UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q





x     QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934


For the
quarterly period ended July 31, 2009





OR





 ̈    TRANSITION
REPORT UNDER SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934


For the
transition period from _______ to _______





Commission
File Number 0-53359





WEBDIGS,
INC.





(Exact
name of registrant as specified in its charter)





Delaware
              
              11-3820796(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification No.)





3433 West
Broadway St, NE, Suite 501, Minneapolis, MN


(Address
of Principal Executive Offices)





(612)
767-3854


(Registrant’s
telephone number, including area code)





(Former
name, former address and former fiscal year, if changed from last
report)





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.  YesxNo ̈





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





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





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





As of
September 21, 2009 there were 32,293,184 shares of the issuer’s common stock,
$0.001 par value, outstanding.








Table of
Contents





PagePART
      I – FINANCIAL INFORMATIONItem
      1.
                      Consolidated
      Financial Statements
                      1Item
      2.
                      Management’s
      Discussion and Analysis of Financial Condition and
      Results of Operations
                      30Item
      3.
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      39Item
      4.
                      Controls
      and Procedures
                      39PART
      II – OTHER INFORMATIONItem
      1.
                      Legal
      Proceedings
                      40Item
      1A.
                      Risk
      Factors
                      40Item
      2.
                      Unregistered
      Sales of Equity Securities
                      40Item
      3.
                      Defaults
      Upon Senior Securities
                      41Item
      4.
                      Submission
      of Matters to a Vote of Shareholders
                      41Item
      5.
                      Other
      Information
                      41Item
      6.
                      Exhibits
                      41SIGNATURES
                      41EXHIBIT
      INDEX
                      42










PART
I – FINANCIAL INFORMATION





Item
1.  Consolidated Financial Statements.





WEBDIGS,
INC.





CONSOLIDATED
FINANCIAL STATEMENTS


(UNAUDITED)





FOR
THE THREE AND NINE MONTH


PERIODS
ENDED JULY 31, 2009 AND 2008




1




WEBDIGS,
INC.


TABLE OF CONTENTS





PAGEConsolidated
      Financial Statements:Consolidated
      Balance Sheets
                
                3Consolidated
      Statements of Operations
                
                5Consolidated
      Statements of Cash Flows
                
                6Notes
      to Consolidated Financial Statements
                
                8





2





WEBDIGS,
INC.







CONSOLIDATED
BALANCE SHEETS


(Unaudited)





July
      31, 2009
                              (Unaudited)
                            
                            
                            October
      31, 2008
                              (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                            
                            $
                            46,309
                            
                            
                            $
                            37,802Commissons
      and fees receivable
                            
                            
                            31,612
                            
                            
                            
                            12,467Prepaid
      expenses and deposits
                            
                            
                            14,902
                            
                            
                            
                            14,011Debt
      issuance costs, net
                            
                            
                            480
                            
                            
                            
                            -Other
      current assets
                            
                            
                            14,080
                            
                            
                            
                            6,125Total
      current assets
                            
                            
                            107,383
                            
                            
                            
                            70,405Investment
      in Marketplace Home Mortgage Webdigs, LLC
                            
                            
                            21,084
                            
                            
                            
                            2,182Office
      equipment and furniture, net
                            
                            
                            36,902
                            
                            
                            
                            30,202Intangible
      assets, net
                            
                            
                            2,153,104
                            
                            
                            
                            351,430Total
      assets
                            
                            $
                            2,318,473
                            
                            
                            $
                            454,219


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


3





WEBDIGS,
INC.




CONSOLIDATED
BALANCE SHEETS (continued)


(Unaudited)





July
      31, 2009
                                      (Unaudited)
                                    
                                    
                                    October
      31, 2008
                                      (Audited)LIABILITIES AND STOCKHOLDERS'
      DEFICITCurrent
      liabilities:Current
      portion of capital lease obligations
                                    
                                    $
                                    4,102
                                    
                                    
                                    $
                                    3,828Accounts
      payable
                                    
                                    
                                    315,346
                                    
                                    
                                    
                                    377,538Accounts
      payable - minority stockholder
                                    
                                    
                                    626,786
                                    
                                    
                                    
                                    550,206Due
      to officers
                                    
                                    
                                    38,571
                                    
                                    
                                    
                                    27,277Accrued
      expenses:Professional
      fees
                                    
                                    
                                    27,000
                                    
                                    
                                    
                                    50,000Payroll
      and commissions
                                    
                                    
                                    27,500
                                    
                                    
                                    
                                    32,269Lease
      expenses for vacated office space
                                    
                                    
                                    -
                                    
                                    
                                    
                                    55,913Other
                                    
                                    
                                    20,148
                                    
                                    
                                    
                                    15,170Promissory
      note payable, net of discount
                                    
                                    
                                    132,290
                                    
                                    
                                    
                                    -Total
      current liabilities
                                    
                                    
                                    1,191,743
                                    
                                    
                                    
                                    1,112,201Long
      term liabilities:Capital
      lease obligation, less current portion
                                    
                                    
                                    7,319
                                    
                                    
                                    
                                    10,431Total
      liabilities
                                    
                                    
                                    1,199,062
                                    
                                    
                                    
                                    1,122,632Stockholders'
      deficit:Common
      stock  - $.001 par value; 125,000,000 shares authorized as
      commonstock
      and an additional 125,000,000 shares designated as common
    orpreferred
      stock;  32,293,184 and 22,308,711 common shares issued
      andoutstanding
      at July 31, 2009 and October 31, 2008, respectively
                                    
                                    
                                    32,294
                                    
                                    
                                    
                                    22,309Treasury
      stock - $.001 par value; 1,063,628 shares and 0 shares held
    intreasury
      as of July 31, 2009 and October 31, 2008, respectively
                                    
                                    
                                    (265,907
                                    )
                                    
                                    
                                    -Additional
      paid-in-capital
                                    
                                    
                                    4,901,116
                                    
                                    
                                    
                                    2,002,226Accumulated
      deficit
                                    
                                    
                                    (3,548,092
                                    )
                                    
                                    
                                    (2,692,948
                                    )Total
      stockholders' deficit
                                    
                                    
                                    1,119,411
                                    
                                    
                                    
                                    (668,413
                                    )Total
      liabilities and stockholders' deficit
                                    
                                    $
                                    2,318,473
                                    
                                    
                                    $
                                    454,219


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





4





WEBDIGS,
INC.







CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)





Three
      Months Ended
                                                            
                                                            
                                                            Nine
      Months EndedJuly
      31,
                                                            
                                                            
                                                            July
      31,2009
                                                            
                                                            
                                                            2008
                                                            
                                                            
                                                            2009
                                                            
                                                            
                                                            2008(unaudited)
                                                            
                                                            
                                                            (unaudited)
                                                            
                                                            
                                                            (unaudited)
                                                            
                                                            
                                                            (unaudited)Revenue:Gross
      revenues
                                                            
                                                            $
                                                            451,841
                                                            
                                                            
                                                            $
                                                            272,882
                                                            
                                                            
                                                            $
                                                            631,033
                                                            
                                                            
                                                            $
                                                            462,387Less:
      commissions, rebates and thirdparty
      agent commissions
                                                            
                                                            
                                                            (204,515
                                                            )
                                                            
                                                            
                                                            (131,849
                                                            )
                                                            
                                                            
                                                            (285,839
                                                            )
                                                            
                                                            
                                                            (198,452
                                                            )Net
      revenues
                                                            
                                                            
                                                            247,326
                                                            
                                                            
                                                            
                                                            141,033
                                                            
                                                            
                                                            
                                                            345,194
                                                            
                                                            
                                                            
                                                            263,935Operating
      expenses:Selling
                                                            
                                                            
                                                            243,192
                                                            
                                                            
                                                            
                                                            353,252
                                                            
                                                            
                                                            
                                                            563,036
                                                            
                                                            
                                                            
                                                            1,339,366General
      and administrative
                                                            
                                                            
                                                            225,793
                                                            
                                                            
                                                            
                                                            278,243
                                                            
                                                            
                                                            
                                                            573,421
                                                            
                                                            
                                                            
                                                            545,851Total
      operating expenses
                                                            
                                                            
                                                            468,985
                                                            
                                                            
                                                            
                                                            631,495
                                                            
                                                            
                                                            
                                                            1,136,457
                                                            
                                                            
                                                            
                                                            1,885,217Operating
      loss
                                                            
                                                            
                                                            (221,659
                                                            )
                                                            
                                                            
                                                            (490,462
                                                            )
                                                            
                                                            
                                                            (791,263
                                                            )
                                                            
                                                            
                                                            (1,621,282
                                                            )Other
      income (expense):Equity
      in income from Marketplace Home MortgageWebdigs,
      LLC
                                                            
                                                            
                                                            117
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            18,902
                                                            
                                                            
                                                            
                                                            -Interest
      expense
                                                            
                                                            
                                                            (210,630
                                                            )
                                                            
                                                            
                                                            (462
                                                            )
                                                            
                                                            
                                                            (303,484
                                                            )
                                                            
                                                            
                                                            (504
                                                            )Loss
      on change in fair value of derivatives and warrants
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (63,708
                                                            )
                                                            
                                                            
                                                            -Total
      other income (expense)
                                                            
                                                            
                                                            (210,513
                                                            )
                                                            
                                                            
                                                            (462
                                                            )
                                                            
                                                            
                                                            (348,290
                                                            )
                                                            
                                                            
                                                            (504
                                                            )Net
      loss from continuing operations beforeincome
      taxes
                                                            
                                                            
                                                            (432,172
                                                            )
                                                            
                                                            
                                                            (490,924
                                                            )
                                                            
                                                            
                                                            (1,139,553
                                                            )
                                                            
                                                            
                                                            (1,621,786
                                                            )Income
      tax provision
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -Net
      loss from continuing operations
                                                            
                                                            
                                                            (432,172
                                                            )
                                                            
                                                            
                                                            (490,924
                                                            )
                                                            
                                                            
                                                            (1,139,553
                                                            )
                                                            
                                                            
                                                            (1,621,786
                                                            )Discontinued
      operations  (Note 7):Income
      (loss) from operations of Marquest Financial, Inc.(including
      gain on disposal of $297,412 during the threemonths
      ended July 31, 2009)
                                                            
                                                            
                                                            292,686
                                                            
                                                            
                                                            
                                                            (63,499
                                                            )
                                                            
                                                            
                                                            284,409
                                                            
                                                            
                                                            
                                                            (124,708
                                                            )Income
      tax effect
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -Income
      (loss) from discontinued operations
                                                            
                                                            
                                                            292,686
                                                            
                                                            
                                                            
                                                            (63,499
                                                            )
                                                            
                                                            
                                                            284,409
                                                            
                                                            
                                                            
                                                            (124,708
                                                            )Net
      loss
                                                            
                                                            $
                                                            (139,486
                                                            )
                                                            
                                                            $
                                                            (554,423
                                                            )
                                                            
                                                            $
                                                            (855,144
                                                            )
                                                            
                                                            $
                                                            (1,746,494
                                                            )Net
      loss per common share - basic and dilutedLoss
      from continuing operations
                                                            
                                                            
                                                            (0.01
                                                            )
                                                            
                                                            
                                                            (0.03
                                                            )
                                                            
                                                            
                                                            (0.04
                                                            )
                                                            
                                                            
                                                            (0.08
                                                            )Income
      (loss) from discontinued operations
                                                            
                                                            
                                                            0.01
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            0.01
                                                            
                                                            
                                                            
                                                            -Net
      income (loss)
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            (0.03
                                                            )
                                                            
                                                            $
                                                            (0.03
                                                            )
                                                            
                                                            $
                                                            (0.08
                                                            )Weighted
      average common shares outstanding -basic
      and diluted
                                                            
                                                            
                                                            28,417,170
                                                            
                                                            
                                                            
                                                            21,789,275
                                                            
                                                            
                                                            
                                                            24,553,883
                                                            
                                                            
                                                            
                                                            20,689,797




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





5




WEBDIGS,
INC.
  
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Nine
Months Ended July 31, 2009 and 2008
 
 Nine
      Months EndedJuly
      31,2009
                                
                                
                                2008(unaudited)
                                
                                
                                (unaudited)Cash
      flows from operating activities:Net
      loss
                                
                                $
                                (855,144
                                )
                                
                                $
                                (1,746,494
                                )Adjustments
      to reconcile net loss to net cash flowsused
      in operating activities:Depreciation
                                
                                
                                10,948
                                
                                
                                
                                23,939Stock
      warrant expense to debt holders for agreement modification
                                
                                
                                138,010
                                
                                
                                
                                -Amortization
      of intangible assets
                                
                                
                                145,331
                                
                                
                                
                                146,372Amortization
      of convertible/promissory note payable discount
                                
                                
                                129,873
                                
                                
                                
                                -Amortization
      or debt issuance costs
                                
                                
                                3,520
                                
                                
                                
                                -Loss
      on change in fair value of derivatives and warrants
                                
                                
                                63,708
                                
                                
                                
                                -Loss
      on disposal of fixed assets
                                
                                
                                -
                                
                                
                                
                                580Equity
      in the income of Marketplace Home Mortgage -Webdigs,
      LLC
                                
                                
                                (18,902
                                )
                                
                                
                                -Share-based
      compensation
                                
                                
                                179,447
                                
                                
                                
                                166,791Gain
      on sale of subsidiary
                                
                                
                                (297,412
                                )
                                
                                
                                -Common
      stock issued for services
                                
                                
                                7,000
                                
                                
                                
                                -Changes
      in operating assets and liabilities:Commissions
      and fees receivable
                                
                                
                                (19,145
                                )
                                
                                
                                (28,735
                                )Prepaid
      expenses and deposits
                                
                                
                                119,109
                                
                                
                                
                                14,005Other
      current assets
                                
                                
                                (7,955
                                )
                                
                                
                                (8,744
                                )Accounts
      payable
                                
                                
                                (25,893
                                )
                                
                                
                                309,162Accounts
      payable - minority stockholder
                                
                                
                                76,580
                                
                                
                                
                                216,052Accrued
      expenses and other liabilities
                                
                                
                                52,209
                                
                                
                                
                                18,158Net
      cash flows used in operating activities
                                
                                
                                (298,716
                                )
                                
                                
                                (888,914
                                )Cash
      flows from investing activities:Purchase
      of equipment and fixtures
                                
                                
                                -
                                
                                
                                
                                (18,216
                                )Purchase
      of equipment and intangible assets
                                
                                
                                (157,733
                                )
                                
                                
                                -Cash
      paid for business acquistion
                                
                                
                                (5,000
                                )
                                
                                
                                -Net
      cash flows used in investing activities
                                
                                
                                (162,733
                                )
                                
                                
                                (18,216
                                )Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                                
                                
                                335,500
                                
                                
                                
                                841,500Proceeds
      from issuance of convertible debentures, net of debt
    issuancecosts
      of $4,000 and unrelated accrued legal fees of $20,000
                                
                                
                                226,000
                                
                                
                                
                                -Principal
      payment on convertible/promissory note
                                
                                
                                (100,000
                                )
                                
                                
                                -Increase
      (decrease) in due to officers
                                
                                
                                11,294
                                
                                
                                
                                (17,601
                                )Principal
      payments on capital lease obligations
                                
                                
                                (2,838
                                )
                                
                                
                                (5,861
                                )Net
      cash flows provided by financing activities
                                
                                
                                469,956
                                
                                
                                
                                818,038Net
      change in cash and cash equivalents
                                
                                
                                8,507
                                
                                
                                
                                (89,092
                                )Cash
      and cash equivalents, beginning of period
                                
                                
                                37,802
                                
                                
                                
                                113,280Cash
      and cash equivalents, end of period
                                
                                $
                                46,309
                                
                                
                                $
                                24,188
 
 The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  6


WEBDIGS,
INC.
 
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Nine
Months Ended July 31, 2009 and 2008
 
 Nine
      Months EndedJuly
      31,2009
                                            
                                            
                                            2008(unaudited)
                                            
                                            
                                            (unaudited)Supplemental cash flow
      informationCash
      paid for interest
                                            
                                            $
                                            16,958
                                            
                                            
                                            $
                                            6,987Supplemental disclosure of non-cash investing
      andfinancing activitiesIssuance
      of common stock to convertible debt holder as a discount
onthe
      debt
                                            
                                            $
                                            20,000
                                            
                                            
                                            $
                                            -Discount
      on convertible debt due to detachable warrant and embeddedconversion
      options
                                            
                                            $
                                            127,583
                                            
                                            
                                            $
                                            -Accrued
      legal fees paid by withholding from debt proceeds
                                            
                                            $
                                            20,000
                                            
                                            
                                            $
                                            -Related
      party contribution to consultant for prepaid consulting
    fees
                                            
                                            $
                                            40,000
                                            
                                            
                                            $
                                            -Common
      stock issued for prepaid consulting fees
                                            
                                            $
                                            80,000
                                            
                                            
                                            $
                                            -Sell
      Marquest Financial, Inc subsidiary to its founder for a return
      ofWebdigs
      common stock
                                            
                                            $
                                            265,907
                                            
                                            
                                            $
                                            -Issuance
      of common stock to acquire Iggy's assets
                                            
                                            $
                                            1,815,625
                                            
                                            
                                            $
                                            -Issuance
      of common stock to acquire theMLSDirect.com
                                            
                                            $
                                            47,000
                                            
                                            
                                            $
                                            -Convert
      accrued officer salary to common stock
                                            
                                            $
                                            55,000
                                            
                                            
                                            $
                                            -Void
      forfeted balance of unearned compensation
                                            
                                            $
                                            41,098
                                            
                                            
                                            $
                                            -
 
 The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  7




WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008





1
            BASIS
      OF PRESENTATION





The
accompanying unaudited consolidated financial information has been prepared by
Webdigs, Inc. (the “Company”) in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities
and Exchange Commission (SEC).  Accordingly, it does not include all
of the information and notes required by accounting principles generally
accepted in the United States of America for complete financial
statements.  In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair statement of
this financial information have been included.  Financial results for
the interim period presented are not necessarily indicative of the results that
may be expected for the fiscal year as a whole or any other interim
period.  This financial information should be read in conjunction with
the audited consolidated financial statements and notes included in the
Company’s Annual Report on Form 10K for the year ended October 31,
2008.





2
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





Nature of
Business





Webdigs,
Inc. (“the Company”) was incorporated on May 25, 1994 under the name of Select
Video, Inc. The Company changed to its current name on October 23,
2007.  Select Video, Inc. was an inactive shell from February 29, 2000
to October 24, 2007 when they entered into a Share Exchange and Acquisition
Agreement whereby it agreed to issue 15,818,251 shares of its common stock to
its subsidiary Select Video Acquisition, LLC which in-turn used those shares to
acquire all of the outstanding units of Webdigs, LLC, a private company
organized in the state of Minnesota resulting in Webdigs, LLC as the surviving
entity. Webdigs, LLC, based in Minneapolis, MN, was organized on May 1,
2007.  All of the Company’s real estate brokerage operations are
operated under Webdigs, LLC. Our two main real estate brokerage brands are
Webdigs and Iggys House.   Webdigs.com is a web-assisted real
estate website and broker, offering a similar customer experience as a full
service broker utilizing a discounted flat-rate percentage fee structure for
listing services to their selling customers and a graduated fee structure for
their buying customers by rebating up to one-half of its broker commissions.
IggysHouse.com is a web-assisted real-estate listing service which enables the
customer to pay a monthly discounted fee to list their homes on their local real
estate multiple listing service but for which there is no additional fee upon
the closing of the transaction.





Upon
completion of the transaction on October 24, 2007, Webdigs, LLC became a wholly
owned subsidiary of Webdigs, Inc.  Since the transaction resulted in
the existing members of Webdigs, LLC acquiring control of Webdigs, Inc., for
financial statement purposes, the merger has been accounted for as a
recapitalization of Webdigs, Inc. (a reverse merger with Webdigs, LLC as the
accounting acquirer).





8





WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008





Consolidation
Policies





The
consolidated financial statements for the nine month periods ended July 31, 2009
and 2008, include the accounts of Webdigs, Inc. and its wholly-owned subsidiary,
Webdigs, LLC, which includes wholly owned subsidiaries of Home Equity Advisors,
LLC, and Credit Garage, LLC.  The investment in Marketplace Home
Mortgage - Webdigs, LLC (49% ownership) is recorded on the equity
method.  All significant intercompany accounts and transactions have
been eliminated in the consolidation.    The Company
divested one of its subsidiaries, Marquest Financial, Inc. on June 4, 2009 (see
Note 6).  The net results from Marquest have been segregated for all
periods presented in the statement of operations.





Estimates





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





Debt Issuance
Costs





The
Company accounts for debt issuance costs and other debt discounts by amortizing
the amounts using the effective interest method over the term of the related
debt instrument.





Intangible
Assets





We have
five types of intangible assets.





Website
Development


The
primary interface with the customer in our web-assisted real estate broker
operation is the Webdigs.com website. Certain costs incurred in development of
this website have been capitalized according to provision in Emerging Issues
Task Force Issue No. 00-2, Accounting for Website Development
Costs (EITF 00-2), and AICPA Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. Amortization is on a
straight-line method over the estimated useful life of the website of 3
years.   No additional costs were capitalized for the year ended
October 31, 2008 or the nine months ended July 31, 2009.


In June
2009, we acquired the assets of Iggys House, Inc. The most significant acquired
asset was the website of Iggys. We have capitalized this technology at
$1,336,769 and expect to begin amortizing it over a 2 year period it when the
site has again become operational.





9





WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008





Customer
Lists


The
Company accounts for customer lists under Statement of Financial Accounting
Statements (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS 142”).
Amortization expense is calculated using the straight-line method (which
approximates the anticipated revenue stream back to the Company) over the lists
estimated 2-3 year life.   In June 2009, we acquired two separate
customer lists from Iggys House for a fair value totaling
$355,922.  We will amortize these costs over the estimated 2 year
useful life of the lists.





Non-Compete
Agreements


The
Company accounts for non-compete agreements under Statement of Financial
Accounting Statements (“SFAS”) No. 142, Goodwill and Other Intangible Assets
(“SFAS 142”). Amortization expense is calculated using the straight-line method
(which approximates the anticipated revenue stream back to the Company) over the
agreement’s estimated 2 year life.   In the case of the asset
purchase of Iggys House, Inc. we have identified the fair value of the
non-compete agreement at $266,019.





Website Domain
Names


The
Company accounts for its website domain names under Statement of Financial
Accounting Statements (“SFAS”) No. 142, Goodwill and Other Intangible Assets
(“SFAS 142”).  We purchased 17 domain names in May 2009 from
theMLSdirect.com and expect to amortize the fair value of these names over a 2
year estimate useful life.   We have valued these domain names at
$25,000.





Contractual
Relationships


The
Company accounts for its contractual relationships intangible assets under
Statement of Financial Accounting Statements (“SFAS”) No. 142, Goodwill and
Other Intangible Assets (“SFAS 142”).  We purchased contractual broker
arrangements for brokers in 17 different states in May from theMLSdirect.com and
expect to amortize the fair value of these names over a 2 year estimate useful
life.   We have valued these contractual relationships at
$27,000.





The
Company last assessed impairment of intangible assets at October 31, 2008 and
determined that there was no impairment.   The Company concluded
that no impairment was present at July 31, 2009.   The Company
will retest for impairment on October 31, 2009.





Investment in Marketplace
Home Mortgage – Webdigs, LLC




On August
1, 2008, the Company contributed non-cash assets into a joint venture created
with Marketplace Home Mortgage, LLC for a 49% ownership interest (see Note 7).
The Company accounts for its investment in the joint venture using the equity
method. Accordingly, the Company records an increase in its investment for
contributions to the joint venture and for its 49% share of any income of the
joint venture, and a reduction in its investment for its 49% share of any losses
of the joint venture or disbursements of profits from the joint
venture.





10





WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008





Segments





Historically,
the Company has reported two strategic operating segments; (1) web-assisted real
estate broker and (2) mortgage broker.  Due to the divestiture of
Marquest Financial, Inc. and the limited activity in the operations of
Marketplace Home Mortgage – Webdigs, LLC the Company has determined that the
mortgage segment is no longer significant to its operations and therefore, now
reports as one strategic reporting segment.





Accounting for Convertible
Debentures, Warrants and Derivative Instruments





The
Company does not enter into derivative contracts for purposes of risk management
or speculation. However, from time to time, the Company enters into contracts
that are not considered derivative financial instruments in their entirety but
that include embedded derivative features.





The
Company accounts for its embedded conversion features and freestanding warrants
pursuant to 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) which requires freestanding contracts that are settled in a
company’s own stock to be designated as an equity instrument, asset, or a
liability. Under the provisions of EITF 00-19, a contract designated as an asset
or a liability must be carried at fair value on a company’s balance sheet, with
any changes in fair value recorded in the results of operations.





In
accordance with EITF 00-19, certain warrants to purchase common stock and
embedded conversion options are accounted for as liabilities at fair value and
the unrealized changes in the values of these derivatives are recorded in the
statement of operations as “gain or loss on warrants and derivatives.”
Contingent conversion features that reduce the conversion price of warrants and
conversion features are included in the valuation of the warrants and the
conversion features. The recognition of the fair value of derivative liabilities
(i.e. warrants and embedded conversion options) at the date of issuance is
applied first to the proceeds. The excess fair value, if any, over the proceeds
from a debt instrument, is recognized immediately in the statement of
operations as interest expense. The value of warrants or derivatives associated
with a debt instrument is recognized at inception as a discount to the debt
instrument. This discount is amortized over the life of the debt instrument
using the effective interest method. A determination is made upon settlement,
exchange, or modification of the debt instruments to determine if a gain or loss
on the extinguishment has been incurred based on the terms of the settlement,
exchange, or modification and on the value allocated to the debt instrument at
such date.





11





WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008





The
Company uses the Black-Scholes pricing model to determine fair values of its
derivatives. Valuations derived from this model are subject to ongoing internal
verification and review. The model uses market-sourced inputs such as interest
rates, exchange rates, and option volatilities. Selection of these inputs
involves management’s judgment and may impact net income (loss). The fair value
of the derivative liabilities are subject to the changes in the trading value of
the Company’s common stock. As a result, the Company’s financial statements may
fluctuate from quarter-to-quarter based on factors, such as the bid price of the
Company’s stock at the balance sheet date, the amount of shares converted by
note holders and/or exercised by warrant holders, and changes in the
determination of market-sourced inputs. Consequently, the Company’s financial
position and results of operations may vary materially from quarter-to-quarter
based on conditions other than its operating revenues and expenses.




Income
Taxes





The
Company accounts for income taxes using an asset and liability approach to
financial accounting and reporting for income taxes.  Accordingly,
deferred tax assets and liabilities arise from the difference between the tax
basis of an asset or liability and its reported amount in the consolidated
financial statements.  Deferred tax amounts are determined using the
tax rates expected to be in effect when the taxes will actually be paid or
refunds received, as provided under currently enacted tax
law.  Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.  Income tax
expense or benefit is the tax payable or refundable, respectively, for the
period plus or minus the change in deferred tax assets and liabilities during
the period.  The Company has recorded a full valuation allowance for
its net deferred tax assets as of July 31, 2009 and 2008 because realization of
those assets is not reasonably assured.





GAAP
requires the recognition of a financial statement benefit of a tax position only
after determining that the relevant tax authority would more likely than not
sustain the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement with the relevant tax
authority.





Recently Issued
Accounting  Pronouncements





In
February 2008, the FASB issued FASB Staff Position FAS 157-2 (“FSP FAS
157-2”) Effective Date of FASB
Statement No. 157 which delays the effective date of SFAS
No. 157 for non-financial assets and non-financial liabilities that are
recognized or disclosed in the financial statements on a nonrecurring basis to
fiscal years beginning after November 15, 2008. These non-financial items
include assets and liabilities such as reporting units measured at fair value in
a goodwill impairment test and non-financial assets acquired and non-financial
liabilities assumed in a business combination. The Company has not applied the
provisions of SFAS No. 157 to its non-financial assets and non-financial
liabilities in accordance with FSP FAS 157- 2.





12





WEBDIGS,
INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008





In June
2008, the FASB ratified the consensus reached by the EITF on Issue
No. 07-5, Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own
Stock (“EITF No. 07-5”). EITF No. 07-5 addresses the
determination of whether an instrument (or embedded feature) is indexed to an
entity’s own stock. EITF No. 07-5 would require the entity to account for
embedded conversion options as derivatives and record them on the balance sheet
as a liability with subsequent fair value changes recorded in the income
statement.  EITF-07-5 is effective for the financial statements issued
for fiscal years beginning after December 15, 2008, and early adoption is
prohibited.  The Company has not yet determined the effect that the
adoption of EITF 07-5 will have on its consolidated financial statements,
particularly with respect to its Convertible/Promissory Note Payable (See Note
8).





3
            GOING
      CONCERN





The
Company has incurred significant operating losses for the nine month periods
ended July 31, 2009 and 2008.  At July 31, 2009, the Company reports a
negative working capital position of $1,084,360 and an accumulated deficit of
$3,548,092.  It is management’s opinion that these facts raise
substantial doubts about the Company’s ability to continue as a going concern
without additional debt or equity financing.





In order
to meet its working capital needs through the next twelve months, the Company
plans to raise additional funds through the issuance of additional shares of
common stock and debt through private placements.  Although the
Company intends to obtain additional financing to meet our cash needs, we may be
unable to secure any additional financing on terms that are favorable or
acceptable to us, if at all. The Company has already begun reducing operating
expenditures and expects to increase revenues through its existing Webdigs.com
customer base and the fourth quarter addition of revenue from its Iggyshouse.com
website.





4
            RELATED
      PARTY TRANSACTIONS





Accounts Payable – Minority
Stockholder





The
Company’s principal advertising agency/website developer was owed $626,786 at
July 31, 2009 and $550,206 at October 31, 2008.  The two principals of
the website developer also are minority stockholders in the Company – holding
less than 2% of the Company’s outstanding shares at July 31,
2009.  For the nine months ended July 31, 2009 and 2008 respectively,
the Company incurred $126,579 and $546,800 in services from this minority
stockholder.    Included in these amounts is office rent
expense of $31,500 and $26,500 for the nine months ended July 31, 2009 and 2008,
respectively.





13





WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008





There is
no ongoing commitment from the Company or the related party regarding rental
office space for which the Company currently pays a market rate rent of $3,500
per month.





Due to
Officers





As of
July 31, 2009 and October 31, 2008, the Company was indebted to its officers for
amounts totaling $38,571 and $27,277, respectively, for business expenses and
consulting services.   All of the indebtedness represents
non-interest bearing payables due on demand.





5
            FIXED
      ASSETS AND INTANGIBLE ASSETS





On June
12, 2009, the Company entered into an Asset Purchase Agreement with Iggys House,
Inc. (Iggys House) to acquire selected assets of Iggys House in consideration of
$157,733 in cash and the issuance of a total of 7,262,500 shares of Webdigs
common stock to the former owners of Iggys House.  Iggys House is a
dormant entity that previously had operated as a web-assisted real estate broker
in 38 states.  The transaction was accounted for as an asset
acquisition, not a business combination, as per the Statement of Financial
Accounting Standards No. 141 (R) Business
Combinations.





The
Company calculated total consideration given for the asset purchase at
$1,973,358 using a per share value of $0.25 for the 7,262,500 issued as part of
the transaction and the $157,733 in cash paid.  The Company allocated
the fair value of the purchase consistent with Accounting Standards Codification
(ASC) 820, Fair Value
Measurements and Disclosures.The Company plans to
amortize the intangible assets ratably over their estimated useful lives of two
years.The initial
allocated fair values for the asset purchase are as follows in the table
below.  The Company did not undertake an independent valuation study
of the assets at this time and as such, the allocation is preliminary and future
refinements may materialize.





14





WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008





Asset
      Allocation
                              
                              Fair
      ValueComputer
      hardware
                              
                              $
                              17,648Intangible
      Assets:Website
      Software
                              
                              
                              1,333,769Customer
      lists
                              
                              
                              355,922Non-compete
      agreements
                              
                              
                              266,019Subtotal
      intangible assets
                              
                              
                              1,955,710Total
      asset purchase allocation
                              
                              $
                              1,973,358





As
of July 31, 2009 and October 31, 2008, the Company’s fixed assets were as
follows:





July
      31, 2009 (unuaudited)
                    
                    
                    October
      31, 2008 (audited)Gross
                      Carrying
                      Amount
                    
                    
                    Accumulated
                      Depreciation
                    
                    
                    Net
                      Carrying
                      Amount
                    
                    
                    Gross
                      Carrying
                      Amount
                    
                    
                    Accumulated
                      Depreciation
                    
                    
                    Net
                      Carrying
                      AmountFixed
      AssetsFurniture
      and Fixtures
                    
                    $
                    9,981
                    
                    
                    $
                    (2,851
                    )
                    
                    $
                    7,130
                    
                    
                    $
                    9,981
                    
                    
                    $
                    (475
                    )
                    
                    $
                    9,506Computer
      hardware
                    
                    
                    50,972
                    
                    
                    
                    (21,200
                    )
                    
                    
                    29,772
                    
                    
                    
                    33,324
                    
                    
                    
                    (12,628
                    )
                    
                    
                    20,696Total
      Fixed Assets
                    
                    $
                    60,953
                    
                    
                    $
                    (24,051
                    )
                    
                    $
                    36,902
                    
                    
                    $
                    43,305
                    
                    
                    $
                    (13,103
                    )
                    
                    $
                    30,202





Intangible
asset balances as of July 31, 2009 and 2008 are as follows:





15


WEBDIGS,
INC.
  
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three and Nine Month Periods Ended July 31, 2009 and
2008


July
      31, 2009 (unaudited)
                                    
                                    
                                    October
      31, 2008 (audited)Gross
                                      Carrying
                                      Amount
                                    
                                    
                                    Accumulated
                                      Amortization
                                    
                                    
                                    Net
      Carrying
                                      Amount
                                    
                                    
                                    Gross
                                      Carrying
                                      Amount
                                    
                                    
                                    Accumulated
                                      Amortization
                                    
                                    
                                    Net
                                      Carrying
                                      AmountIdentifiable
      assets with determinable livesWebsite
      Software
                                    
                                    $
                                    1,747,285
                                    
                                    
                                    $
                                    (252,704
                                    )
                                    
                                    $
                                    1,494,581
                                    
                                    
                                    $
                                    413,516
                                    
                                    
                                    $
                                    (149,325
                                    )
                                    
                                    $
                                    264,191Customer
      lists
                                    
                                    
                                    355,922
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    355,922
                                    
                                    
                                    
                                    130,859
                                    
                                    
                                    
                                    (43,620
                                    )
                                    
                                    
                                    87,239Non-compete
      agreements
                                    
                                    
                                    266,019
                                    
                                    
                                    
                                    (11,084
                                    )
                                    
                                    
                                    254,935
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Other
                                    
                                    
                                    52,000
                                    
                                    
                                    
                                    (4,334
                                    )
                                    
                                    
                                    47,666
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Total
      Intangible Assets
                                    
                                    $
                                    2,421,226
                                    
                                    
                                    $
                                    (268,122
                                    )
                                    
                                    $
                                    2,153,104
                                    
                                    
                                    $
                                    544,375
                                    
                                    
                                    $
                                    (192,945
                                    )
                                    
                                    $
                                    351,430





6
            ACQUISITIONS
      AND DIVESTITURES





Acquisition


The
following acquisition was accounted for as a business combination in accordance
with the Statement of Financial Accounting Standards No. 141
(R),  Business
Combinations; accordingly, the purchase price was allocated to the assets
acquired  based on the estimated fair values determined by the
Company’s management based upon information currently available and on current
assumptions as to future operations.





The
Company acquired the intangible assets, including a series of exclusive website
domain names and operations from the owners of theMLSDirect.com on May 13,
2009.    The Company gave consideration consisting of $5,000
cash and 100,000 shares of restricted common stock to complete the
transaction.   The share issuance was valued at $0.47 per common
share based upon the quoted OTC Bulletin Board price on the date of closing for
a total share value of $47,000.     The business
operations of theMLSDirect.com have been integrated into the existing Webdigs,
LLC operating entity.





The total
purchase consideration of $52,000 was allocated to the acquired identifiable
intangible assets, based on their estimated fair values at the acquisition date.
The estimated allocation of the purchase consideration was as
follows:





16





WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008





Allocation of Consideration
                  
                  ValueEstablished
      real estate broker network in 17 states
                  
                  $
                  27,000Website
      domain names
                  
                  
                  25,000Total
      consideration
                  
                  $
                  52,000





Divestiture


On June
4, 2009 the Company sold its 100% equity interest in Marquest Financial, Inc., a
non-operating entity which, until August 2008, had been the Company’s principal
mortgage brokerage operation.  In August 2008, the Company entered
into a joint venture with Marketplace Home Mortgage, LLC forming Marketplace
Home Mortgage – Webdigs, LLC, the Company’s current mortgage brokerage entity
(see Note 7).  Marquest was sold back to its founder, Mr. Edward Graca
for 1,063,628 shares of the Company’s common stock which was valued at $0.25 per
share based upon the quoted OTC bulletin Board price quoted at the date of
closing.   The shares had a total value of $265,907 and the net
carrying value of the Marquest entity was a negative
$31,505.  Accordingly, the transaction resulted in a gain of
$297,412.  The shares received by the Company were the shares provided
to Graca back when it was originally purchased from him in October
2007.  The shares returned in this divestiture were retained by the
Company as treasury stock.





A
summarized statement of operations for the discontinued operations
follows:





17





WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008





Three Months Ended
                                  
                                  
                                  Nine Months EndedMarquest Financial, Inc.
                                  
                                  July 31,
                                  
                                  
                                  July 31,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008(unaudited)
                                  
                                  
                                  (unaudited)
                                  
                                  
                                  (unaudited)
                                  
                                  
                                  (unaudited)Net
      Revenue
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  94,889
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  471,348Operating
      expenses
                                  
                                  
                                  (4,726
                                  )
                                  
                                  
                                  (156,417
                                  )
                                  
                                  
                                  (13,003
                                  )
                                  
                                  
                                  (589,573
                                  )Other
      income (expense)
                                  
                                  
                                  297,412
                                  
                                  
                                  
                                  (1,971
                                  )
                                  
                                  
                                  297,412
                                  
                                  
                                  
                                  (6,483
                                  )Pre
      - tax income
                                  
                                  
                                  292,686
                                  
                                  
                                  
                                  (63,499
                                  )
                                  
                                  
                                  284,409
                                  
                                  
                                  
                                  (124,708
                                  )Income
      taxes
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Net
      income
                                  
                                  $
                                  292,686
                                  
                                  
                                  $
                                  (63,499
                                  )
                                  
                                  $
                                  284,409
                                  
                                  
                                  $
                                  (124,708
                                  )-
                                  
                                  
                                  
                                  -





Assets and liabilities of the
discontinued operations as assumed by the buyer are as follows:





June 4, 2009Marquest Financial, Inc.
                                
                                (Unaudited)AssetsIntangible
      assets, customer list, net
                                
                                $
                                60,704Total
      assets
                                
                                $
                                60,704LiabilitiesAccounts
      payable
                                
                                $
                                30,996Accrued
      expnses
                                
                                
                                55,913Taxes
      payable
                                
                                
                                5,300Total
      liabilities
                                
                                $
                                92,209Net
      carrying value
                                
                                $
                                (31,505
                                )





18


WEBDIGS,
INC.
  
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three and Nine Month Periods Ended July 31, 2009 and 2008




7
            INVESTMENT
      IN MARKETPLACE HOME MORTGAGE - WEBDIGS,
LLC





On August
1, 2008, the Company entered into a joint venture arrangement with Marketplace
Home Mortgage, LLC whereby they created a new joint venture entity called
Marketplace Home Mortgage – Webdigs, LLC.  The Company contributed
assets with a net book value totaling $34,804 less transferred liabilities of
$23,558 for a 49% ownership stake in the joint venture, and Marketplace Home
Mortgage, LLC contributed cash totaling $23,039 for 51%
ownership.  The assets and liabilities contributed came entirely from
the Company’s mortgage brokerage subsidiaries; Marquest Financial, Inc. and Home
Equity Advisors, LLC.  All mortgage brokerage activity previously
performed within these entities will now take place under the new joint venture
created August 1, 2008.  Because the Company has the ability to
exercise significant influence as a result of rights granted in the purchase
agreement and its 49% ownership stake, the Company has accounted for this
transaction as an equity investment.





Summarized financial information for
this joint venture is as follows:





Summary Balance
Sheet





July
      31, 2009Current
      assets
                        
                        $
                        42,233Other
      assets
                        
                        
                        18,195Liabilities
                        
                        
                        (1,380
                        )Net
      equity
                        
                        $
                        59,048The
      Company's share in the equity in Marketplace Home Mortgage
    -Webdigs,
      LLC (49%)
                        
                        $
                        28,934Less:
      Deferred gain on excess of fair value received over net
    bookvalue
      of assets contributed to Marketplace Home Mortgage -Webdigs,
      LLC (1)
                        
                        
                        (7,850
                        )Investment
      in Marketplace Home Mortgage - Webdigs, LLC atJuly
      31, 2009
                        
                        $
                        21,084





(1)
            At
      July 31, 2009, the Company’s share of the underlying assets of Marketplace
      Home Mortgage – Webdigs, LLC exceeded its investment by
      $7,850.  The excess, which relates to office equipment, is being
      amortized into income over the estimated remaining life of the respective
      assets (31 months).





19





WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008





Summary Statement of
Operations





Three
      Months
                          Ended
      July 31,
                          2009
                        
                        
                        Nine
      months
                          ended
      July 31,
                          2009Revenue
      (1)
                        
                        $
                        -
                        
                        
                        $
                        246,413Operating
      expenses
                        
                        
                        (1,314
                        )
                        
                        
                        (212,491
                        )Operating
      income
                        
                        
                        (1,314
                        )
                        
                        
                        33,922Other
      expense
                        
                        
                        -
                        
                        
                        
                        -Net
      income
                        
                        $
                        (1,314
                        )
                        
                        $
                        33,922The
      Company's share in the income of Marketplace HomeMortgage
      Webdigs, LLC (49%)
                        
                        $
                        (643
                        )
                        
                        $
                        16,622Amortization
      of deferred gain on transfer of non-cash assets
                        
                        
                        760
                        
                        
                        
                        2,280Net
      equity in the income of Marketplace Home Mortgage -Webdigs,
      LLC
                        
                        $
                        117
                        
                        
                        $
                        18,902





(1)
              Marketplace
      Home Mortgage- Webdigs had no revenue for the quarter ending July 31,
      2009.  The Company expects to a make decision as to the future
      of the joint venture with its joint venture partner sometime in the fourth
      quarter of the current fiscal year ending October 31,
  2009.





20





WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008





8
            CONVERTIBLE/PROMISSORY
      NOTE PAYABLE





On
December 12, 2008, the Company entered into a $250,000 convertible/promissory
note (the Note) with Lantern Advisers, LLC (“Lantern”). The Note contains a
simple interest rate of 12% per annum with $2,500 (1%) payable to the lender on
a monthly basis. The Note proceeds were reduced by issuance and legal costs of
$24,000 to arrive at net proceeds of $226,000.  The Note terms require
repayment on or before September 30, 2009.   Company executive
officers and managers have pledged as collateral 4,510,910 shares of the
Company’s common stock which would be awarded to Lantern in the event of
non-fulfillment of the terms of the Note.  The Company’s Chairman and
CEO has also provided a personal guaranty for the entire amount of the
Note.





In
connection with the Note, the Company issued Lantern 200,000 shares of common
stock valued at $0.10 per share.  The share price of $.10 per share was
based on the most recent share price at which the Company had sold shares for
cash to accredited investors (prior to the listing of the Company’s stock on the
OTC bulletin board on December 19, 2008).  The issuance of these
shares was recorded as a discount to the Note and will be recognized over the
term of the Note using the effective interest method.





As
additional consideration for the Note, the Company issued Lantern a three-year
detachable warrant expiring December 11, 2011 to purchase up to 200,000 shares
of its common stock at an exercise price of $0.30 per share (the “Warrant”)
which was deemed to have a fair market value of $1,651 at the time of issuance.
The Company used the Black-Scholes-Merton pricing model as a method for
determining the estimated fair value of the warrants issued. The following
assumptions were used to estimate the fair market value of the warrant: risk
free interest rate of 1.1%; expected life of 1.5 years; no expected dividends;
and volatility of 74%.  The expected life of the Warrant was
determined using management’s estimate. The risk-free interest rate is based on
the Federal Reserve Board’s constant maturities of U.S. Treasury bond
obligations with terms comparable to the expected life of the warrants valued.
The Company’s volatility is based on the historical volatility of publicly
traded companies with similar business and risk characteristics of the Company.
The expense for the warrant was recorded as a discount to the Note and will be
recognized over the term of the Note using the effective interest
method.





In
addition to the above conditions, under the original agreement date of December
12, 2008, the Note would have been convertible at the option of Lantern at any
time into shares of the Company's common stock at a price equal to 75% of the
lowest bid price of the 5 days preceding conversion of the Note.  On
December 12, 2008, this conversion feature would have converted into 3,333,333
common shares of the Company’s stock at a conversion price of $.075 per
share.  On May 14, 2009, the Company agreed to revised terms for the
promissory note. The revisions to the promissory note eliminated the optional
conversion feature. As consideration for the elimination of the conversion
feature, the Company issued Lantern Advisers a warrant to purchase up to 300,000
shares of Webdigs common stock at $0.01 per share on or before December 12,
2009.  Using the Black-Scholes pricing model, these warrants had a
fair value of $138,010 which has been recorded as interest expense for the three
month period ended July 31, 2009. Other than as described above, there were no
other  changes to the terms of the promissory note.





21





WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008





In
connection with the above-described revision to the promissory note, the Company
paid Lantern Advisers $100,000 in principal under the promissory note, thereby
reducing the outstanding principal amount to $150,000. This amount, plus all
then accrued but unpaid interest remains due on September 30, 2009.





Because
the optional conversion feature has been eliminated from the promissory note,
the derivative elements of this debt transaction are no longer considered to be
a financial derivative.  Therefore, the fair value of the conversion
feature and embedded warrant as of April 30, 2009, which totaled $191,291, has
been reclassified to additional paid in capital during the three month period
ended July 31, 2009.





9
            SHARE- BASED
      COMPENSATION





Stock
Options





In May
2008, the Board of Directors approved the issuance of incentive stock
options totaling 600,000 shares to its non-employee directors. 
The exercise price of the options to purchase common stock was at
the fair market value of such shares on the date of the grant. Options
generally become exercisable ratably on the anniversary of the date of the grant
over a period of up to 2 years. There are no vesting provisions tied to
performance conditions for any outstanding options. Vesting for all outstanding
options is based solely on continued service as a director of the Company
and vest one-half on the grant date and one-quarter on each of the next two
yearly anniversaries of the grant. Options to purchase shares expire not later
than five years after the grant of the option.    One
of the Company’s directors resigned his position in July
2009.   As part of the separation agreement negotiated with the
director, the Company immediately declared as fully vested the previously
unvested portion of his options.





In June
2009, the Board of Directors approved the issuance of 200,000 incentive stock
options to an employee of the Company.  The options were issued on
June 12, 2009 and shall vest annually (50,000 options each) on each of the four
anniversary dates of the granting of the options.  The exercise price
of the shares purchased under these options shall be determined by calculating
75% of closing stock price on the last working day prior to the vesting date of
the options.   The options will expire five years after the
original grant date.





22





WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008





The
Company recognizes compensation expense for all stock options over the requisite
service period for vesting of the award.  Total stock-based compensation
expense included in the Company's consolidated statements of operations for the
nine months ended July 31, 2009 and 2008 was $18,861 and $41,610
respectively.   This expense is included in general and
administrative expense.  The compensation expense had less than a
$0.01 per share impact on the basic loss per common share for the nine
months ended July 31, 2009.  As of July 31, 2009, the
Company had $20,614 of unrecognized compensation expense related to the
outstanding stock options, which will be recognized over the next four
years.





The fair
value of each option grant was estimated as of the date of the grant using the
Black-Scholes pricing model.





The
following is a summary of stock option activity for the nine months ended July
31, 2009:





Number
      of
                        options
                      
                      
                      Weighted
                        average
                        exercise
                        price
                      
                      
                      Aggregate
                        intrinsic
                        value
                      
                      
                      Weighted
                        average
                        remaining
                        contractual
                        term (years)Outstanding
      at October 31, 2008
                      
                      
                      600,000
                      
                      
                      $
                      0.25
                      
                      
                      $
                      -
                      
                      
                      
                      3.75Granted
                      
                      
                      200,000
                      
                      
                      
                      0.08
                      
                      
                      
                      -
                      
                      
                      
                      5.00Exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Cancelled
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      at July 31, 2009
                      
                      
                      800,000
                      
                      
                      $
                      0.21
                      
                      
                      $
                      5,000
                      
                      
                      
                      4.10Exercisable
      at July 31, 2009
                      
                      
                      500,000
                      
                      
                      $
                      0.25
                      
                      
                      $
                      -
                      
                      
                      
                      3.75





The
intrinsic value of a stock award is the amount by which the fair value of the
underlying stock exceeds the exercise price of the award.  As of July
31, 2009, the Company’s stock was quoted at $0.10 per share.  The
total intrinsic value of the outstanding options was $5,000 at July 31,
2009.





Restricted Stock
Compensation





As of
July 31, 2009, the Company had completed the vesting of 6,388,310 shares of
time-based restricted common stock (non-vested shares) outstanding to certain
officers and employees of the Company.  This is the remaining balance
after forfeitures of an original grant of 8,610,347 restricted shares. The
original grants took place in the period ended October 31, 2007. As a condition
of the award, the officers and employees must be employed with the Company in
order to continue to vest in their shares over a two year period.  The
fair value of the non-vested shares is equal to the fair market value on the
date of grant and is recognized as expense ratably over the vesting
period.





23


WEBDIGS,
INC.
  
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three and Nine Month Periods Ended July 31, 2009 and
2008


In June,
2009 the Company granted a new employee 50,000 shares of time-based restricted
common stock.  As a condition of the award, the employee must be
employed with the Company throughout the six month vesting period ending in
December, 2009.





The
Company recorded $160,586 and $125,181 of stock compensation expense in the
consolidated statement of operations for the nine months ended July 31, 2009 and
2008,  respectively.





A summary
of the status of non-vested shares and changes as of July 31, 2009 is set forth
below:




24





WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008




Restricted
                    Shares
                  
                  
                  Unearned
                    CompensationOutstanding,
      October 31, 2007
                  
                  
                  4,686,904
                  
                  
                  $
                  365,398Granted
                  
                  
                  -
                  
                  
                  
                  -Vested
                  
                  
                  (577,806
                  )
                  
                  
                  (41,727
                  )Forfeited/canceled
                  
                  
                  -
                  
                  
                  
                  -Outstanding,
      January 31, 2008
                  
                  
                  4,109,098
                  
                  
                  
                  323,671Granted
                  
                  
                  -
                  
                  
                  
                  -Vested
                  
                  
                  (577,806
                  )
                  
                  
                  (41,727
                  )Forfeited/canceled
                  
                  
                  -
                  
                  
                  
                  -Outstanding,
      April 30, 2008
                  
                  
                  3,531,292
                  
                  
                  
                  281,944Granted
                  
                  
                  -
                  
                  
                  
                  -Vested
                  
                  
                  (577,806
                  )
                  
                  
                  (41,727
                  )Forfeited/canceled
                  
                  
                  -
                  
                  
                  
                  -Outstanding,
      July 31, 2008
                  
                  
                  2,953,486
                  
                  
                  
                  240,217Granted
                  
                  
                  -
                  
                  
                  
                  -Vested
                  
                  
                  (659,344
                  )
                  
                  
                  (41,727
                  )Forfeited/canceled
                  
                  
                  (353,329
                  )
                  
                  
                  -Outstanding,
      October 31, 2008
                  
                  
                  1,940,813
                  
                  
                  
                  198,490Granted
                  
                  
                  -
                  
                  
                  
                  -Vested
                  
                  
                  (652,311
                  )
                  
                  
                  (60,860
                  )Forfeited/canceled
                  
                  
                  -
                  
                  
                  
                  -Outstanding,
      January 31, 2009
                  
                  
                  1,288,502
                  
                  
                  
                  137,630Granted
                  
                  
                  -
                  
                  
                  
                  -Vested
                  
                  
                  (652,309
                  )
                  
                  
                  (60,861
                  )Forfeited/canceled
                  
                  
                  -
                  
                  
                  
                  -Outstanding,
      April 30, 2009
                  
                  
                  636,193
                  
                  
                  
                  76,769Granted
                  
                  
                  50,000
                  
                  
                  
                  12,500Vested
                  
                  
                  (407,999
                  )
                  
                  
                  (38,865
                  )Forfeited/canceled
                  
                  
                  (240,970
                  )
                  
                  
                  (41,098
                  )Outstanding,
      July 31, 2009
                  
                  $
                  37,224
                  
                  
                  $
                  9,306





25





WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008





10
            STOCKHOLDERS'
      EQUITY





On July
7, 2009, the Company sold 100,000 shares to a third-party accredited investor
for $10,000 ($0.10 per share) in cash proceeds.





On June
12, 2009, the Company issued 50,000 restricted shares to an employee of the
Company at a value of $12,500 or $0.25 per share as part of their employment
agreement, the trading value of the Company’s common stock at that
time.   These shares have a six-month vesting term (see note
9).





On June
12, 2009, the Company also issued 7,102,500 shares to Iggys House Inc. for the
acquisition of all of its assets for a value of $1,775,625 ($0.25 per share).
The Company also issued 100,000 shares to a securities brokerage for services
provided in connection with the Iggys House asset acquisition for a value of
$25,000 ($0.25 per share).





On June
12, 2009, in connection with the Iggys House asset purchase, the Company
sold 375,000 shares of stock to accredited investors for $150,000 ($0.40 per
share).   To fund the cash portion for every share of stock
issued 2.2 shares of Webdigs stock received by Iggys House were transferred by
Iggys House to these investors effectively reducing the net investor’s purchase price
of the Webdigs stock to $0.125 per share.  Included in the
375,000 shares are purchases from the Company’s Chairman and CEO of 43,750
shares and an outside director of an additional 43,750 shares.  In
connection with this offering, the Company issued 60,000 shares to a securities
brokerage for services provided for a value of $15,000 ($0.25 per
share).





On May
18, 2009, the Company’s CEO converted $50,000 of his accrued but unpaid
compensation owed to him by the Company into shares at a per-share price of
$0.35, receiving 142,857 shares. The Company’s CFO also converted $5,000 of his
accrued but unpaid compensation into shares at the same price, receiving 14,286
shares.





On May
14, 2009, the Company issued 1,750,000 shares in a private placement transaction
all at a per-share price of $0.10. Of these shares, the CEO purchased 500,000
shares for $75,000 in cash proceeds. Two other accredited investors participated
in the transaction and together received the remaining 1,250,000 shares sold in
the transaction for cash proceeds of $100,000





On May
13, 2009 the Company issued 100,000 shares at a value of $47,000 ($0.47 per
share) in connection with the acquisition of theMLSDirect.com
business.





On
January 12, 2009, the Company sold 2,000 shares to a third-party accredited
investor for $500 ($0.25 per share) in cash proceeds.





On
January 2, 2009, the Company issued 200,000 shares to third parties at a value
of $80,000 or $0.40 per share, the trading value of the Company’s common stock
at that time, for prepaid consulting services.





26





WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008





On
December 12, 2008, the Company issued 200,000 shares to an investment company as
issuance costs in connection with the $250,000 convertible note payable at a
value of $20,000 or $0.10 per share.  The $0.10 represents the most
recent price received for cash sales of shares which occurred prior to December
12, 2008.  (Note 8)





On
November 15, 2008, the Company issued 28,800 shares for $7,000 or $0.243 per
share for consulting services performed for the Company.  The $0.243
represents the most recent price received for cash sales of shares.





11
            BASIC
      AND DILUTED EARNINGS PER SHARE





The
Company computes earnings per share under two different methods, basic and
diluted, and present per share data for all periods in which statements of
operations are presented. Basic earnings per share are computed by dividing net
income by the weighted average number of shares of common stock outstanding.
Diluted earnings per share are computed by dividing net income by the weighted
average number of common stock and common stock equivalents
outstanding.





The
following table provides a reconciliation of the numerators and denominators
used in calculating basic and diluted earnings per share for the three and nine
months ended July 31, 2009 and 2008.





27





WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008




Three Months Ended
                                                                                        
                                                                                        
                                                                                        Nine Months EndedJuly 31,
                                                                                        
                                                                                        
                                                                                        July 31,2009
                                                                                        
                                                                                        
                                                                                        2008
                                                                                        
                                                                                        
                                                                                        2009
                                                                                        
                                                                                        
                                                                                        2008Basic
      earnings per share calculation:Net
      loss from continuing operations
                                                                                        
                                                                                        $
                                                                                        (432,172
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (490,924
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (1,139,553
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (1,621,786
                                                                                        )Net
      income (loss) from discontinued operations
                                                                                        
                                                                                        
                                                                                        292,686
                                                                                        
                                                                                        
                                                                                        
                                                                                        (63,499
                                                                                        )
                                                                                        
                                                                                        
                                                                                        284,409
                                                                                        
                                                                                        
                                                                                        
                                                                                        (124,708
                                                                                        )Net
      loss
                                                                                        
                                                                                        $
                                                                                        (139,486
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (554,423
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (855,144
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (1,746,494
                                                                                        )Weighted
      average of common sharesoutstanding
                                                                                        
                                                                                        
                                                                                        28,417,170
                                                                                        
                                                                                        
                                                                                        
                                                                                        21,789,275
                                                                                        
                                                                                        
                                                                                        
                                                                                        24,553,883
                                                                                        
                                                                                        
                                                                                        
                                                                                        20,689,797Net
      loss per common share - basicLoss
      from continuing operations
                                                                                        
                                                                                        
                                                                                        (0.01
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (0.03
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (0.04
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (0.08
                                                                                        )Income
      (loss) from discontinued operations
                                                                                        
                                                                                        
                                                                                        0.01
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        0.01
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Net
      income (loss) per basic share
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (0.03
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (0.03
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (0.08
                                                                                        )Diluted
      earnings per share calculation:Net
      loss from continuing operations
                                                                                        
                                                                                        $
                                                                                        (432,172
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (490,924
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (1,139,553
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (1,621,786
                                                                                        )Net
      income (loss) from discontinued operations
                                                                                        
                                                                                        
                                                                                        292,686
                                                                                        
                                                                                        
                                                                                        
                                                                                        (63,499
                                                                                        )
                                                                                        
                                                                                        
                                                                                        284,409
                                                                                        
                                                                                        
                                                                                        
                                                                                        (124,708
                                                                                        )Net
      loss
                                                                                        
                                                                                        $
                                                                                        (139,486
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (554,423
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (855,144
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (1,746,494
                                                                                        )Weighted
      average of common sharesoutstanding
                                                                                        
                                                                                        
                                                                                        28,417,170
                                                                                        
                                                                                        
                                                                                        
                                                                                        21,789,275
                                                                                        
                                                                                        
                                                                                        
                                                                                        24,553,883
                                                                                        
                                                                                        
                                                                                        
                                                                                        20,689,797Stock
      options, and warrants (1)
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Diluted
      weighted average common sharesoutstanding
                                                                                        
                                                                                        
                                                                                        28,417,170
                                                                                        
                                                                                        
                                                                                        
                                                                                        21,789,275
                                                                                        
                                                                                        
                                                                                        
                                                                                        24,553,883
                                                                                        
                                                                                        
                                                                                        
                                                                                        20,689,797Net
      loss per common share - dilutedLoss
      from continuing operations
                                                                                        
                                                                                        
                                                                                        (0.01
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (0.03
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (0.04
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (0.08
                                                                                        )Income
      (loss) from discontinued operations
                                                                                        
                                                                                        
                                                                                        0.01
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        0.01
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Net
      income (loss) per diluted share
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (0.03
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (0.03
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (0.08
                                                                                        )





(1)
            The
      computation of diluted net loss per share as of July 31, 2009 does not
      differ from the basic computation because potentially dilutive issuable
      securities of 800,000 stock options and 300,000 stock warrants would be
      anti-dilutive.  There were no potentially anti-dilutive shares
      as of July 31, 2008.





28





WEBDIGS,
INC.







NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For
the Three and Nine Month Periods Ended July 31, 2009 and 2008





12
            SUBSEQUENT
      EVENTS





Loan from Related
Party





On August
14, 2009, the Company’s Chairman and Chief Executive Officer loaned the Company
$10,000.  On September 1, 9th, and 11th, 2009, the Company’s Chairman
and Chief Executive Officer loaned the Company an additional $10,000, $20,000,
and $30,000 respectively, bringing the total principal amount due him to
$70,000.





The
principal amount of all this debt is accrued at a simple interest rate of 1% per
month.  The Chief Executive Officer will receive no additional
consideration for his loans.




29




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





Our
Management’s Discussion and Analysis of Financial Condition and Results of
Operation set forth below should be read in conjunction with our audited
consolidated financial statement contained in our Form 10K  filed with
the SEC on February 13, 2009  relating to our fiscal year ended
October 31, 2008.





Cautionary
Note Regarding Forward-Looking Statements





Some of
the statements made in this section of our report are forward-looking
statements. These forward-looking statements generally relate to and are based
upon our current plans, expectations, assumptions and projections about future
events.  Our management currently believes that the various plans,
expectations, and assumptions reflected in or suggested by these forward-looking
statements are reasonable.  Nevertheless, all forward-looking
statements involve risks and uncertainties and our actual future results may be
materially different from the plans, objectives or expectations, or our
assumptions and projections underlying our present plans, objectives and
expectations, which are expressed in this section.





In light
of the foregoing, prospective investors are cautioned that the forward-looking
statements included in this filing may ultimately prove to be inaccurate—even
materially inaccurate.  Because of the significant uncertainties
inherent in such forward-looking statements, the inclusion of such information
should not be regarded as a representation or warranty by Webdigs, Inc. or any
other person that our objectives, plans, expectations or projections that are
contained in this filing will be achieved in any specified time frame, if
ever.  We undertake no obligation to publicly release any revisions to
the forward-looking statements or reflect events or circumstances after the date
of this document. The risks discussed in the 10K filed with the SEC on February
13, 2009 should be considered in evaluating our prospects and future
performance.





General
Overview





We are a
web-assisted, full service real estate company that offers innovative services
to home buyers and sellers. We share with each buyer up to one-half (50%) of the
commission we receive from the seller or listing broker, with a minimum fee of
$3,000 per transaction to the Company.  We also offer discounted
listing services to customers wishing to sell their homes.  Our total
commission to our sellers is a flat rate of 3.9%, compared to a real estate
industry full service standard commission of 6%. Since more than 70% of home
buyers today begin their home search on the internet, we primarily target those
home buyers.  As part of our website interface and personal service,
we also provide home buyers tools to manage their purchase transactions from
initial search to the closing of their purchase.


30





Results
of Operation





For
the three month periods ended July 31, 2009 and 2008





We are
pleased with the result of the quarter ended July 31, 2009.  We cut
our operating losses by 55% to $221,659 for the three months ended July 31, 2009
as compared to a loss of $490,462 for the three month period ended July 31,
2008.  On a consolidated level, net revenues increased 75% from
$141,033 for the quarter ended July 31, 2008 to $247,326 for the quarter ended
July 31, 2009.  We are pleased, that our core real estate operations
continue to grow; net revenues were up 75% in the quarter ended July 31, 2009
despite a 73% decrease ($80,843) in advertising & promotion expenses.
Sequentially, we grew net real estate brokerage revenues 317% compared to the
quarter ended April 30, 2009.    In the three month period
ended April 30, 2009, we recorded net real estate revenue of $59,241 compared to
$247,326 for the quarter ended July 31, 2009.





On a
transaction level, we grew by 55% versus the same three month period last
year.  For the quarter ended July 31, 2009 we closed 62 real estate
transactions compared to 40 for the three month period ended July 31,
2008.





We also
have continued to evolve our real estate model and improve operating
efficiencies.   For the quarter ended July 31, 2009, our top
producing agents have been able to comfortably generate and close up to 10
transactions individually per month.





During
the quarter ended July 31, 2009, we continued to focus our marketing
expenditures towards low cost highly targeted real estate marketing in order
to  become cash flow positive on a quarterly basis as soon as
possible. To achieve these goals, we reduced selling expenses from $353,252 in
three months ended July 31, 2008 to $243,192 for the three months ended July 31,
2009.  Most significant among the selling cost decreases were two
items: website development and advertising and promotion. We cut our www.webdigs.com
website upkeep and development and other information technology expenses from
$109,234 for the three months ended July 31, 2008 to $32,666 for the three
months ended July 31, 2009.  For the same three month periods, we
reduced advertising and promotion from $111,384 to $30,541.





We
continue to strive to limit the spending we do on
administration.   For the three months ended July 31, 2009, we
were able to reduce our general and administrative spending by $52,450 to
$225,793 compared to $278,243 for three months ended July 31,
2008.  The most significant general and administrative expense
decrease was in non-cash compensation.   Non-cash stock
compensation costs directed to employees and directors decreased by $34,861
from $83,340 for the three months ended July 31, 2008 to $48,479 for the
three months ended July 31, 2009.  The additional $17,589 decrease in
administrative spending is largely due to a 1 person decrease in management
staffing.





We
experienced significant interest costs of $210,630 in the period ended July 31,
2009.    For the same period ended July 31, 2008, interest
expenses totaled $462.  Of the approximately $210,000 increase versus
last year, over 96% of the change (approximately $202,000) is due to interest
charges coming from our promissory note and a one-time charge to interest for
the warrants issued to Lantern in connection with the note modification (see
Note 8 of the financial statements).  The remaining increase of
approximately $8,000 comes from interest charges from our suppliers for overdue
payables.


31





On June
4, 2009, we unwound our prior acquisition of Marquest Financial,
Inc.  In the process, we returned the entire legal Marquest Financial,
Inc. entity to its previous owner, Mr. Edward Graca in exchange for 1,063,628
shares of Webdigs common stock which were owned by him.   In
doing so, we recognized a gain of $297,412.  Marquest also had
operating losses of $4,726 for the quarter ended July 31, 2009, resulting in
income from discontinued operations of $292,686 (see Note 6 of the financial
statements for more details).





For
the nine month periods ended July 31, 2009 and 2008





We are
pleased to report that our operating losses have been reduced by $830,019 (51%)
for the nine month period ended July 31, 2009.  We had operating
losses of $791,263 for the nine month periods ended July 31, 2009 compared to a
loss of $1,621,282 for the same period last year.  On a consolidated
level, net revenues increased 31% from $263,935 for the nine months ended July
31, 2008 to $345,194 for the nine months ended July 31, 2009.  The
most encouraging part of the revenue increase is that our core real estate sales
were up 67% from $206,366 for the nine months ended July 31, 2008 to $345,194
for the nine months ended July 31, 2009.    Our business
focus is centered on building our real estate brokerage operations so the real
estate revenue growth is important.  Consistent with the revenue
increase, we have seen a year over year growth of 43% in the number of real
estate transactions closed (from 61 to 87) for the nine month periods ended July
31, 2009 and 2008, respectively.





Despite a
decrease of $776,330 (58%) to $563,036 in selling expenses in the nine months
ended July 31, 2009 compared to the nine months ended July 31, 2008, we are
satisfied with our marketing results.   We have streamlined our
marketing operations. Most notably, Webdigs has reduced real estate brokerage
advertising and promotion expenditures by $388,969 (85%) through elimination of
print, TV and outdoor advertising.  Advertising in the current fiscal
year (nine months ended July 31, 2009) has successfully relied upon targeted
direct mail and internet marketing. Of the remaining $387,361 decrease in real
estate brokerage selling expenses for the nine months ended July 31, 2009,
$317,792 comes from reductions in website and other information technology
expenses.   We incurred $385,626 in information technology
expenses (real estate brokerage focused) in the nine months ended July 31,
2008.  For the nine months ended July 31, 2009, we have incurred only
$67,834 in information technology expenses.


32





For the
nine month periods ended July 31, 2009, we incurred $573,421 in general and
administrative expense spending compared to $545,851 for the same period last
year.   Although these costs have increased by $27,520 compared
to the prior year, we continue to hold a low administrative cost
structure.  If we exclude the $120,000 of non-cash investor relations
expenses we incurred in the nine month period ended July 31, 2009, (coming from
stock issuances related to the Company’s transition to publically traded status
in the current fiscal year), our administrative costs decreased by
$92,480.  The most significant cost decreases result from reductions
in use of outside contractors ($21,523 savings), reduced audit expenses
($18,676) and legal fees ($31,109).





Our
interest expense costs of $303,484 for the nine month period ended July 31, 2009
are largely due to the convertible/promissory note with Lantern Advisers (see
Note 8 of the financial statements).   The Lantern note accounts
for approximately $289,000 of the $303,484 year to date expense with the
remainder due to vendor finance charges.





As
mentioned above, on June 4, 2009, we unwound our prior acquisition of Marquest
Financial, Inc.  Due to the unwinding, we recognized a gain of
$297,412.  Marquest’s nine month operating losses of $13,003 offset
the gain on disposal resulting in overall income from discontinued operations of
$284,409 for the nine months ended July 31, 2009 (see Note 6 of the financial
statements for more details).





Assets
and Employees; Research and Development





Our
primary assets are cash and intellectual-property rights, which are the
foundation for our services. At this time, we do not anticipate purchasing or
selling any significant equipment or other assets in the near term. Neither do
we anticipate any imminent or significant changes in the number of our
employees.  We have recently acquired the assets of Iggys House, Inc.
(Iggys) and the business of theMLSDirect.com.   Iggys was
formerly a web-based online real estate broker that had operations in 38
states.   We expect that the acquisition of Iggys along with the
continued organic growth we expect to generate with our www.webdigs.com real
estate brokerage will ultimately result in the addition of real estate field
agents, an increase in website development costs and a small increase in
administrative staffing.  TheMLSDirect.com brings to us an existing
network of affiliate brokers in 17 states and exclusive rights to 17 website
domain names that should help us generate leads for our Webdigs real estate
operations.





We expect
that we will invest time, effort and expense in the continued refinement of our
website and the recently acquired www.iggyshouse.com
website and user interface. Currently, we expect to spend approximately $125,000
in such improvement activities over the remaining quarterof fiscal
2009.     As mentioned above, as of July 31, 2009 we
have spent approximately $68,000 of our anticipated $125,000 current fiscal year
website spending.


33





Liquidity
and Capital Resources; Anticipated Financing Needs





As of
July 31, 2009, we had $46,309 cash and cash equivalents, and current liabilities
of $1,191,743. On December 12, 2008, we obtained a convertible promissory
note in the amount of $250,000 from an investment group affiliated with current
shareholders of the Company (see Note 8 of the consolidated financial statements
for note conditions and details) for working capital needs. After an early
prepayment principal reduction of $100,000, our current balance of the
promissory note is $150,000 due on September 30, 2009.





We used
$298,716 of cash in operating activities during the nine months ended July 31,
2009 compared to $888,914 for the nine months ended July 31,
2008.  Cash used in operations for the nine months ended July 31, 2009
included a net loss of $855,144, which was partially offset by $361,523
of various non-cash expenses for depreciation, amortization, share-based
compensation, debt discount, gain on disposal of Marquest Financial, issuance
cost amortization, unrealized losses on derivatives, change in our equity
position with our joint venture and shares issued for vendor
payment.  For the nine months ended July 31, 2008, these non-cash
items totaled $337,682. For the nine months ended July 31, 2009, we were able to
make progress on reducing balances owed to key vendors, thereby using
$25,893 of cash for a reduction in accounts payable.  The decrease in
accounts payable of $25,893 is partially offset by increases in accounts payable
owed to related parties of $76,580 and accrued expenses and other liabilities of
$52,209.





For the
nine months ended July 31, 2009, cash flows used in investing activities
included payments of $157,733 for the purchase of Iggy’s House Inc. intangible
assets, and $5,000 used for the business acquisition of
theMLSDirect.com.  For the same period last year, we invested $18,216
in computer equipment.





In total,
financing activities provided $469,956 and $818,038 for the nine month periods
ended July 31, 2009 and 2008, respectively.   As mentioned above,
the convertible/promissory note we issued in December provided net cash proceeds
of $126,000 (after paying $4,000 in issuance costs and $20,000 in accrued legal
fees and later by making a principal payment of $100,000).  In the
nine months ended July 31, 2008 we generated $841,500 from the issuance of
common stock.  In the current fiscal year, we have received $335,500
from common stock issuances.  In addition, in the current nine month
period ended July 31, 2009, officer payables increases provided $11,294 cash
compared to a $17,601 use of cash for the nine months ended July 31,
2008.





For our
issuances of common stock in the private placement offering, we relied on the
exemption from federal registration under Section 4(2) of the Securities Act of
1933 and Rule 506 promulgated thereunder. We relied on this exemption and the
safe harbor thereunder based on the fact that there was one single investor who
qualified as an “accredited investors” under Rule 501 of the Securities Act of
1933 and who had knowledge and experience in financial and business matters such
that it was capable of evaluating the risks of the investment. The securities
offered and sold in the transaction were not registered under the Securities Act
of 1933 and therefore may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements. The
disclosure about the private placement offering contained in this information
statement is not an offer to sell or a solicitation of an offer to buy any
securities of the Company.


34





Given our
relatively low cash position, our near term focus for the remaining quarter
of  fiscal 2009 continues to be to create some positive operating
cash flow from our web-assisted real estate brokerage
operations.    While we believe that our year over year
revenue growth will remain strong up until and past our current fiscal year
ending October 31, 2009, we recognize that we will need to raise additional
capital to fund our operations this upcoming winter until the seasonal real
estate business re-commences growth in spring of 2010.  We retain our
expectation that the growth of our core brokerage operations will provide us
with a solid base from which we believe we would be able to raise an additional
$5 to $6 million to fund expansion.   If we succeed in raising
such amount, we believe that we would have sufficient capital to fund our
operations and expansion plans indefinitely. To achieve a more
accelerated growth, however, we would likely require additional financing to
fund acquisitions and development of related business
opportunities.





Critical
Accounting Policies





The
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures. We evaluate these estimates on an on-going
basis. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.





We
consider the following accounting policies to be those most important to the
portrayal of our results of operations and financial condition:





Revenue
Recognition





Our
online real estate brokerage business recognizes revenue at the closing of a
real estate transaction. Commissions and rebates due to third party real estate
agents or consumers are accrued at the time of closing and treated as an offset
to gross revenues. Our mortgage brokerage business recognizes commissions
received and loan fees earned at the time a mortgage loan
closes.


35





Share-Based
Compensation





The
Company accounts for stock incentive plans under the recognition and measurement
provisions of FASB Statement No. 123(R), Share-Based Payments, which requires
the measurement and recognition of compensation expense for all stock-based
awards based on estimated fair values, net of estimated forfeitures. Share-based
compensation expense includes compensation cost for restricted stock
awards.





Intangible
Assets





We have
five types of intangible assets.





Website
Development


The
primary interface with the customer in our web-assisted real estate broker
operation is the Webdigs.com website. Certain costs incurred in development of
this website have been capitalized according to provision in Emerging Issues
Task Force Issue No. 00-2, Accounting for Website Development
Costs (EITF 00-2), and AICPA Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. Amortization is on a
straight-line method over the estimated useful life of the website of 3
years.   No additional costs were capitalized for the year ended
October 31, 2008 or the nine months ended July 31, 2009.





Customer
Lists


The
Company accounts for customer lists under Statement of Financial Accounting
Statements (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS 142”).
Amortization expense is calculated using the straight-line method (which
approximates the anticipated revenue stream back to the Company) over the lists
estimated 2-3 year life.   In June 2009, we acquired two separate
customer lists from Iggys House for a fair value totaling
$355,922.  We will amortize these costs over the estimated 2 year
useful life of the lists.





Non-Compete
Agreements


The
Company accounts for non-compete agreements under Statement of Financial
Accounting Statements (“SFAS”) No. 142, Goodwill and Other Intangible Assets
(“SFAS 142”). Amortization expense is calculated using the straight-line method
(which approximates the anticipated revenue stream back to the Company) over the
agreement’s estimated 2 year life.   In the case of the asset
purchase of Iggys House, Inc. we have identified the fair value of the
non-compete agreement at $266,019.





Website Domain
Names


The
Company accounts for its website domain names under Statement of Financial
Accounting Statements (“SFAS”) No. 142, Goodwill and Other Intangible Assets
(“SFAS 142”).  We purchased 17 domain names in May 2009 from
theMLSdirect.com and expect to amortize the fair value of these names over a 2
year estimate useful life.   We have valued these domain names at
$25,000.


36





Contractual
Relationships


The
Company accounts for its contractual relationships intangible assets under
Statement of Financial Accounting Statements (“SFAS”) No. 142, Goodwill and
Other Intangible Assets (“SFAS 142”).  We purchased contractual broker
arrangements for brokers in 17 different states in May from theMLSdirect.com and
expect to amortize the fair value of these names over a 2 year estimate useful
life.   We have valued these contractual relationships at
$27,000.





The
Company last assessed impairment of intangible assets at October 31, 2008 and
determined that there was no impairment.   The Company concluded
that no impairment was present at July 31, 2009.   The Company
will retest for impairment on October 31, 2009.





Investment in Marketplace
Home Mortgage





On August
1, 2008, the Company contributed non-cash assets into a joint venture created
with Marketplace Home Mortgage, LLC for a 49% ownership interest (see Note 7 to
the consolidated financial statements). The Company accounts for its investment
in the joint venture using the equity method. Accordingly, the Company records
an increase in its investment for contributions to the joint venture and for its
49% share of the income of the joint venture, and a reduction in its investment
for its 49% share of any losses of the joint venture or disbursements of profits
from the joint venture.





Accounting for Convertible
Debentures, Warrants and Derivative Instruments





The
Company does not enter into derivative contracts for purposes of risk management
or speculation. However, from time to time, the Company enters into contracts
that are not considered derivative financial instruments in their entirety but
that include embedded derivative features.





The
Company accounts for its embedded conversion features and freestanding warrants
pursuant to 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) which requires freestanding contracts that are settled in a
company’s own stock to be designated as an equity instrument, asset, or a
liability. Under the provisions of EITF 00-19, a contract designated as an asset
or a liability must be carried at fair value on a company’s balance sheet, with
any changes in fair value recorded in the results of
operations.


37





In
accordance with EITF 00-19, certain warrants to purchase common stock and
embedded conversion options are accounted for as liabilities at fair value and
the unrealized changes in the values of these derivatives are recorded in the
statement of operations as “gain or loss on warrants and derivatives.”
Contingent conversion features that reduce the conversion price of warrants and
conversion features are included in the valuation of the warrants and the
conversion features. The recognition of the fair value of derivative liabilities
(i.e. warrants and embedded conversion options) at the date of issuance is
applied first to the proceeds. The excess fair value, if any, over the proceeds
from a debt instrument, is recognized immediately in the statement of
operations as interest expense. The value of warrants or derivatives associated
with a debt instrument is recognized at inception as a discount to the debt
instrument. This discount is amortized over the life of the debt instrument
using the effective interest method. A determination is made upon settlement,
exchange, or modification of the debt instruments to determine if a gain or loss
on the extinguishment has been incurred based on the terms of the settlement,
exchange, or modification and on the value allocated to the debt instrument at
such date.





The
Company uses the Black-Scholes pricing model to determine fair values of its
derivatives. Valuations derived from this model are subject to ongoing internal
verification and review. The model uses market-sourced inputs such as interest
rates, exchange rates, and option volatilities. Selection of these inputs
involves management’s judgment and may impact net income (loss). The fair value
of the derivative liabilities are subject to the changes in the trading value of
the Company’s common stock. As a result, the Company’s financial statements may
fluctuate from quarter-to-quarter based on factors, such as the bid price of the
Company’s stock at the balance sheet date, the amount of shares converted by
note holders and/or exercised by warrant holders, and changes in the
determination of market-sourced inputs. Consequently, the Company’s financial
position and results of operations may vary materially from quarter-to-quarter
based on conditions other than its operating revenues and expenses.





Seasonality
of Business





The
residential real estate market has traditionally experienced seasonality, with a
peak in the spring and summer seasons and a decrease in activity during the fall
and winter seasons. We expect revenues in each quarter to be significantly
affected by activity during the prior quarter, given the time lag between
contract execution and closing.





Going
Concern





The
Company incurred significant operating losses for the nine month period ended
July 31, 2009 and 2008.  At July 31, 2009, the Company reports a
negative working capital position of $1,084,360 and accumulated deficit of
$3,548,092.  It is management’s opinion that these facts raise
substantial doubts about the Company’s ability to continue as a going concern
without additional debt or equity financing.





Our
consolidated financial statements included do not include any adjustments
related to recoverability and classification of asset carrying amounts, or the
amount and classification of liabilities that might result, should we be unable
to continue as a going concern.  Our ability to continue as a going
concern ultimately depends on achieving profitability, producing revenues or
raising additional capital to sustain operations.  Although we intend
to obtain additional financing to meet our cash needs, we may be unable to
secure any additional financing on terms that are favorable or acceptable to us,
if at all.


38





Item
3. Quantitative and Qualitative Disclosures About Market Risk





Not
applicable.





Item
4.  Controls and Procedures.





Management’s
Report On Internal Control Over Financial Reporting


Under the
supervision of, and the participation of, our management, including our Chief
Executive Officer and Chief Financial Officer, we have conducted an evaluation
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities and Exchange Act of 1934, as amended (the
“Exchange Act”)) as of the end of the period covered by this Quarterly Report on
Form 10-Q to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission’s rules and forms, and is accumulated and communicated to
our management as appropriate to allow timely decisions regarding required
disclosure.




Based on
this evaluation and taking into account that certain material weaknesses existed
as of October 31, 2008, our Chief Executive Officer and Chief Financial Officer
have each concluded that our disclosure controls and procedures were not
effective.  As a result of this conclusion, the financial statements
for the period covered by this Quarterly Report on Form 10-Q were prepared with
particular attention to the material weaknesses previously disclosed.
Notwithstanding the material weaknesses in internal controls that continue to
exist as of July 31, 2009, we have concluded that the financial statements
included in this Quarterly Report on Form 10-Q present fairly, the financial
position, results of operations and cash flows of the Company as required for
interim financial statements.





Changes
in Internal Control Over Financial Reporting





During
the fiscal quarter ended July 31, 2009, there was no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. Management has
concluded that the material weaknesses in internal control as described in Item
9A of the Company’s Form 10-K for the year ended October 31, 2008 have not
been remediated.  Due to the small number of employees dealing with
general administrative and financial matters and the expenses associated with
increasing the number of employees to remediate the disclosure control and
procedure material weaknesses that have been identified, the Company continued
to operate without changes to its internal controls over financial reporting for
the period covered by this Quarterly Report on Form 10-Q while continuing to
seek the expertise it needs to remediate the material
weaknesses.


39





PART
II – OTHER INFORMATION





Item
1. Legal Proceedings





None.





Item
1A.  Risk Factors.





None.





Item
2. Unregistered Sales of Equity Securities


`


During
the nine month period ended July 31, 2009, the Company offered and sold
2,227,000 shares of common stock in a series of private placements at per share
prices ranging between $0.10 and $0.40 per share.  The Company received
gross proceeds of $335,500 from these sales.  As part of the asset
purchase agreement with Iggys House, Inc. the Company also issued 160,000 shares
as a commission to Northland Securities for its work in the sale of 375,000 of
the 2,227,000 shares.  The Company paid no cash commissions or cash
fees in connection with these private placements.





For these
issuances of common stock in the private placement offering, we relied on the
exemption from federal registration under Section 4(2) of the Securities Act of
1933 and Rule 506 promulgated thereunder. We relied on this exemption and the
safe harbor thereunder based on the fact that the investors who purchased these
securities qualified as an “accredited investors” under Rule 501 of the
Securities Act of 1933 and who had knowledge and experience in financial and
business matters such that it was capable of evaluating the risks of the
investment. The securities offered and sold in the transaction were not
registered under the Securities Act of 1933 and therefore may not be offered or
sold in the United States absent registration or an applicable exemption from
registration requirements. The disclosure about the private placement offering
contained in this information statement is not an offer to sell or a
solicitation of an offer to buy any securities of the Company.


40





Item
3. Defaults Upon Senior Securities





None.





Item
4 Submission of Matters to a Vote of Shareholders





None.





Item
5. Other Information





a)
            All
      information required to be disclosed on a report on Form 8-K during the
      period ended July 31, 2009 has previously been
    reported.


b)
            There
      have been no material changes to the procedures by which security holders
      may recommend nominees to the registrant’s board of
    directors.





Item
6.  Exhibits.





Exhibit No.
              
              Description31.1
              
              Certification
      of Chief Executive Officer31.2
              
              Certification
      of Chief Financial Officer32
              
              Certification
      of Chief Executive Officer and Chief Financial Officer
                pursuant
      to Section 906 of the Sarbanes-Oxley Act of
2002





SIGNATURES





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


WEBDIGS,
      INC./s/ Robert A. Buntz,
      Jr.Robert
      A. Buntz, Jr.Chief
      Executive OfficerDated:  September
      21, 2009/s/ Edward
      WickerEdward
      WickerChief
      Financial OfficerDated:  September
      21, 2009




41


INDEX
TO EXHIBITS FILED WITH THIS REPORT





Exhibit No.
              
              Description31.1
              
              Certification
      of Chief Executive Officer31.2
              
              Certification
      of Chief Financial Officer32
              
              Certification
      of Chief Executive Officer and Chief Financial Officer
                pursuant
      to Section 906 of the Sarbanes-Oxley Act of
2002




42