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 January 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
March 14, 2009 there were 22,739,511 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
                                24Item
      3.
                                Quantitative
      and Qualitative Disclosures About Market Risk
                                35Item
      4.
                                Controls
      and Procedures
                                35PART
      II – OTHER INFORMATIONItem
      1.
                                Legal
      Proceedings
                                36Item
      1A.
                                Risk
      Factors
                                36Item
      2.
                                Unregistered
      Sales of Equity Securities
                                37Item
      3.
                                Defaults
      Upon Senior Securities
                                37Item
      4.
                                Submission
      of Matters to a Vote of Security Holders
                                37Item
      5.
                                Other
      Information
                                37Item
      6.
                                Exhibits
                                37SIGNATURES
                                38EXHIBIT
      INDEX
                                39









PART
I – FINANCIAL INFORMATION





Item
1.  Consolidated Financial Statements.




WEBDIGS, INC.
 
 CONSOLIDATED
FINANCIAL STATEMENTS
 (UNAUDITED)
 
 FOR
THE THREE MONTH
 PERIODS
ENDED JANUARY 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)
  January 31, 2009(Unaudited)
                          
                          
                          October 31, 2008(Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          88,467
                          
                          
                          $
                          37,802Commissons
      and fees receivable
                          
                          
                          8,969
                          
                          
                          
                          12,467Prepaid
      expenses and deposits
                          
                          
                          109,885
                          
                          
                          
                          14,011Debt
      issuance costs, net
                          
                          
                          3,200
                          
                          
                          
                          -Other
      current assets
                          
                          
                          2,989
                          
                          
                          
                          6,125Total
      current assets
                          
                          
                          213,510
                          
                          
                          
                          70,405Investment
      in Marketplace Home Mortgage Webdigs, LLC
                          
                          
                          21,035
                          
                          
                          
                          2,182Office
      equipment and furniture, net
                          
                          
                          26,803
                          
                          
                          
                          30,202Intangible
      assets, net
                          
                          
                          306,065
                          
                          
                          
                          351,430Total
      assets
                          
                          $
                          567,413
                          
                          
                          $
                          454,219
 
 The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  3
  WEBDIGS,
INC.
 
 CONSOLIDATED
BALANCE SHEETS (continued)
 (Unaudited)
 
 January 31, 2009(Unaudited)
                                  
                                  
                                  October 31, 2008(Audited)LIABILITIES AND STOCKHOLDERS'
      DEFICITCurrent
      liabilities:Current
      portion of capital lease obligations
                                  
                                  $
                                  3,917
                                  
                                  
                                  $
                                  3,828Accounts
      payable
                                  
                                  
                                  289,691
                                  
                                  
                                  
                                  377,538Accounts
      payable - minority stockholder
                                  
                                  
                                  583,071
                                  
                                  
                                  
                                  550,206Due
      to officers
                                  
                                  
                                  32,108
                                  
                                  
                                  
                                  27,277Accrued
      expenses:Professional
      fees
                                  
                                  
                                  35,000
                                  
                                  
                                  
                                  50,000Payroll
      and commissions
                                  
                                  
                                  40,650
                                  
                                  
                                  
                                  32,269Lease
      expenses for vacated office space
                                  
                                  
                                  55,913
                                  
                                  
                                  
                                  55,913Other
                                  
                                  
                                  14,217
                                  
                                  
                                  
                                  15,170Convertible
      note payable, net of discount
                                  
                                  
                                  131,933
                                  
                                  
                                  
                                  -Liabilities
      for warrant to purchase common stock
                                  
                                  
                                  4,648
                                  
                                  
                                  
                                  -Embedded
      derivatives of convertible debt instruments
                                  
                                  
                                  148,489
                                  
                                  
                                  
                                  -Total
      current liabilities
                                  
                                  
                                  1,339,637
                                  
                                  
                                  
                                  1,112,201Long
      term liabilities:Capital
      lease obligation, less current portion
                                  
                                  
                                  9,417
                                  
                                  
                                  
                                  10,431Total
      long term liabilities
                                  
                                  
                                  9,417
                                  
                                  
                                  
                                  10,431Total
      liabilities
                                  
                                  
                                  1,349,054
                                  
                                  
                                  
                                  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;  22,739,511 and 22,308,711 common shares issued
      andoutstanding
      at January 31, 2009 and October 31, 2008, respectively
                                  
                                  
                                  22,740
                                  
                                  
                                  
                                  22,309Additional
      paid-in-capital
                                  
                                  
                                  2,214,780
                                  
                                  
                                  
                                  2,002,226Accumulated
      deficit
                                  
                                  
                                  (3,019,161
                                  )
                                  
                                  
                                  (2,692,948
                                  )Total
      stockholders' deficit
                                  
                                  
                                  (781,641
                                  )
                                  
                                  
                                  (668,413
                                  )Total
      liabilities and stockholders' deficit
                                  
                                  $
                                  567,413
                                  
                                  
                                  $
                                  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 EndedJanuary 31,2009
                    
                    
                    2008(unaudited)
                    
                    
                    (unaudited)Revenue:Gross
      revenues
                    
                    $
                    88,026
                    
                    
                    $
                    194,656Less:
      commissions, rebates and third party agent commissions
                    
                    
                    (49,399
                    )
                    
                    
                    (25,274
                    )Net
      revenues
                    
                    
                    38,627
                    
                    
                    
                    169,382Operating
      expenses:Selling
                    
                    
                    164,415
                    
                    
                    
                    570,184General
      and administrative
                    
                    
                    156,682
                    
                    
                    
                    160,306Total
      operating expenses
                    
                    
                    321,097
                    
                    
                    
                    730,490Operating
      loss
                    
                    
                    (282,470
                    )
                    
                    
                    (561,108
                    )Other
      income (expense):Equity
      in income from Marketplace Home Mortgage Webdigs, LLC
                    
                    
                    18,853
                    
                    
                    
                    -Interest
      expense
                    
                    
                    (37,042
                    )
                    
                    
                    (2,210
                    )Loss
      on change in fair value of derivatives and warrants
                    
                    
                    (25,554
                    )
                    
                    
                    -Total
      other income (expense)
                    
                    
                    (43,743
                    )
                    
                    
                    (2,210
                    )-Net
      loss before income taxes
                    
                    
                    (326,213
                    )
                    
                    
                    (563,318
                    )Income
      tax provision
                    
                    
                    -
                    
                    
                    
                    -Net
      loss
                    
                    $
                    (326,213
                    )
                    
                    $
                    (563,318
                    )Net
      loss per common share - basic and diluted
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.03
                    )Weighted
      average common shares outstanding - basic and diluted
                    
                    
                    22,504,968
                    
                    
                    
                    19,279,275
 
 The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  5
 WEBDIGS,
      INC.
  
 CONSOLIDATED
      STATEMENTS OF CASH FLOWSThree
      Months Ended January 31, 2009 and 2008(Unaudited)
 Three
      Months Ended
                                                                                                                                                            January 31,2009
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          2008(unaudited)
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (unaudited)Cash
      flows from operating activities:Net
      loss
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          (326,213
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          (563,318
                                                                                                                                                          )Adjustments
      to reconcile net loss to net cash flowsused
      in operating activities:Depreciation
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          3,399
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          7,357Amortization
      of intangible assets
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          45,365
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          48,792Amortization
      of convertible note payable discounts
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          29,516
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          -Amortization
      or debt issuance costs
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          800
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          -Loss
      on change in fair value of derivatives and warrants
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          25,554
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          -Equity
      in the income of Marketplace Home Mortgage -Webdigs,
      LLC
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (18,853
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          -Share-based
      compensation
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          65,485
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          41,727Common
      stock issued for services
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          7,000
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          -Changes
      in operating assets and liabilities:Commissions
      and fees receivable
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          3,498
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          3,520Prepaid
      expenses and deposits
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          24,126
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          4,754Other
      current assets
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          3,136
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (1,478
                                                                                                                                                          )Accounts
      payable
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (87,847
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          41,721Accounts
      payable - minority stockholder
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          32,865
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          106,684Accrued
      expenses and other liabilities
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          12,428
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (28,542
                                                                                                                                                          )Net
      cash flows used in operating activities
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (179,741
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (338,783
                                                                                                                                                          )Cash
      flows from investing activities:Purchase
      of equipment and fixtures
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          -
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (6,814
                                                                                                                                                          )Net
      cash flows used in investing activities
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          -
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (6,814
                                                                                                                                                          )Cash
      flows from financing activities:Issuance
      of common stock
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          500
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          269,000Proceeds
      from issuance of convertible debentures, net of debt issuance costs of
      $4,000 and unrelated accrued legal fees of $20,000
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          226,000
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          -Increase
      (decrease) in due to officers
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          4,831
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (19,552
                                                                                                                                                          )Principal
      payments on capital lease obligations
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (925
                                                                                                                                                          )
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (2,156
                                                                                                                                                          )Net
      cash flows provided by financing activities
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          230,406
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          247,292Net
      change in cash and cash equivalents
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          50,665
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          (98,305
                                                                                                                                                          )Cash
      and cash equivalents, beginning of period
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          37,802
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          113,280Cash
      and cash equivalents, end of period
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          88,467
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          14,975
 
 The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  6
 
 WEBDIGS,
      INC.
  
 CONSOLIDATED
      STATEMENTS OF CASH FLOWSThree
      Months Ended January 31, 2009 and 2008(Unaudited)
  Three
      Months Ended
                                                                                                                      January
      31,2009
                                                                                                                    
                                                                                                                    
                                                                                                                    2008(unaudited)
                                                                                                                    
                                                                                                                    
                                                                                                                    (unaudited)Supplemental cash flow
      informationCash
      paid for interest
                                                                                                                    
                                                                                                                    $
                                                                                                                    6,029
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    2,210Supplemental 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
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    -
    7
  WEBDIGS,
INC.
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three Month Periods Ended January 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 and
consists of two strategic operating segments;  (1) mortgage broker,
assisting homeowners in refinancing their home mortgages and assisting new home
buyers in qualifying for home mortgages and brokering the financing, (2)
web-assisted real estate broker, offering the same customer experience as a full
service broker utilizing a flat fee structure for listing services to their
selling customers and a graduated fee structure for their buying customers by
rebating up to  two-thirds of its broker commissions. The mortgage
broker segment operates as an unconsolidated joint venture under the name of
Marketplace Home Mortgage - Webdigs, LLC.  The web-assisted real
estate broker segment operates as Webdigs, LLC.
 
 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 Month Periods Ended January 31, 2009 and 2008
  The
operations of Webdigs, LLC are the only continuing operations of the
Company.  In accounting for this transaction, Webdigs, LLC was deemed
to be the purchaser and parent company for financial reporting purposes.
Accordingly, its net assets were included in the consolidated balance sheet at
their historical value. The accompanying consolidated financial statements as of
January 31, 2009 and 2008 present the historical financial information of
Webdigs, LLC and its subsidiaries.
 
 Consolidation
Policies
 
 The
consolidated financial statements for the three month periods ended January 31,
2009 and 2008, include the accounts of Webdigs, Inc. and its wholly-owned
subsidiary, Webdigs, LLC, which includes wholly owned subsidiaries of Marquest
Financial, Inc., 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.
 
 Segment
Information
 
 SFAS No.
131 Disclosure About Segments
of an Enterprise and Related Information defines operating segments as
components of a company about which separate financial information is evaluated
regularly by the chief decision maker in deciding how to allocate resources and
assess performance.  The Company has identified two operating
segments: web-assisted real estate brokerage and mortgage
brokerage.
 
 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.
  9
  WEBDIGS,
INC.
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three Month Periods Ended January 31, 2009 and 2008
  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 6).
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.
 
 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.
  10
  WEBDIGS,
INC.
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three Month Periods Ended January 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 in accordance with SFAS No. 109, as
clarified by FIN No. 48, which requires 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 January 31, 2009 and 2008 because realization
of those assets is not reasonably assured.
 
 FIN No.
48 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.
 
 11
  WEBDIGS,
INC.
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three Month Periods Ended January 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 Note Payable (See Note
7).
 
 3
              GOING
      CONCERN
 
 The
Company has incurred significant operating losses for the three month periods
ended January 31, 2009 and 2008.  At January 31, 2009, the Company
reports a negative working capital position of $1,126,127, accumulated deficit
of $3,019,161 and a stockholders’ deficit of $781,641.  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.  The Company has
already begun reducing operating expenditures and expects to increase revenues
through its existing customer base and website traffic.
 
 4
              RELATED
      PARTY TRANSACTIONS
 
 Accounts Payable – Minority
Stockholder
 
 The
Company’s principal advertising agency/website developer was owed $583,071 at
January 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 January 31,
2009.  For the three months ended January 31, 2009 and 2008
respectively, the Company incurred $32,865 and $206,965 in services from this
minority stockholder.    Included in these amounts is office
rent expense of $10,500 and $6,000 for the three months ended January 31, 2009
and 2008, respectively.
 
 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.
  12
  
 WEBDIGS,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three Month Periods Ended January 31, 2009 and 2008
 
 Due to
Officers
 
 As of
January 31, 2009 and October 31, 2008, the Company was indebted to its officers
for amounts totaling $32,108 and $27,277, respectively, for business expenses
and consulting services.   The indebtedness is due on demand and
is non-interest bearing.
 
 5
              PREPAID
      EXPENSES
  Prepaid
expenses consist of two components: prepaid consulting fees and other prepaid
expenses. The prepaid consulting fees are calculated amounts from the issuance
of common stock to consultants for various services. In January 2009, the
Company issued 200,000 shares of the Company’s common stock and agreed to pay
$15,000 to consultants as prepayments for services to be performed over the next
six to nine months.  In addition, one of the Company’s minority
stockholders transferred 100,000 shares of the Company’s common stock to
one of these consultants on behalf of the Company. This transfer of the
Company’s common stock held by the minority shareholder was treated as a capital
contribution. All of the shares issued to the consultants were valued at $0.40
per share, which represented the trading fair value of the stock on the date the
agreements were finalized. The amortization periods coincide with the terms of
the agreements which are expected to be completed in September
2009.
 
 The other
prepaid expenses contain miscellaneous amounts the Company has prepaid for an
annual software subscription and general insurance premiums.  These
prepaid items are being expensed as they are being utilized.
 
 Components
of prepaid expenses are as follows:
 
 January
      31,
                        2009
                      
                      
                      October
      31,
                        2008(unaudited)
                      
                      
                      (audited)Prepaid
      consulting fees
                      
                      $
                      100,000
                      
                      
                      $
                      -Other
      prepaid expenses
                      
                      
                      9,885
                      
                      
                      
                      14,011Total
                      
                      $
                      109,885
                      
                      
                      $
                      14,011
  13
 
 WEBDIGS,
INC.
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three Month Periods Ended January 31, 2009 and 2008
 
 6
              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
  January 31,
                    2009Current
      assets
                  
                  $
                  71,331Other
      assets
                  
                  
                  20,822Liabilities
                  
                  
                  (30,101
                  )Net
      equity
                  
                  $
                  62,052The
      Company's share in the equity in Marketplace Home Mortgage
    -Webdigs,
      LLC (49%)
                  
                  $
                  30,405Less:
      Deferred gain on excess of fair value received over net
    bookvalue
      of assets contributed to Marketplace Home Mortgage -Webdigs,
      LLC (1)
                  
                  
                  (9,370
                  )Investment
      in Marketplace Home Mortgage - Webdigs, LLC atJanuary
      31, 2009
                  
                  $
                  21,035
 
 (1)
              At
      January 31, 2009, the Company’s share of the underlying assets of
      Marketplace Home Mortgage – Webdigs, LLC exceeded its investment by
      $9,370.   The excess, which relates to office equipment, is
      being amortized into income over the estimated remaining life of the
      respective assets (37 months).
  14
 
 WEBDIGS,
INC.
  
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three Month Periods Ended January 31, 2009 and 2008
 
 Summary Statement of
Operations
  Three Months
                    EndedJanuary
                    31,2009Revenue
                  
                  $
                  169,120Operating
      expenses
                  
                  
                  (132,195
                  )Operating
      income
                  
                  
                  36,925Other
      expense
                  
                  
                  -Net
      income
                  
                  $
                  36,925The
      Company's share in the income of Marketplace Home Mortgage
    -Webdigs,
      LLC (49%)
                  
                  $
                  18,093Amortization
      of deferred gain on transfer of non-cash assets
                  
                  
                  760Net
      equity in the income of Marketplace Home Mortgage - Webdigs,
      LLC
                  
                  $
                  18,853
 7
              CONVERTIBLE
      NOTE PAYABLE
 
 On
December 12, 2008, the Company entered into a $250,000 convertible debt
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.
  15
 
 WEBDIGS,
INC.
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three Month Periods Ended January 31, 2009 and 2008
 
 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, the Note is 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.   At January 31, 2009, the Note would
have converted into 3,703,704 shares at a conversion price of $0.068 per
share.
 
 Pursuant
to SFAS 133 and EITF 00-19 Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in a Company’s Own Stock,the conversion features and warrant of the Note are considered embedded
derivatives requiring bifurcation from the debt host and they are included in
the balance sheet as liabilities at fair value.  The embedded
derivatives are revalued at each balance sheet date and marked to fair value
with the corresponding adjustment recognized as “gain or loss on warrants and
derivatives” in the statement of operations.
 
 The
embedded derivatives and the warrants are initially measured at fair value using
the Black-Scholes option valuation technique. In selecting the appropriate fair
value technique, the Company considers the nature of the instrument, the market
risks that it embodies, and the expected means of settlement.
 
 The
embedded derivative liability is re-valued at each balance sheet date and marked
to fair value with the corresponding adjustment recognized as “gain or loss on
warrants and derivatives” in the statement of operations. As of January 31, 2009
and December 12, 2008, the fair values of the derivatives embedded in the Note
were $148,489 and $125,932, respectively.
 
 The
warrant liability is revalued at each balance sheet date and marked to fair
value with the corresponding adjustment recognized as “gain or loss on warrants
and derivatives” in the statement of operations. As of January 31, 2009 and
December 12, 2008, the fair values of the warrant were $4,648 and $1,651,
respectively.
  16
 
 WEBDIGS,
INC.
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three Month Periods Ended January 31, 2009 and 2008
 
 For the
three months ended January 31, 2009 the Company adjusted its embedded derivative
liability (conversion feature) and warrant liability by $25,554.  This
adjustment was recorded as a loss on the change in fair market value of
derivatives and warrants in the statement of operations.
 
 The
following table summarizes the convertible note balance as of January 31,
2009:
  Original
      gross proceeds
                              
                              $
                              250,000Less:
      Debt discount arising from issuance of common stock
                              
                              
                              (20,000
                              )Net
      proceeds prior to paying transaction costs
                              
                              
                              230,000Less:
      Fair value assigned to conversion feature and detachable
      warrants
                              
                              
                              (127,583
                              )Net
      balance at December 12, 2008
                              
                              
                              102,417Plus:
      Amortization of debt discount, conversion feature and
    warrant
                              
                              
                              29,516Balance
      at January 31, 2009
                              
                              $
                              131,933
 8
              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.
 
 The
Company recognizes compensation expense for the 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
three months ended January 31, 2009 and 2008 is $4,624 and $0,
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 three
months ended January 31, 2009.  There were no stock option grants
during the three months ended January 31, 2009. There were no stock
option grants prior to January 31, 2008, and thus no option expense for
the three months ended January 31, 2008. As of January 31, 2009, the
Company had $23,118 of unrecognized compensation expense related to the
outstanding stock options, which will be recognized over a weighted-average
period of 1.25 years.
  17
 
 WEBDIGS,
INC.
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three Month Periods Ended January 31, 2009 and 2008
 
 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 summary of stock option activity for the three months ended January
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
                          
                          
                          $
                          —
                          
                          
                          
                          4.5Granted
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Exercised
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Forfeited
      or expired
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Outstanding
      at January 31, 2009
                          
                          
                          600,000
                          
                          
                          $
                          0.25
                          
                          
                          
                          —
                          
                          
                          
                          4.25Exercisable
      at January 31, 2009
                          
                          
                          300,000
                          
                          
                          $
                          0.25
                          
                          
                          
                          —
                          
                          
                          
                          4.25
 
 The
aggregate intrinsic value in the table above represents the difference between
the closing stock price on January 31, 2009 and the exercise price, multiplied
by the number of in-the-money options that would have been received by the
option holders had all option holders exercised their options on January 31,
2009.   There were no options exercised in the three months ended
January 31, 2009.
 
 Restricted Stock
Compensation
 
 As of
January 31, 2009, the Company had 6,629,280 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 amortized
ratably over the vesting period.  No additional awards were made
during the three months ended January 31, 2009 or during the year ended October
31, 2008.
  18
 WEBDIGS,
INC.
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three Month Periods Ended January 31, 2009 and 2008
 
 The
Company recorded $60,859 and $41,727 of compensation expense in the consolidated
statement of operations related to vested shares (restricted stock) for the
three months ended January 31, 2009 and
2008,  respectively.
 
 A summary
of the status of non-vested shares and changes as of January 31, 2009 is set
forth below:
 
 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
                          )
                          
                          
                          (60,859
                          )Forfeited/canceled
                          
                          
                          -
                          
                          
                          
                          -Outstanding,
      January 31, 2009
                          
                          
                          1,288,502
                          
                          
                          $
                          137,631
 
 The
remaining 1,288,502 shares and associated unearned compensation of $137,631 will
all vest during the fiscal year ending October 31, 2009.
 
 19
 
 WEBDIGS,
INC.
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three Month Periods Ended January 31, 2009 and 2008
 
 9
              STOCKHOLDERS'
      EQUITY
 
 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.  (Note 5)
 
 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.
 
 During
the period from November 1, 2007 to January 31, 2008, the Company sold 1,076,000
shares of common stock to accredited investors for $269,000 ($0.25 per share) in
cash proceeds.
  10
              FAIR
      VALUE MEASUREMENT
  Effective
November 1, 2008, the Company adopted the methods of measuring fair value
described in SFAS No. 157, Fair Value Measurements. As
defined in SFAS No. 157, fair value is based on the prices that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. In order to
increase consistency and comparability in fair value measurements, SFAS
No. 157 establishes a three-tier fair value hierarchy that prioritizes the
inputs used to measure fair value. These tiers include: Level 1, defined as
observable inputs such as quoted prices in active markets; Level 2, defined as
inputs other than quoted prices in active markets that are either directly or
indirectly observable; and Level 3, defined as unobservable inputs for which
little or no market data exists, therefore requiring an entity to develop its
own assumptions.
  For the
three months ended January 31, 2009, using level 2 inputs, the Company adjusted
its derivative liabilities by $25,554 and recorded a loss on the change in fair
value of derivatives and warrants in the statement of
operations.   As of January 31, 2009, the fair value recorded on
the balance sheet for the embedded derivatives and warrants was $148,489 and
$4,648, respectively.
  20
 WEBDIGS,
INC.
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three Month Periods Ended January 31, 2009 and 2008
 
 11
              COMMITMENTS
      AND CONTINGENCIES
 
 The
Company’s mortgage operation vacated its Bloomington, Minnesota, leased office
space in October, 2008.  The mortgage operation had leased this space
under a non-cancelable operating lease expiring August, 2009.  As a
cost of exiting this leased office space, the Company accrued the costs of the
remaining 10 months of unpaid rent (including its share of insurance, taxes,
operating expenses, and common area expenses) as of October 31,
2008.  There have been no payments against the accrued amounts since
October 31, 2008.
  Three Months EndedJanuary 31, 2009
                              
                              
                              January 31, 2008Accrued
      exit costs at October  31, 2008
                              
                              $
                              55,913
                              
                              
                              
                              —Additional
      expenses accrued during the period
                              
                              
                              —
                              
                              
                              
                              —Payments
      made during the period
                              
                              
                              —
                              
                              
                              
                              —Accrued
      exit costs at January 31, 2009
                              
                              $
                              55,913
                              
                              
                              
                              —
 12
              BASIC
      AND DILUTED EARNINGS PER SHARE
 
 The
Company computes earnings per share in accordance with FASB Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"). SFAS 128 requires companies to compute 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 months
ended January 31, 2009 and 2008.
 
 21
 
 WEBDIGS,
INC.
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three Month Periods Ended January 31, 2009 and 2008
 
 Three Months
      EndedJanuary 31,2009
                        
                        
                        2008Basic
      earnings per share calculation:Net
      loss to common shareholders
                        
                        $
                        (326,213
                        )
                        
                        $
                        (563,318
                        )Weighted
      average of common shares outstanding
                        
                        
                        22,504,968
                        
                        
                        
                        19,279,275Basic
      net loss per share
                        
                        $
                        (0.01
                        )
                        
                        $
                        (0.03
                        )Diluted
      earnings per share calculation:Net
      loss to common shareholders
                        
                        $
                        (326,213
                        )
                        
                        $
                        (563,318
                        )Weighted
      average of common shares outstanding
                        
                        
                        22,504,968
                        
                        
                        
                        19,279,275Stock
      options, warrants, and convertible debt (1)
                        
                        
                        -
                        
                        
                        
                        -Diluted
      weighted average common shares outstanding
                        
                        
                        22,504,968
                        
                        
                        
                        19,279,275Diluted
      net loss per share
                        
                        $
                        (0.01
                        )
                        
                        $
                        (0.03
                        )
 
 (1)
              The
      computation of diluted net loss per share as of January 31, 2009 does not
      differ from the basic computation because potentially dilutive issuable
      securities of warrants and options of 500,000 shares and 3,703,704
      conversion shares related to the convertible debt promissory note would be
      anti-dilutive.  There were no potentially anti-dilutive shares
      as of January 31, 2008.
 
 13
              SEGMENT FINANCIAL
      INFORMATION
 
 The
Company has two reporting segments that fall within two primary business groups:
web-assisted real estate broker and mortgage broker.
 
 The main
distinction offered by the Company’s web-assisted real estate brokerage services
is that of a flat fee structure for listing services and a graduated fee
structure offering customers a rebate up to 50% of the Company’s broker
commission for real estate buyers. This business segment operates as Webdigs,
Inc. Its principal market is the United States.
 
 22
 
 WEBDIGS,
INC.
 
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For
the Three Month Periods Ended January 31, 2009 and 2008
 
 The
mortgage broker segment assists homeowners in refinancing their home mortgages
and assists prospective home buyers in qualifying for a home mortgage and
brokering the financing. This business segment operated as Marquest Financial
(from October 22, 2007) and Home Equity Advisors (from July 15, 2007) to July
31, 2008.  Starting in August 2008, the Company created a new joint
venture and began operating this segment in Minnesota as a limited liability
company under the name Marketplace Home Mortgage - Webdigs, LLC.
 
 The
corporate segment consists primarily of investments in fixed assets, personnel
and other operating expenses associated with the Company’s corporate offices in
Minneapolis, and certain technology initiatives.
 
 Selected
financial information about the Company’s operations by segment for the quarters
ended January 31, 2009 and 2008 is as follows:
  Web-
                Assisted
                RealEstate
                Brokerage
              
              
              Retail
                Mortgage
                Brokerage
              
              
              Corporate
                and Other
              
              
              TotalThree Months Ended January 31,
      2009Net
      revenues
              
              $
              38,627
              
              
              $
              -
              
              
              $
              -
              
              
              $
              38,627Operating
      loss
              
              
              (95,766
              )
              
              
              (13,286
              )
              
              
              (173,418
              )
              
              
              (282,470
              )Equity
      in income from Marketplace HomeMortgage
      - Webdigs, LLC
              
              
              -
              
              
              
              18,853
              
              
              
              -
              
              
              
              18,853Interest
      expense
              
              
              -
              
              
              
              -
              
              
              
              37,042
              
              
              
              37,042Depreciation
      & amortization
              
              
              37,859
              
              
              
              10,905
              
              
              
              -
              
              
              
              48,764Assets
              
              
              274,014
              
              
              
              80,697
              
              
              
              212,702
              
              
              
              567,413Capital
      expenditures and websitedevelopment
      costs
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Three Months Ended January 31,
      2008Net
      revenues
              
              $
              19,096
              
              
              $
              150,286
              
              
              $
              -
              
              
              $
              169,382Operating
      loss
              
              
              (357,048
              )
              
              
              (65,971
              )
              
              
              (138,089
              )
              
              
              (561,108
              )Equity
      in income from Marketplace HomeMortgage
      - Webdigs, LLC
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Depreciation
      & amortization
              
              
              36,295
              
              
              
              19,854
              
              
              
              -
              
              
              
              56,149Assets
              
              
              401,012
              
              
              
              188,821
              
              
              
              14,975
              
              
              
              604,808Capital
      expenditures and websitedevelopment
      costs
              
              
              6,814
              
              
              
              -
              
              
              
              -
              
              
              
              6,814
  23




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





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-based, 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. Using a generally accepted industry
average fee of 2.7% for buyer representation, any customer purchasing a home for
a price exceeding $111,000 may benefit financially from using Webdigs as the
broker. Using the same 2.7% buyer’s broker fee, a customer purchasing a home for
a price exceeding $222,000 will receive a commission rebate of approximately
1.35% of purchase price (or one-half of the 2.7% buyer’s brokers fee). Again
using the same 2.7% buyer’s broker fee, a buyer purchasing a home with a sales
price between $111,000 and $222,000 will pay Webdigs a flat $3,000 broker fee
with the remainder of the buyer’s broker fee being returned to him as a
non-taxable rebate. We believe this gives buyers a financial incentive to use
our services. We primarily target those home buyers who are willing and able to
independently begin their home search on the Internet. As part of our website
interface and personal service, we also offer home buyers tools to manage their
purchase transactions from initial search to the closing of their
purchase.




24




In our
main Twin Cities market, we provide our home sellers with Northstar MLS listings
for a flat fee of $3,000 at closing. A traditional listing (selling) broker
charges 3.3% of final sale price as their fee for representing a seller.
Assuming a sale price of $300,000, a Webdigs listing customer may save
approximately $6,900 on his or her home sale by using Webdigs as their broker.
Instead of paying a broker 3.3% of the $300,000 sale price ($9,900), the seller
would pay Webdigs $3,000. The savings of $6,900 belongs to the Webdigs customer.
The Northstar MLS contains listings from Minnesota, portions of western
Wisconsin, northern Iowa, and eastern North and South Dakota. Our listings also
appear on Realtor.com and 14 other national home-listing websites. In addition
to providing home sellers with a home listing, Webdigs arranges for virtual home
tours of our sellers’ homes so that the resulting virtual tour may become a part
of the listing on our website. To assist with the pricing of a seller’s home, we
provide a comparative market analysis to the seller and individual consultation
on pricing strategies. Finally, we also provide a range of individual strategies
for readying a seller’s home for sale, including appropriately staging the home.
We support these services with marketing and advertising campaigns designed to
drive traffic to our website.





We
currently offer our services in three states-Minnesota, Wisconsin, and Florida.
When we represent buyers, we share with them up to one-half of our buyer broker
commission, which we receive from the seller or listing broker. For the three
months ended January 31, 2009, our net real estate brokerage revenue increased
by 102% to $38,627 versus the $19,096 closed in the three months ended January
31, 2008.    After paying out customer rebates, we averaged
net commissions of $3,813 on each of the five buyer transactions we closed in
the quarter ended January 31, 2009.   On a quarterly transaction
basis, we grew by 150% versus the prior year quarter by closing a total of 10
real estate transactions (five buyer and five listings) in the quarter ended
January 31, 2009 compared to 4 in the same period last fiscal
year.  On average, each of the five customers who purchased a home
through Webdigs in the quarter ended January 31, 2009 received a rebate check of
over $5,000.   Our revenues for the quarter ended January 31,
2009 can be broken down as follows: buyers - $19,064, sellers – $15,413, and
miscellaneous administrative fees - $4,150.   The miscellaneous
fees consist primarily of $295  per closed transaction in
administrative fees charged and some non-refundable payments from clients who
are listing their homes with us for virtual photo tours, yard signs and our
administrative time to get all of their homes’ data onto the on-line multiple
listing service.




25




Currently,
our revenues consist primarily of web-assisted real estate brokerage commissions
received, as agents in residential real estate transactions, at the time a real
estate transaction closes. We record revenues as gross revenue. Consumer rebates
and third-party agent commissions paid to buyer’s brokers (in those instances
where we represent the seller of a home) are treated as offsetting reductions to
gross revenue. Our net revenues are principally driven by the number of
transactions we close and the average net revenue per transaction. Average net
revenue per transaction is a function of the home purchase price and percentage
commission we receive on each transaction.  In addition to traditional
financial measures, we use several tools to monitor the overall health of our
real estate business. Some of the key performance indicators we use are the
following: website traffic, daily number of contacts initiated by potential
customers, number of new customers (i.e., both buyers and sellers) added weekly,
weekly number of transactions closed, and overall pipeline of active customers.
We also monitor daily cash flow and the average time it takes to close a
transaction (i.e., time elapsed between the creation of a customer relationship
and the closing date for a transaction related to that customer).





Since we
commenced our real estate broker operations after the U.S. housing industry had
already entered its well publicized slump, it is difficult to assess the affect
the real estate industry’s difficulties have had on our ability to grow our
business. We do believe our brokerage model, with the lower prices we offer,
will be seen favorably by customers looking to save money when buying or selling
a home in a difficult market.





We are
encouraged that the new Presidential administration has placed an emphasis on
stabilizing the housing and mortgage markets and is injecting hundreds of
billions of dollars to do so.  Additionally, there is positive news in
our largest market (Twin Cities) as published by the Minneapolis Star Tribune on
January 15, 2009.   Pending sales over the second half of the
year increased by 15.7% in 2008 versus 2007.   The same Star
Tribune article cited a second piece of positive news for buyers in the Twin
Cities; only a 4.1% drop in the median home price of traditional sales
(excluding foreclosures or lender mediated sales) in 2008 versus
2007.   We believe that these two factors, coupled with federal
government’s economic stimulus package, and currently low interest rates, should
help the Twin Cities real estate market stabilize in 2009.





Mortgage
and Insurance





Since
August 1, 2008 and for the entire quarter ended January 31, 2009, all mortgage
operations have been generated through our investment in our mortgage joint
venture, Marketplace Home Mortgage - Webdigs, LLC (MHMW).   Prior
to the establishment of the joint venture, we consolidated revenues from our two
wholly owned mortgage subsidiaries, Marquest Financial, Inc., and Home Equity
Advisors, LLC. The operations from these two subsidiaries were transferred into
the joint venture on August 1, 2008. Once the joint venture was established, we
no longer consolidate revenues from this operation. Instead, we report only our
share of the net profits and losses from the joint venture as other
income.  Revenues are reported in a separate footnote (See Note 6 of
the consolidated financial statements). Therefore, in the three month period
ended January 31, 2009, we recorded no mortgage revenue compared to $150,286 for
the three month period ended January 31, 2008.




26




MHMW has
its own staff of mortgage loan officers that obtain mortgages for customers who
are refinancing existing mortgages or obtaining new mortgages. MHMW bears no
risk of loan default nor determines loan eligibility. All mortgage fee income is
paid by the loan underwriter (typically a large bank) to MHMW for finding the
customer and processing the paperwork for the loan.





There are
two types of fees paid by banks to MHMW for its work as a mortgage broker. The
first is loan origination fees, which may be considered as commissions.
Typically, loan origination fees are a percentage of the total value of the
loan. A second fee source is referred to as “yield spread premium.” In certain
cases, a mortgage broker might find it possible to increase the interest rate
charged on a mortgage above the rate considered acceptable by the bank. In those
cases, the bank will pay a second fee “yield spread premium” to the mortgage
broker for obtaining a more favorable interest rate for the bank.  The
ability to earn a “yield spread premium” has become more difficult in the last
few months due to market pressures.   A 1% loan origination fee
is considered average by the U.S. mortgage industry. Yield spread premiums
are also occasionally paid by mortgage underwriters. When they are earned,
a typical yield spread would range from 0% to 1%.





To
further enhance cash flow and provide convenience to our real estate customers,
we have recently obtained approval from the Commissioner of Insurance in
Minnesota to refer Webdigs real estate customers to an unaffiliated insurance
broker for quotes on their home and other personal insurance policies. Should a
referred customer end up purchasing insurance through our referral, the Company
will receive a commission for the referral.





Significant
Trends and Uncertainties





We are
experiencing sales growth in our real estate brokerage segment but do face
significant liquidity constraints due to the costs associated with developing
our real estate business. Since inception (May 1, 2007) to January 31, 2009, we
have incurred net losses totaling $3,019,161.   Fortunately, our
quarterly operating losses continue to lessen; $282,470 for the quarter ended
January 31, 2009 as compared $561,108 for the quarter ended January 31,
2008.  As mentioned in more detail below and elsewhere in this filing,
we will require additional financing to maintain operations and to achieve our
expansion goals. If our efforts to raise additional capital take longer than we
expect or we are unsuccessful in securing capital, we expect to decrease our
advertising, identify other areas to reduce current costs, and concentrate on
continuing to build market share and real estate revenue in the Minneapolis-St.
Paul metropolitan area and Wisconsin. As part of this plan, we would intend to
have our Florida real estate operations continue for as long as possible,
even in a diminished capacity, if necessary. We do expect, however, that we
would cease operating in Florida prior to any significant reduction in
operation in Minneapolis-St. Paul or Wisconsin. Due to the difficult markets for
obtaining equity and debt financing, we are exploring a wide variety of
potential financing sources and arrangements.




27




In
addition to the uncertainties surrounding our cash and liquidity situation,
current real estate and credit market conditions present a significant
uncertainty for our business.  We believe that our business in the
latter parts of fiscal 2008 was adversely affected by the well publicized
problems in these markets, resulting in lower real estate activity and fewer
real estate brokerage transactions.  Dramatic declines in the housing
market during 2008, with falling home prices, decreasing home sales volume, and
increasing foreclosures and unemployment, have resulted in many lenders and
institutional investors reducing, and in some cases, ceasing to provide funding
to borrowers (including other financial institutions).  This market
turmoil and tightening of credit have led to an increased level of commercial
and consumer delinquencies, lack of consumer confidence, increased market
volatility and widespread reduction of business activity
generally.  Our business and our viability may be threatened if these
adverse conditions persist into the summer of 2009.   We are
hopeful that the intense national focus on restoring American capital markets
and stabilizing our banking system will provide an impetus to a revival in the
housing and real estate markets.





Results
of Operation





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





The
Company incurred operating losses of $282,470 for the three months ended January
31, 2009 compared to a loss of $561,108 for the three month period ended January
31, 2008.    On a consolidated level, net revenues decreased
from $169,382 for the quarter ended January 31, 2008 to $38,627 for the quarter
ended January 31, 2009.  Because our mortgage subsidiaries were
transferred into the joint venture, Marketplace Home Mortgage – Webdigs, LLC we
no longer include their revenue in our total revenue amount.  We only
report our percentage share of net profit from the joint venture in our
financial statements. The shifting of our mortgage brokerage to MHMW has
affected our reported revenues significantly.  We are pleased,
however, that our core real estate operations continue to grow; sales were up
102% from $19,096 in the quarter ended January 31, 2008 to $38,627 for the same
period ended January 31, 2009.   As mentioned above, the number
of real estate transactions closed increased from 4 to 10 for the three month
periods ended January 31, 2008 and 2009, respectively.





In
addition to the sales growth mentioned above, our joint venture MHMW also has
begun to show solid profit growth.  For the quarter ended January 31,
2009, the joint venture recorded net income of $36,925.   Our 49%
share of the net income, which we adjusted for amortization of a deferred gain
on the initial transfer of assets we made to the joint venture amounted to
$18,853. (See Note 6 of the consolidated financial statements for more
details).  We expect additional growth from the mortgage joint venture
in the spring of this year.





The
quarter ended January 31, 2009 marked a shift in our strategy towards more lower
cost targeted real estate marketing and a focus on becoming cash flow
positive  on a quarterly basis before the end of this fiscal
year.   To achieve these goals, we reduced selling expenses from
$570,184 in three months ended January 31, 2008 to $164,415 for the three months
ended January 31, 2009.  Most significant among the selling cost
decreases were three items: website development, compensation, and advertising
and promotion.   We cut our www.webdigs.com
website development and upkeep expenses from $156,866 for the three months ended
January 31, 2008 to $2,296 for the three months ended January 31,
2009.    For the same periods, we reduced sales compensation
costs from $201,947 to $68,456 and advertising and promotion from $82,372 to
$21,280.   Fortunately, our www.webdigs.com
website is fully operational and requires very limited maintenance right
now.




28




Our
general and administrative spending allows less flexibility than selling
costs.  For the three months ended January 31, 2009, we incurred
$156,682 in general and administrative expense spending compared to $160,306 for
three months ended January 31, 2008.  The most significant general and
administrative items were non-cash compensation and professional
fees.   Non-cash compensation is addressed in the financial
statements. Non-cash stock compensation costs increased from $41,727 for the
three months ended January 31, 2008 to $65,485 for the three months ended
January 31, 2009.  Partially, offsetting the increase in non-cash
compensation was a decrease in professional fees of $29,580.  The
decrease in professional fees can be attributed to significantly reduced legal
fees and also a switch from consulting expense to payroll for the Company’s
Chief Financial Officer.  In the three months ended January 31, 2008,
our CFO was a non-employee contractor.  For the three months ended
January 31, 2009, his salary is classified as compensation
costs.    This shift results in a decrease in professional
fees of approx $13,000 for the three months ended January 31,
2009.     Further reductions in general and
administrative costs will be difficult to achieve given the fact that over 41%
of our costs are non-cash accounting entries ($65,485 in non-cash restricted
share and stock option compensation costs for the three months ended January 31,
2009).   Furthermore, with the exception of our Chief Financial
Officer and part-time accountant, everyone employed by the Company is directly
involved in sales efforts.





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 will be increasing the number of independent contractor real
estate agents upon whom we rely to provide personal services in the event that
we expand into other markets or our business in our current markets
significantly increases.





We expect
that we will invest time, effort and expense in the continued refinement of our
website and user interface. Currently, we expect to spend approximately $50,000
in such improvement activities over the course of fiscal
2009.     As mentioned above, as of January 31, 2009 we
have spent approximately $2,296 of our anticipated $50,000 current fiscal year
website spending.




29




Liquidity
and Capital Resources; Anticipated Financing Needs





As of
January 31, 2009, we had $88,467 cash and cash equivalents, and current
liabilities of $1,339,637 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.   In December, 2008, we also raised $500 cash from
one accredited investor who purchased 2,000 shares of our common stock in a
private placement.





We used
$179,741 of cash in operating activities during the three months ended January
31, 2009 compared to $338,783 for the three months ended January 31,
2008.  Cash used in operations for the three months ended January 31,
2009 included a net loss of $326,213, which was partially offset by $158,266 of
various non-cash expenses for depreciation, amortization, share-based
compensation, debt discount and issuance cost amortization, unrealized losses on
derivatives, change in our equity position with our joint venture and shares
issued for vendor payment.  For the three months ended January 31,
2008, these non-cash expenses totaled $97,876. For the three months ended
January 31, 2009, a decrease in accounts payable of $90,606 is partially offset
by increases in amounts owed to related parties of $35,624.   As
mentioned above, the note we obtained in December provided cash of $226,000
(after paying $4,000 in issuance costs and $20,000 in accrued legal fees). In
total, financing activities were virtually identical in the two three month
periods ended January 31, 2009 and 2008.  In the quarter ended in
January 2009, net financing activities provided a total of $230,406 compared to
$247,292 for the same period ended January, 2008.   As it
pertains to investing activities, we did not make any investments in the three
month period ended January 31, 2009.  For the same period last year,
we invested $6,814 in computer equipment.





For our
one issuance 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.





Given our
relatively low cash position, our near term focus in fiscal 2009 continues to
create some positive operating cash flow from our web-assisted real estate
brokerage and mortgage brokerage operations.    We believe
that our projected revenue growth during the second and third quarters of the
current fiscal year ending October 31, 2009 should generate sufficient capital
to fund our operations beyond September, 2009, based primarily on extended
payment terms that we have negotiated or obtained with our vendors and in part
on effective working capital management.    If our core
brokerage operations grow and provide us with a solid positive monthly cash
flow, we expect that towards the end of the fiscal year or beginning of the next
fiscal year (starting November 2009) we would seek $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 through October 31,
2011. Thereafter, however, we would likely require additional financing to fund
full nationwide expansion.




30




The
proceeds from the $250,000 convertible promissory note financing obtained in
December 2008 have provided critical liquidity to our business
operations. We expect the note will provide us working capital
sufficient to fund current operations through the note's maturity date on
September 30, 2009.  In addition, as indicated above, we have obtained
express or tacit extended payment agreements with our vendors relating to an
aggregate of $630,000 in payables that are presently due.  In those
cases where we do not have an express agreement with vendors, it is possible
that a vendor may demand payment or refuse to provide services that are critical
to the ability of the Company to either continue to operate or to timely
file  required reports with the SEC.  If any such risk
materializes, it would likely decrease our likelihood of obtaining financing on
terms acceptable to us, if at all.  In addition, if we fail to reach
sales revenue objectives (for any reason, including due to continued poor real
estate and credit market conditions beyond our control), additional financing
may not be available on terms favorable to us, if at all.





If
additional funds are raised by the issuance of our equity securities, such as
through the issuance of common stock and exercise of stock options and warrants,
then existing stockholders will experience dilution of their ownership interest.
If additional funds are raised by the issuance of debt or other types of
(typically preferred) equity instruments, then we may be subject to certain
limitations in our operations, and issuance of such securities may have rights
senior to those of the then existing holders of our common stock. If adequate
funds are not available or not available on acceptable terms, we may be unable
to fund expansion, develop or enhance products or respond to competitive
pressures.





Effective
as of May 7, 2008, we granted options to three non-employee directors as a means
of inducing them to join the Board of Directors, giving each of them the right
to purchase up to 200,000 shares of common stock at the per-share price of
$0.25. These options may be exercised, to the extent vested, at any time prior
to May 7, 2013. Rights to purchase one-half of the shares issuable under the
options vested immediately upon issuance, with the remaining rights scheduled to
vest in two equal annual installments on each of May 7, 2009 and 2010. Under
SFAS No. 123(R), for stock-based awards granted after January 1, 2006, we
recognized compensation expense based on estimated grant date fair value using
the Black-Scholes option-pricing model of $4,624 for the three months ended
January 31, 2009. Black-Scholes is used to determine the fair value for options
issued to both employees and non-employees. The estimated fair value of these
stock option grants was $73,979.  We will record the remaining $23,118
as stock compensation expense over the vesting period until May 7,
2010.




31




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.





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
two 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. These capitalized costs
totaled $413,516 from inception (May 1, 2007) to October 31, 2007. 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 three months ended January 31,
2009.   All costs incurred in 2008 relating to the website were
determined to be operational type costs and were properly expensed.




32




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.





The
company assessed impairment of these two intangible assets at October 31, 2008
and determined that there was no impairment.   The Company
concluded that no impairment was present at January 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 5 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.




33




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 three month period ended
January 31, 2009 and 2008.  At January 31, 2009, the Company reports a
negative working capital position of $1,126,127, accumulated deficit of
$3,019,161 and a stockholders’ deficit of $781,641.  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.




34




In order
to meet its working capital needs through the next nine months, the Company
plans to seek additional financing where available.  The Company has
already begun reducing operating expenditures and expects to increase revenues
through its existing customer base and website traffic.





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.





Item
3.   Quantitative and Qualitative Disclosures About Market
Risk





Not
applicable.





Item
4.    Controls and Procedures.





Evaluation
of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures designed to provide reasonable
assurance that information required to be disclosed in our reports filed
pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer as appropriate, to allow timely decisions regarding
required disclosure. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance the objectives of
the control system are met.





As of
January 31, 2009, our management with the participation of our Chief Executive
Officer and Chief Financial Officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures as such term is defined
in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company’s disclosure controls and procedures were not effective as of
January 31, 2009, because of the identification of the material weaknesses in
internal control over financial reporting described below. Notwithstanding the
material weaknesses that existed as of January 31, 2009, our Chief Executive
Officer and Chief Financial Officer have each concluded that the consolidated
financial statements included in this Report on Form 10-Q present fairly, in all
material respects, the financial position, results of operations and cash flows
of the Company and its subsidiaries in conformity with accounting principles
generally accepted in the United States of America (GAAP).  We are
currently looking into cost effective steps to potentially remediate such
material weakness as described below.   These material weaknesses
have been previously identified in our October 31, 2008 10-K filing which was
filed on February 13, 2009.




35





The
material weaknesses which we identified are as follows:





·
            The
      Company does not currently have an audit committee that is actively
      involved with the financial reporting process and thus the Company lacks
      the board oversight role within the financial reporting
      process.





·
            The
      Company’s small size and only “one financial person” office prohibits the
      segregation of duties and the timely review of financial data and banking
      information.  The Company has limited review procedures in
      place.





·
            Numerous
      GAAP audit adjustments were made to the financial statements for the
      period ended January 31, 2009 and the year ended October 31,
      2008.





We have
now established a formalized audit commitee which is fully aware that there is
lack of segregation of duties due to the small number of employees dealing with
general administrative and financial matters.   No other
remediation efforts have taken place during the quarter ended January 31, 2009
due to lack of available funds.





Changes
in Internal Control Over Financial Reporting





During
the fiscal quarter ended January 31, 2009, no change in our internal control
over financial reporting has occurred which has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





PART
II – OTHER INFORMATION





Item
1. Legal Proceedings





None.





Item
1A.  Risk Factors.





None.


36





Item
2. Unregistered Sales of Equity Securities `


During
the quarter ended January 31, 2009, the Company offered and sold 2,000 shares of
common stock in a private placement  at a per share price of
$0.25.  The Company received gross proceeds from this sale of $500 and paid
no commissions or fees in connection with the private
placement.





For our
one issuance 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.





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 January 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


37





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:  March
      17, 2009/s/
      Edward WickerEdward
      WickerChief
      Financial OfficerDated:  March
      17, 2009


38


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


39