shares
        of common stock.
  (7)
        Commitments and
        Contingencies
  The
          Company is obligated under seven (7) employment contracts with officers
          and
          employees aggregating approximately $1,000,000 with terms ranging from
          one to
          three years. The Company also issued stock options and restricted stock
          units to
          these individuals covered by their contracts.
  The
          Company rents office space on a month to month basis for $21,500. Rent
          expense
          for the nine months ended September 30, 2007 and 2006 was approximately
          $
          193,500 and $100,000, respectively.
  Under
          the terms of employment agreements the Company has had with its Chairman
          and
          Chief Executive Officer and with its Corporate Secretary, during the period
          from
          February 5, 2004 (inception) to December 31, 2004 and a portion of 2005
          and
          2006, the Company did not pay these officers a salary, as a result of the
          lack
          of available resources. The Company recorded compensation expense and a
          capital
          contribution of $360,000, $110,500 and $166,332 for the period from February
          5,
          2004 (inception) to December 31, 2004 and the years ended December 31,
          2005 and
          2006, respectively. These amounts are equal to the salaries that would
          have been
          paid during that period, representing an imputed compensation expense for
          the
          minimum base salary amount under the agreement with them, as if the Company
          had
          paid their salaries.
  The
          Company filed Form 10-SB with the Securities and Exchange Commission on
          June 29,
          2007, and an amendment to this filing on August 1, 2007. The effective
          date of
          this filing occurred August 28, 2007 (the “required listing date”). 
Therefore, in accordance with the Series B preferred certificate of designation,
          the Company determined in May, 2007, that they were required to pay the
          Series B
          shareholders liquidated damages of 2% per month for each share outstanding
          for
          each month the Company was not publicly listed, as defined therein. As
          a result,
          the Company recorded a charge (in accordance with the accounting requirements
          of
          EITF 00-19-2) for such damages of $208,000, which was paid in August,
          2007.




**(8)
      Legal Matters**




In
      the
      normal course of business, the Company may be involved in various legal
      proceedings which are incidental to its operations. Management is not aware
      of
      any ongoing proceedings that would have a material adverse effect on the
      Company’s financial statements.




**(9)
      Related Party Transactions**




The
      Company paid insurance commissions amounting to approximately $21,750 for the
      year ended December 31, 2006 to an insurance broker who is related to the
      Company’s Chairman of the Board.




**(10)
      Subsequent Events**




On
      October 16, 2007, Spiral Frog, Inc., and Sony/ATV
      Music  Publishing, entered into a Digital Music and Video License
      Agreement that grants SpiralFrog the right to use the underlying musical
      compositions of the songwriters and composers represented by SONY
      ATV.




F-17




**Item 2.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATIONS**




**Forward-Looking
      Statements**




*This
      Quarterly Report on Form 10-QSB contains forward-looking statements within
      the
      meaning of the federal securities laws. These statements relate to future events
      or our future financial performance and involve known and unknown risks,
      uncertainties and other factors that may cause our actual results, levels of
      activity, performance or achievements to be materially different from those
      expressed or implied by the forward-looking statements. In some cases, you
      can
      identify forward-looking statements by terminology such as “may”, “likely”,
“will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate”,
“predict”, “potential”, “continue” or the negative of these terms or other
      comparable terminology. These forward-looking statements include, but are not
      limited to, the statements relating to: our financial condition; results of
      operations; download activity; the impact of recently acquired catalogs on
      overall download rates; the relationship of low download rates with our return
      on investment; business strategy; future operating performance; industry growth
      trends; the evolution of music and video distribution; industry seasonality;
      management focus and objectives; business prospects; the purchase and license
      of
      music and video recordings by us; the processing of music and video recordings
      by us; our distribution of video content; our ability to process video
      recordings; the early stage nature of digital video distribution; our internal
      music and video processing capabilities; the digital rights and master
      recordings acquisition terms we seek from content owners; payment of royalties
      by our capitalization and amortization policies; the impact of recent accounting
      pronouncements; increases in future revenue; our expectations for achieving
      profitability in the near-term or long-term; our expectations for increases
      in
      operations, general and administrative expenses; our expectations for achieving
      cost synergies; the non-recurring nature of severance expense; our cash
      investment policy and market rate risk; and that our cash and cash equivalents
      will be adequate for the foreseeable future. You should not place undue reliance
      on these forward-looking statements ,which are based on our current views and
      assumptions. In evaluating these statements, you should specifically consider
      various factors, including the risks outlined under “Risk Factors ”in this
      Quarterly Report on Form 10-Q. Many of these factors are beyond our control.
      Our
      forward-looking statements represent estimates and assumption only as of the
      date of this report. Except as required by law, we undertake no obligation
      to
      update any forward-looking statement to reflect events or circumstances
      occurring after the date of this Quarterly Report on Form
      10-QSB.*




*The
      following discussion of our financial condition and results of operations should
      be read in conjunction with the audited financial statements and related notes
      of SpiralFrog, Inc. included in our Registration of Securities of Small Business
      Issuers Report on Form 10-SB, Amendment Number 3, for the year ended
      December 31, 2006 with the audited financial statements and related notes
      of SpiralFrog, Inc.*





3




**Background**





We
      were formed in February 5, 2004 as
      Mohen Entertainment Portals, LLC, which then merged with and into Mohen, Inc.
      on
      May 12, 2005. On August 6, 2007, we changed our name to SpiralFrog, Inc. We
      are
      a development stage company seeking to establish an advertising-funded, free
      and
      legal music download internet site specifically targeted to the age 13-34
      market. Substantially all revenue will be produced from advertising appearing
      on
      our website.  We initiated a beta test of our website in Canada in
      April 2007 and went live in Canada in May 2007. We launched our website in
      the
      United States on September 17, 2007. We intend to attract advertisers who desire
      to place targeted advertisements on our website. During 2006, we licensed sound
      records from Universal Music Group for use on our website and in 2007 we secured
      the licensing rights from Universal Music Canada, The Orchard Enterprises,
      Inc.,
      Independent Online Distribution Alliance, Inc. (IODA), INgrooves and other
      music
      companies. In addition on October 16, 2007 the Company entered into a licensing
      agreement with SONY/ATV Music Publishing for the right to use the underlying
      musical compositions of the songwriters and composers represented by SONY ATV.
      We are continuing our efforts to seek additional licensing rights from other
      record labels and music publishers to broaden our offering.





**Plan
      of Operations**





Over
      the next 12 months, we plan to
      aggressively expand our catalogue of music and videos available for download
      to
      our users.  In addition, we hope to attract a significantly large
      number of unique users and advertisers wanting to provide targeted marketing
      to
      our users.








·
            Sign
                additional independent music labels to add one million or more audio
                music
                tracks to our content inventory


·
            Expand
                United States sales force by adding at least five sales
                people.


·
            Sign
                additional United States publishing
                agreements.


·
            Sign
                second major record label.


·
            Hire
                creative site director


·
            Sign
                additional United States music publishing
                agreements


·
            Conduct
                a private placement to raise up to $25
                million.


·
            Sign
                third major music label and increase inventory to three million audio
                tracks.


·
            Achieve
                at least three million unique monthly
                users.


·
            Execute
                marketing campaign in the United States aimed at 13-34 year olds,
                through
                one or more of the following approaches: hire gorilla marketing firms
                for
                unconventional promotions; consumer targeted press releases; advertising
                on some of the youth community sites; or hiring “bloggers” to attract
                attention to us on the internet. ·
            Increase
              marketing programs


·
            Sign
                fourth major music label.


·
            Hire
                vice president of business development to provide joint marketing
                agreements and strategic alliances.


·
            Pre-launch
                in the United Kingdom.


·
            Provide
                mobile integration with website.


·
            Add
                advertising sponsorships sections to
                website.





4





**Liquidity
      and Capital Resources**





For
      the
      nine months ended September 30, 2007, net cash provided by financing activities
      was $9,917,350, which was primarily attributable to proceeds of approximately
      $10,955,000 (less financing costs) received from the issuance of Senior Secured
      Exchangeable notes. For the nine months ended September 30, 2006, net cash
      provided from financing activities was $8,292,456 as a result of the Company’s
      issuance of its Series B Redeemable Convertible Preferred Stock





**Results
      of operations for the nine months ended September 30, 2007 and
      2006**





Research
      and Development costs
      increased by $864,330 to $1,415,959 over the same period in 2006 primarily
      due
      to higher personnel costs associated with the continued maintenance and
      development of our website and development of our hardware and software
      technology. Royalty and License Expense increased to $1,782,779 which is
      indicative of the level of content the Company has secured from licensing deals
      with UMG Recording Inc., Universal Music Canada, The Orchard Enterprises, Inc.,
      Independent Online Distribution Alliance, Inc. (IODA), POLLSTAR, INgrooves
      and
      other music companies. In addition on October 16, 2007 the Company entered
      into
      a licensing agreement with SONY/ATV Music Publishing which will be accounted
      for
      in the fourth quarter on 2007.




General
      and Administrative Expenses
      increased $1,747,581 from $1,725,236 to $3,472,817 for the nine months ended
      September 30, 2007 due to increased administrative staff and related overhead
      expenses as we build our infrastructure.





We
      expect to incur significant capital
      expenditures during the next 12 months, which is contingent upon raising
      additional capital.  These anticipated expenditures are for music
      license acquisitions, website maintenance and development, overhead and working
      capital purposes. We have limited funding to conduct our
      operations.  There can be no assurance that adequate financing will be
      available in amounts or on terms acceptable to us, if at all.





We
      presently do not have any available
      credit, bank financing or other external sources of liquidity. Due to our brief
      history and historical operating losses, our operations have not been a source
      of liquidity. We will need to obtain additional capital in order to expand
      operations and become profitable. In order to obtain capital, we may need to
      sell additional shares of our common stock or borrow funds from private lenders.
      There can be no assurance that we will be successful in obtaining additional
      funding.





In
      April 2006, to obtain funding for
      our ongoing operations, we entered into a securities purchase agreement with
      accredited investors pursuant to which the investors purchased 10,414,654 shares
      of Series B Convertible Preferred Stock at a price per share of $0.85, for
      gross
      proceeds of approximately $8,852,456, less $951,000 in transaction fees (cash
      and warrants).  On August 28, 2007, our Series B Convertible Preferred
      Stock was automatically converted into shares of our common stock, upon the
      automatic effectiveness of our Form 10-SB Registration Statement, as our
      securities are now registered under Section 12(g) of the Securities Exchange
      Act
      of 1934.  The 10,414,654 shares of Series B Convertible Preferred
      Stock were converted into shares of our common stock on a one for one
      basis.




5




During
      March and April 2007, we entered
      into securities purchase agreements with  accredited investors for the
      sale of an aggregate of $5,000,000 in senior secured exchangeable notes, of
      which we received net proceeds of approximately $4,500,000 after expenses and
      closing costs.  On August 7, 2007, we entered into an amended and
      restated securities purchase agreement, pursuant to which we sold an additional
      $6,000,000 in senior secured exchangeable notes and issued 6,000,000
      warrants.





The
      senior secured exchangeable note
      bears interest at 12% per annum, payable monthly commencing October 1, 2007,
      maturing August 7, 2012, and is exchangeable into common stock, at the
      investor’s option, at a rate of $0.86 per share, subject to adjustment, as
      defined in the agreement.





The
      senior secured exchangeable notes
      are collateralized by 3,734,847 shares of Series A Convertible Preferred Stock
      and 2,930,000 shares of common stock of certain of our shareholders and
      directors. In addition, we executed a security agreement in favor of the
      investors granting them a first priority security interest in all of our goods,
      inventory, contractual rights and general intangibles, receivables, documents,
      instruments, chattel paper, and intellectual property.  The security
      agreement states that if an event of default occurs under the secured
      convertible debentures or security agreements, the investor has the right to
      take possession of the collateral, to operate our business using the collateral,
      and have the right to assign, sell, lease or otherwise dispose of and deliver
      all or any part of the collateral, at public or private sale or otherwise to
      satisfy our obligations under these agreements.




***Off-Balance
      Sheet Arrangements***




As
      of September 30, 2007, we had
      no off-balance sheet arrangements other than lease commitments for our corporate
      office.





**Critical
      Accounting Policies**





*Income
      Taxes*





We
      account for our income taxes in
      accordance with SFAS No. 109, “Accounting for Income Taxes.” Under SFAS No. 109,
      deferred tax assets and liabilities are recognized for the future tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their tax bases.
      Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. The effect on deferred
      tax
      assets or liabilities of a change in tax rates is recognized in the period
      that
      the tax change occurs. SFAS No. 109 also requires that deferred tax assets
      be
      reduced by a valuation allowance if it is more likely than not that some or
      all
      of the deferred tax asset will not be realized. We have established a valuation
      allowance related to the benefits of net operating losses for which utilization
      in future periods is uncertain. We believe it is more likely than not that
      we
      will not realize the benefits of these deductible differences in the near future
      and, therefore, a valuation allowance has been recorded to offset such future
      tax benefits.




6




*Revenue
      Recognition*





We
      expect that we will derive
      substantially all of our revenue from the sale of advertising on our
      website.  We anticipate to have four major advertising revenues
      streams:  Click Ad revenues will be recognized when an ad that is placed in
      our website is successfully ‘Clicked’ and linked to another website or area;
      Video revenues will be recognized when ads are played within the website; Banner
      revenues will be recognized when an ad is displayed in our website; and Imprint
      revenues will be recognized once the established number of times an ad is to
      be
      shown is displayed.  Any prepaid advertising payments received will be
      treated as deferred revenues.





Revenue
      shall not be recognized until
      it is realizable and earned, considering: the existence/proof of an arrangement;
      delivery has occurred or the services have been rendered; the price is fixed
      or
      determinable; and collection is reasonably assured.








*Research
      and Development*





In
      accordance with SFAS No. 2,
      "Accounting for Research and Development Costs," all research and development
      costs are expensed when they are incurred. Research and development expenses
      consist primarily of research and development activities associated with the
      development of our technology.  Since inception through September 30, 2007,
      we have expended $2,302,688 for research and development
      activities.





*Software
      Development*





We
      expense all costs incurred in the
      preliminary project stage for software developed for internal use and capitalize
      all external direct costs of materials and services consumed in developing
      or
      obtaining internal-use computer software in accordance with Statement of
      Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed
      or Obtained for Internal Use.” In addition, for employees who are directly
      associated with and who devote time to internal-use computer software projects,
      to the extent of the time spent directly on the project, we capitalize payroll
      and payroll-related costs of such employees incurred once the development has
      reached the applications development stage.  All costs incurred for
      upgrades, maintenance and enhancements that do not result in additional
      functionality are expensed. To date, we did not capitalize any software
      development costs as such technology has not reached any definitive stage
      of functionality. These costs once capitalized will be amortized to expense
      over
      the estimated life of the software technology.  We will
      periodically perform reviews of the recoverability of
      capitalized software costs.




7




*Web
      Site Development Costs*





We
      adopted Emerging Issues Task Force
      Abstract (“EITF”) Issue number 00-2, “Accounting for Web Site Development
      Costs.” EITF 00-2 provides guidance on the accounting for the costs of
      development of company web sites, dividing the web site development costs into
      five stages: (1) the planning stage, during which the business and/or project
      plan is formulated and functionalities, necessary hardware and technology
      are determined, (2) the web site application and infrastructure development
      stage, which involves acquiring or developing hardware and software to operate
      the web site, (3) the graphics development stage, during which the initial
      graphics and layout of each page are designed and coded, (4) the content
      development stage, during which the information to be presented on the web
      site,
      which may be either textual or graphical in nature, is developed, and (5) the
      operating stage, during which training, administration, maintenance and other
      costs to operate the existing web site are incurred. The costs incurred in
      the
      web site application and infrastructure stage, the graphics development stage
      and the content development stage are capitalized; all other costs are expensed
      as incurred. To date, we did not capitalize any web site development
      costs.  Such costs once capitalized will amortized to expense over the
      estimated life of the website technology.  We will periodically perform
      reviews of the recoverability of capitalized web site costs.





*Stock-Based
      Compensation*





Effective
      January 1, 2006, we adopted
      SFAS No. 123(R), "Share Based Payment," using the modified prospective
      transition method. There was no effect to the accompanying financial statements
      pursuant to the adoption of SFAS No. 123R. SFAS No. 123R is a revision of SFAS
      No. 123, and supersedes APB Opinion No. 25, and its related implementation
      guidance. SFAS No. 123(R) addresses all forms of share-based payment awards
      including shares issued under employee stock purchase plans, stock options,
      restricted stock and stock appreciation rights. Under SFAS No. 123(R),
      stock-based awards result in a cost that will be measured at fair value on
      the
      award's grant date, based on the estimated number of awards that are expected
      to
      vest that will result in a charge to operations.





Prior
      to January 1, 2006, we accounted
      for employee stock transactions in accordance with Accounting Principle Board
      ("APB") Opinion No. 25. "Accounting for Stock Issued to Employees." We had
      adopted the pro forma disclosure requirements of SFAS No. 123, "Accounting
      for
      Stock-Based Compensation."





Prior
      to our adoption of SFAS No.
      123(R), SFAS No. 123 required that we provide pro-forma information regarding
      net earnings and net earnings per share as if our stock-based awards had been
      determined in accordance with the fair value method prescribed therein. We
      previously adopted the disclosure portion of SFAS No. 148 "Accounting for
      Stock-based Compensation - Transition and Disclosure," requiring quarterly
      SFAS
      No. 123 pro-forma disclosures. The pro-forma charge for compensation cost
      related to stock-based awards granted was recognized over the service period.
      For stock options, the service period represents the period of time between
      the
      date of grant and the date each option becomes exercisable without consideration
      of acceleration provisions (e.g., retirement, change of control,
      etc.).





8




There
      were no stock options granted to employees during the year ended
      2005.





The
      cost of stock-based compensation
      awards issued to non-employees for services are recorded at either the fair
      value of the services rendered or the fair value of the stock-based award,
      whichever is more readily determinable, using the measurement date guidelines
      enumerated in Emerging Issues Task Force ("EITF") Issue No. 96-18, "Accounting
      for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services."





**Recent
      Accounting Pronouncements**





In
      February 2006, the FASB issued SFAS
      No. 155 "Accounting for Certain Hybrid Financial Instruments-an amendment of
      FASB Statements No. 133 and 140" ("FAS 155"). FAS 155 addresses the following:
      a) permits fair value re-measurement for any hybrid financial instrument that
      contains an embedded derivative that otherwise would require bifurcation; b)
      clarifies which interest-only strips and principal-only strips are not subject
      to the requirements of Statement 133; c) establishes a requirement to evaluate
      interests in securitized financial assets to identify interests that are
      freestanding derivatives or that are hybrid financial instruments that contain
      an embedded derivative requiring bifurcation; d) clarifies that concentrations
      of credit risk in the form of subordination are not embedded derivatives; and
      e)
      amends Statement 140 to eliminate the prohibition on a qualifying
      special-purpose entity from holding a derivative financial instrument that
      pertains to a beneficial interest other than another derivative financial
      instrument. FAS 155 is effective for all financial instruments acquired or
      issued after the beginning of an entity's first fiscal year that begins after
      September 15, 2006. We have not yet completed our evaluation of the impact
      of
      adopting SFAS 155 on our results of operations or financial position, but do
      not
      expect the adoption to have a material impact.





In
      March 2006, the FASB issued SFAS 156
      - "Accounting for Servicing of Financial Assets - an amendment of FASB Statement
      No. 140" ("SFAS 156"). SFAS 156 is effective for the first fiscal year beginning
      after September 15, 2006. SFAS 156 changes the way entities account for
      servicing assets and obligations associated with financial assets acquired
      or
      disposed of. We have not yet completed our evaluation of the impact of adopting
      SFAS 156 on our results of operations or financial position, but do not expect
      that the adoption of SFAS 156 will have a material impact.





In
      July 2006, the Financial Accounting
      Standards Board issued Interpretation No. 48, "Accounting for Uncertainty in
      Income Taxes - an Interpretation of FASB Statement No. 109" (the
      "Interpretation"). The Interpretation establishes for all entities a minimum
      threshold for financial statement recognition of the benefit of tax positions,
      and requires certain expanded disclosures. The Interpretation is effective
      for
      fiscal years beginning after December 31, 2006, and is to be applied to all
      open
      tax years as of the date of effectiveness. We are in the process of evaluating
      the impact of the adoption of this Interpretation. We do not expect this
      Interpretation to have a material impact on our financial position or results
      of
      operations.




9




In
      September 2006, the FASB issued
      Statement of Financial Accounting Standard No. 157, "Fair Value Measurements"
      (“SFAS 157”). This statement defines fair value, establishes a fair value
      hierarchy to be used in generally accepted accounting principles and expands
      disclosures about fair value measurements. Although this statement does not
      require any new fair value measurements, the application could change current
      practice. The statement is effective for fiscal years beginning after November
      15, 2007. We are currently evaluating the impact of this statement and do not
      expect the adoption of this pronouncement to have a material impact on our
      financial position or results of operations.





In
      February 2007, the FASB issued SFAS
      No. 159, "The Fair Value Option for Financial Assets and Liabilities" ("SFAS
      No.
      159"). SFAS No. 159 provides companies with an option to report selected
      financial assets and liabilities at fair value, and establishes presentation
      and
      disclosure requirements designed to facilitate comparisons between companies
      that choose different measurement attributes for similar types of assets and
      liabilities. The new guidance is effective for fiscal years beginning after
      November 15, 2007. We are currently evaluating the potential impact of this
      statement and do not expect the adoption of this pronouncement to have a
      material impact on our financial position or results of operations.





In
      September 2006, the staff of the
      Securities and Exchange Commission issued SAB No. 108 which provides
      interpretive guidance on how the effects of the carryover or reversal of prior
      year misstatements should be considered in quantifying a current year
      misstatement. SAB 108 becomes effective in fiscal 2007. The adoption of this
      pronouncement is not expected to have an impact on our financial position,
      results of operation or cash flows.





In
      December 2006, the FASB approved
      FASB Staff Position (FSP) No. EITF 00-19-2, "Accounting for Registration Payment
      Arrangements" ("FSP EITF 00-19-2"), which specifies that the contingent
      obligation to make future payments or otherwise transfer consideration under
      a
      registration payment arrangement, whether issued as a separate agreement or
      included as a provision of a financial instrument or other agreement, should
      be
      separately recognized and measured in accordance with SFAS No. 5, "Accounting
      for Contingencies". FSP EITF 00-19-2 also requires additional disclosure
      regarding the nature of any registration payment arrangements, alternative
      settlement methods, the maximum potential amount of consideration and the
      current carrying amount of the liability, if any. The guidance in FSP EITF
      00-19-2 amends FASB Statements No. 133, "Accounting for Derivative Instruments
      and Hedging Activities", and No. 150, "Accounting for Certain Financial
      Instruments with Characteristics of both Liabilities and Equity", and FASB
      Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
      for
      Guarantees, Including Indirect Guarantees of Indebtedness of Others", to include
      scope exceptions for registration payment arrangements.





FSP
      EITF 00-19-2 is effective
      immediately for registration payment arrangements and the financial instruments
      subject to those arrangements that are entered into or modified subsequent
      to
      the issuance date of this FSP, or for financial statements issued for fiscal
      years beginning after December 15, 2006, and interim periods within those fiscal
      years, for registration payment arrangements entered into prior to the issuance
      date of this FSP. The adoption of this pronouncement is not expected to have
      a
      material impact on our financial position, results of operations or cash flows.
      However, we were required to pay the holders of our Series B Convertible
      Preferred Stock liquidated damages of 2% per month for each share outstanding
      for each month after July 31, 2007 and through September 30, 2007 that we are
      not publicly listed.





10




**Item 3.**
            **CONTROLS
                AND PROCEDURES**




**Evaluation
      and Disclosure Controls and Procedures**




The
      Company, under the supervision and with the participation of the Company’s
      management, including the Company’s Chief Executive Officer and Chief Financial
      Officer, have evaluated the effectiveness of the design and operation of the
      Company’s “disclosure controls and procedures,” as such term is defined in Rules
      13a-15e promulgated under the Securities and Exchange Act of 1934, as amended
      (the Exchange Act”), as of this report. Based upon the evaluation, the Chief
      Executive Officer and Chief Financial Officer have concluded that the Company’s
      disclosure controls and procedures were effective as to the end of the period
      covered by this report to provide reasonable assurance that information required
      to be disclosed by the Company in reports that it files or submits under the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in SEC rules and forms.




However,
      during the September quarter of 2007, the company was not able to complete
      its
      month-end close process on a timely basis. This resulted in delays in the
      preparation of the monthly financial reports and certain adjustments to these
      reports. The second condition identified, is in our inability to ensure that
      the
      accounting for our complex debt and equity-based transactions is accurate and
      complete. These conditions are considered significant deficiencies.




As
      a
      development stage company seeking to expand its business, we recognize the
      need
      to enhance our systems, policies and procedures.  We also recognize
      the need to retain highly skilled financial management to assist us in
      accounting for complex financing transactions.  During the current
      quarter of 2007, we have taken measures to implement reporting controls to
      allow
      for more timely reporting and we have hired an interim CFO on a consulting
      basis, with extensive financial accounting experience, to assist us in
      accurately reporting complex financing transactions when they
      occur.




Based
      on
      these additional efforts and additional time spent by the new interim CFO in
      connection with the review, management believes the financial statements are
      accurate in their presentation of the financial results for the quarter ended
      September 30, 2007.




**Changes
      in Internal Controls**




There
      were no changes in our internal control over financial reporting that
      occurred  during the quarter ended September 30, 2007, that has
      materially affected or is reasonably likely to materially affect, our internal
      control over financial reporting.




11




**Limitations
      on Effectiveness of Controls**




A
      control
      system, no matter how well conceived and operated, can provide only reasonable,
      not absolute, assurance that the objectives of the control system are met.
      Because of the inherent limitations in all control systems, no evaluation of
      controls can provide absolute assurance that all control issues and instances
      of
      fraud, if any, within a company have been detected. The Company’s disclosure
      controls and procedures are designed to provide reasonable assurance of
      achieving its objectives. The Company’s principal executive officer and
      principal financial officer concluded that the Company’s disclosure controls and
      procedures are effective at that reasonable assurance level.







**PART
      II – OTHER INFORMATION**







**Item 1.**
            **LEGAL
                PROCEEDINGS**




In
      the
      normal course of business, the Company may be involved in various legal
      proceedings which are incidental to its operations. Management is not aware
      of
      any ongoing proceedings that would have a material adverse effect on the
      Company’s financial statements.




**Item 2.**
            **UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS**





On
      August 28, 2007, we issued
      10,414,654 shares of our common stock to investors upon the automatic conversion
      of all issued and outstanding shares of series B preferred stock.





During
      August and September 2007, we
      issued 9,440,200 shares of our common stock to investors upon the conversion
      of
      all issued and outstanding shares of series A preferred stock.





In
      connection with the Amended and Restated agreement of August 7, 2007, 6,000,000
      warrants to purchase common stock with an exercise price of $1.00 per share,
      exchangeable on a one-for-one basis into 6,000,000 shares of common stock were
      issued to holder of Senior Secured Exchangeable notes. An additional 550,000
      warrants were issued to the placement agent


with
      an
      exercise price of $0.86 per share, in connection with the
      aforementioned.








**Item 3.**
            **DEFAULTS
                UPON SENIOR SECURITIES**




None




**Item 4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS**




None




**Item 5.**
            **OTHER
                INFORMATION**




None




12





**Item 6.**
            **EXHIBITS**





**Exhibit**
              **Number**
            
            **Description**3.1
            
            Certificate
                of Incorporation and amendments, filed as an exhibit to the Registration
                Statement on Form 10SB filed with the Securities and Exchange Commission
                on June 29, 2007 and incorporated herein by reference.3.2
            
            By-Laws,
                filed as an exhibit to the Registration Statement on Form 10SB filed
                with
                the Securities and Exchange Commission on June 29, 2007 and incorporated
                herein by reference.3.3
            
            Certificate
                of Designation of Series A preferred stock, filed as an exhibit to
                the
                Registration Statement on Form 10SB filed with the Securities and
                Exchange
                Commission on June 29, 2007 and incorporated herein by
                reference.3.4
            
            Certificate
                of Designation of Series B preferred stock and amendments, filed
                as an
                exhibit to the Registration Statement on Form 10SB filed with the
                Securities and Exchange Commission on June 29, 2007 and incorporated
                herein by reference.3.5
            
            Certificate
                of Amendment to the Certificate of Incorporation, filed as an exhibit
                to
                the amended Registration Statement on Form 10SB/A filed with the
                Securities and Exchange Commission on August 20, 2007 and incorporated
                herein by reference.4.1
            
            Form
                of Securities Purchase Agreement, filed as an exhibit to the Registration
                Statement on Form 10SB filed with the Securities and Exchange Commission
                on June 29, 2007 and incorporated herein by reference.4.2
            
            Form
                of Senior Secured Exchangeable Note, filed as an exhibit to the
                Registration Statement on Form 10SB filed with the Securities and
                Exchange
                Commission on June 29, 2007 and incorporated herein by
                reference.4.3
            
            Form
                of Registration Rights Agreement, filed as an exhibit to the Registration
                Statement on Form 10SB filed with the Securities and Exchange Commission
                on June 29, 2007 and incorporated herein by reference.4.4
            
            Form
                of Security Agreement, filed as an exhibit to the Registration Statement
                on Form 10SB filed with the Securities and Exchange Commission on
                June 29,
                2007 and incorporated herein by reference.4.5
            
            Form
                of Guaranty, filed as an exhibit to the Registration Statement on
                Form
                10SB filed with the Securities and Exchange Commission on June 29,
                2007
                and incorporated herein by reference.4.6
            
            Form
                of Amended and Restated Securities Purchase Agreement, filed as an
                exhibit
                to the amended Registration Statement on Form 10SB/A filed with the
                Securities and Exchange Commission on August 20, 2007 and incorporated
                herein by reference.4.7
            
            Form
                of Senior Secured Exchangeable Note, filed as an exhibit to the amended
                Registration Statement on Form 10SB/A filed with the Securities and
                Exchange Commission on August 20, 2007 and incorporated herein by
                reference.4.8
            
            Form
                of Warrant, filed as an exhibit to the amended Registration Statement
                on
                Form 10SB/A filed with the Securities and Exchange Commission on
                August
                20, 2007 and incorporated herein by reference.4.9
            
            Form
                of Pledge Agreement, filed as an exhibit to the amended Registration
                Statement on Form 10SB/A filed with the Securities and Exchange Commission
                on August 20, 2007 and incorporated herein by
                reference.4.10
            
            Amendment
                No. 1 to Security Agreement, filed as an exhibit to the amended
                Registration Statement on Form 10SB/A filed with the Securities and
                Exchange Commission on August 20, 2007 and incorporated herein by
                reference.10.1
            
            Employment
                Agreement between the Company and Mel Schrieberg, filed as an exhibit
                to
                the Registration Statement on Form 10SB filed with the Securities
                and
                Exchange Commission on June 29, 2007 and incorporated herein by
                reference.10.2
            
            Employment
                Agreement between the Company and Vesa Suomalainen, filed as an exhibit
                to
                the Registration Statement on Form 10SB filed with the Securities
                and
                Exchange Commission on June 29, 2007 and incorporated herein by
                reference.10.3
            
            Employment
                Agreement between the Company and Orville Hagler, filed as an exhibit
                to
                the Registration Statement on Form 10SB filed with the Securities
                and
                Exchange Commission on June 29, 2007 and incorporated herein by
                reference.10.4
            
            Consulting
                Agreement between the Company and Joe Mohen, filed as an exhibit
                to the
                Registration Statement on Form 10SB filed with the Securities and
                Exchange
                Commission on June 29, 2007 and incorporated herein by
                reference.10.5
            
            Agreement
                for the Inclusion of Universal Sound Recordings and Universal Videos
                in
                Online, On-Demand Ad-Supported Services between the Company and UMG
                Recordings, Inc.10.6
            
            EMI
                Music Publishing Agreement, filed as an exhibit to the Registration
                Statement on Form 10SB filed with the Securities and Exchange Commission
                on June 29, 2007 and incorporated herein by reference.10.7
            
            Employment
                Agreement between the Company and George Hayes, filed as an exhibit
                to the
                Registration Statement on Form 10SB filed with the Securities and
                Exchange
                Commission on June 29, 2007 and incorporated herein by
                reference.10.8
            
            Amendment
                No. 1 to Agreement for the Inclusion of Universal Sound Recordings
                and
                Universal Videos in Online, On-Demand Ad-Supported Services between
                the
                Company and UMG Recordings, Inc., filed as an exhibit to the Registration
                Statement on Form 10SB filed with the Securities and Exchange Commission
                on August 31, 2007 and incorporated herein by
                reference.10.9
            
            Digital
                Music and Video License Agreement between the Company and Universal
                Music
                Publishing Group dated May 16, 2007, filed as an exhibit to the
                Registration Statement on Form 10SB filed with the Securities and
                Exchange
                Commission on August 31, 2007 and incorporated herein by
                reference.10.10
            
            Digital
                Music and Video License Agreement between the Company and BMG Music
                Publishing division of Universal Music Publishing Group dated August 6,
                2007.10.11
            
            Digital
                Music and Video Distribution Agreement between the Company and Independent
                Online Distribution Alliance, Inc. dated August 16, 2007, filed as
                an
                exhibit to the Registration Statement on Form 10SB filed with the
                Securities and Exchange Commission on August 31, 2007 and incorporated
                herein by reference.10.12
            
            Digital
                Music and Video License Agreement between the Company and The Orchard
                Enterprises, Inc. dated November 15, 2006, filed as an exhibit to
                the
                Registration Statement on Form 10SB filed with the Securities and
                Exchange
                Commission on August 31, 2007 and incorporated herein by
                reference.31.1
            
            Certification
                of Principal Executive Officer and Principal Financial Officer pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 200232.1
            
            Certification
                of Principal Executive Officer and Principal Financial Officer pursuant
                to
                18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002




13







**SIGNATURES**








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





SPIRALFROG,
              INC.November
                __,
                2007
            By:
            /s/ Mel
              SchriebergMel
              SchriebergChief
              Executive Officer
              (Principal Executive Officer and Principal Financial Officer)  14