UpSnap (CEENQ) 10QSB 2006 Q4 Quarterly report (small business)

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the period ended December 31, 2006

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _______ to _______

Commission File No. 000-50560

UPSNAP, INC.

(Exact name of small business issuer as specified in its charter)

Nevada (State or other jurisdiction of incorporation or organization) 20-0118697 (IRS Employer identification No.)

134 Jackson Street, Suite 203, P.O. Box 2399, Davidson, North Carolina 20836

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(Address of Principal Executive Offices)

(704) 895-4121

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(Issuer’s Telephone Number)

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

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

State the number of shares outstanding of each of the issuers’ classes of common equity, as of the latest practicable date:

Class of StockOutstanding February 15, 2007

Common Stock ($.001 par value)22,170,324

Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]

UPSNAP, INC.

FORM 10-QSB

For the Quarter ended December 31, 2006

TABLE OF CONTENTS

		Page
	PART I - FINANCIAL INFORMATION
ITEM 1.	Selected Financial Statements	1
	Balance Sheet - December 31, 2006 (unaudited)	2
	Statements of Operations - Three Months Ended December 31, 2006 and 2005 (unaudited)	3
	Statements of Stockholders’ Equity - (unaudited)	4
	Statements of Cash Flows - Three months Ended December 31, 2006 and 2005 (unaudited)	5
	Notes to Financial Statements (unaudited)	6
ITEM 2.	Management’s Discussion and Analysis	16
ITEM 3.	Controls and Procedures	21
	PART II - OTHER INFORMATION
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	23
ITEM 6.	Exhibits	23
Signatures		24

PART I

ITEM 1. SELECTED FINANCIAL STATEMENTS

1

UPSNAP, Inc.

CONSOLIDATED BALANCE SHEET

AS OF DECEMBER 31, 2006

UNAUDITED

ASSETS
Current Assets
Cash	$	183,612
Accounts receivable		103,463
Other current assets		20,301
TOTAL CURRENT ASSETS		307,376
PROPERTY & EQUIPMENT (Note H)
Computer and office equipment		171,565
Accumulated Depreciation		(54,921	)
NET PROPERTY & EQUIPMENT		116,644
OTHER ASSETS
Other intangibles (Note L)		1,008,780
Goodwill (Note L)		4,677,862
Security deposits		1,114
TOTAL ASSETS	$	6,111,776
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	70,043
Total Other Current Liabilities		40,378
TOTAL CURRENT LIABILITIES		110,421
LONG TERM LIABILITIES
Note Payable (Note K)		113,500
TOTAL LIABILITIES		223,921
Commitments (Note I)
STOCKHOLDERS' EQUITY (Note C and D)
Common stock, par value $0.001, 97,500,000 authorized,		21,151
issued and outstanding 21,151,324 shares at December 31, 2006
Additional paid-in capital		8,272,706
Accumulated deficit		(2,406,002	)
TOTAL STOCKHOLDERS' EQUITY		5,887,855
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	6,111,776

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

2

UPSNAP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005

UNAUDITED

	Three Months Ended December 31,
			2006			2005
SALES AND COST OF SALES
Sales		$	253,977		$	-
Cost of Sales			123,414			3,530
Gross Profit			130,563			(3,530	)
OPERATING EXPENSES
Product development			86,076			55,942
Sales and marketing expenses			28,876			46,675
General and administrative			447,312			258,490
Total Expense			562,264			361,107
Net operating income			(431,700	)		(364,637	)
Other income and expense
Interest income			126			-
Interest expense			-			300
Net Other Income			126			(300	)
NET LOSS		$	(431,574	)	$	(364,937	)
Net loss per share		$	(0.02	)	$	(0.02	)
Weighted average common shares outstanding:
Basic and diluted			21,151,324			14,658,252
The average shares listed below were not
included in the computation of diluted losses
per share because to do so would have been
antidilutive for the periods presented:
Warrants:			5,144,668			5,144,668

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

3

UPSNAP, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY

FOR THE PERIOD SEPTEMBER 30, 2004 to DECEMBER 31, 2006

UNAUDITED

	Common Stock
										Total
					Additional					Stockholders'
					Paid-in		Accumulated			Equity
	Shares		Par Value		capital		Deficit			(Deficit)
Balances, September 30, 2004		-	$	-	$	27,474	$	(27,474	)	$	-
-
Donated capital		-		-		119,525		-			119,525
Shares issued for cash ($.0003 per share)		12,999,999		1,300		1,700		-			3,000
Net loss		-		-		-		(158,586	)		(158,586	)
Balances, September 30, 2005		12,999,999		1,300		148,699		(186,060	)		(36,061	)
Shares issued in connection with reverse merger		5,788,495		17,488		2,079,623		-			2,097,112
Shares issued in connection with XSVoice acquisition		2,362,830		2,363		5,997,712		-			6,000,074
Net loss								(1,788,368	)		(1,788,368	)
Balances, September 30, 2006		21,151,324		21,151		8,226,034		(1,974,428	)		6,272,757
Stock based compensation		-		-		46,672		-			46,672
Net loss		-		-		-		(431,574	)		(431,574	)
Balances, December 31, 2006		21,151,324		21,151	$	8,272,706	$	(2,406,002	)	$	5,887,855

The accompanying notes are an integral part of these unaudited financial statement

4

UPSNAP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTH PERIODS ENDED DECEMBER 31, 2006 AND 2005

UNAUDITED

	December 31, 2006			December 31, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(431,574	)	$	(364,937	)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation		12,708			208
Amortization of intangibles		150,690			-
Changes to goodwill		-			-
Stock based compensation		46,672			-
CHANGES IN CURRENT ASSETS AND CURRENT
LIABILITIES: (Net of effect of acquisition)
Accounts receivable		65,364			-
Other current assets		(9,358	)		(50,978	)
Deposits		-			(965	)
Accounts payable and accrued expenses		(60,363	)		55,469
Other current liabilities		33,936			(16,090	)
NET CASH USED FOR OPERATING ACTIVITIES		(191,925	)		(377,293	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from the company merger		-			1,919,662
Purchase of equipment		(5,258	)		(2,761	)
NET CASH PROVIDED BY INVESTING ACTIVITIES		(5,258	)		1,916,901
NET INCREASE IN CASH		(197,184	)		1,539,608
CASH, beginning of period		380,796			175,611
CASH, end of period	$	183,612		$	1,715,219
Taxes paid	$	-		$	-
Interest paid	$	-		$	-
Other non-cash investing and financing activities:
Shares issued in connection with reverse merger	$	-		$	2,097,112
Shares issued in connection with XSVoice acquisition	$	-		$	6,000,074

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

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to SEC Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required 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 balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto incorporated by reference in the Company’s Annual Report on SEC Form 10-KSB for the year ended September 30, 2006.

In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the financial position of UPSNAP, INC. and its subsidiaries as of December 31, 2006 and the results of their operations for the three month periods ended December 31, 2006 and 2005 and their cash flows for the three months ended December 31, 2006 and 2005. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-QSB or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year.

When required, certain reclassifications are made to the prior period’s consolidated financial statements to conform to the current presentation.

As of January 1, 2006 the Company exited the development stage company as defined in Financial Accounting Statements Board (“FASB”) Statement No. 7, Accounting and Reporting for Development Stage Companies.

Organization

In November, 2005, UpSNAP, Inc. (formerly Manu Forti Group) completed an acquisition of UpSNAP USA, Inc. The acquisition was accounted for as a recapitalization effected by a reverse merger, wherein UpSNAP USA, Inc. is considered the acquirer for accounting and financial reporting purposes (collectively, UpSNAP, Inc. and UpSNAP USA, Inc are referred to hereinafter as the “Company”). The pre-merger assets and liabilities of the acquired entity have been brought forward at their book value and no goodwill has been recognized. The accumulated deficit of UpSNAP USA, Inc. has been brought forward, and common stock and additional paid-in-capital of the combined company have been retroactively restated.

Pursuant to a definitive share exchange agreement dated November 15, 2005 (as previously filed on SEC Form 8-k on November 16, 2005), UpSNAP, Inc. acquired 100% of the issued and outstanding shares of UpSNAP USA, Inc.

Under the terms of the agreement UpSNAP, Inc. issued 11,730,000 shares of its common stock for all of the issued and outstanding stock of UpSNAP USA, Inc. As a result of the acquisition, the former shareholders of UpSNAP USA, Inc. held immediately after the acquisition 62.4% of the issued and outstanding shares of UpSNAP, Inc.'s common stock. The remaining 37.8% were held by UpSNAP, Inc.’s (formerly Manu Forti Group, Inc.) shareholders.

On January 6, 2006, the Company completed the purchase of XSVoice, Inc., a privately held wireless platform and application developer, by acquiring substantially all of the assets of XSVoice, Inc. for a total purchase price of $6.3 million. XSVoice, Inc.’s results of operations have been included in the consolidated financial statements since the date of acquisition (See Note L).

The consolidated financial statements include the operations of UpSNAP, Inc. from November 15, 2005 through December 31, 2006.

UpSNAP, Inc. changed its year-end to September 30 to coincide with the year-end of UPSNAP USA, Inc.

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NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These financial statements have been prepared by management in accordance with GAAP. The significant accounting principles are as follows:

Principles of consolidation

The consolidated financial statements include the accounts of UpSNAP, Inc. since November 15, 2005 and its wholly-owned subsidiary, UpSNAP USA, Inc., which is 100% consolidated in the financial statements, and the accounts and results from operations acquired as a result of the XSVoice, Inc. acquisition as of January 6, 2006. All material inter-company accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. These estimates and assumptions are based on management's judgment and available information and, consequently, actual results could be different from these estimates.

Cash and cash equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Property and equipment

Property and equipment are stated at cost. Major renewals and improvements are charged to the asset accounts while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed. At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are credited or charged to income.

The Company depreciates its property and equipment on the double declining balance method with a five year life and half year convention.

Disclosure about Fair Value of Financial Instruments

The Company estimates that the fair value of all financial instruments at December 31, 2006, as defined in FASB 107, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange.

Research and Development Expenditures

The Company incurs product development expenses related to the ongoing development of their search engine technology and connecting new clients to the existing streaming audio platform. Research and development expenses consist primarily of wages paid to employees and to independent contractors. The Company follows the guidelines in Statement of Financial Accounting Standards No. 2, Accounting for Research and Development Costs. Expenditures, including equipment used in research and development activities, are expensed as incurred.

7

Revenue Recognition

The Company recognizes revenue under the guidance provided by the SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” and the Emerging Issues Task Force (“EITF”) Abstract No. 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent” (“EITF 99-19”).

The Company receives revenue from the wireless carriers by providing streaming audio content that the carriers make available to their mobile handset customers. UpSNAP generates revenues from this line of business in two distinct ways:

1. Provider of Technology Platform: UpSNAP provides technology to brands that have their own mobile distribution and revenue arrangements with the carriers. In this case, UpSNAP does not act as the principal in the transaction. The brands - typically large brands such as NASCAR or ESPN, have their own relationships with the carriers and look to UpSNAP to provide the technology platform and service, while they retain the relationship with the consumer and set the pricing. In these cases, UpSNAP reports net revenues received from the carrier which are revenues after both carrier charges and content provider charges.

2. UpSNAP is Principal Party: UpSNAP acts as the principal party in the content relationships. Specifically, UpSNAP has the relationship with the carriers, sets the re-sale price at which consumers buy the product, pays the content provider for the content, and builds the mobile application or service. In these relationships, the Company recognizes revenue based on the gross fees remitted by the carrier to the company. The Company’s payments to the third party content providers are treated as cost of sales.

Dividends

The Company has not yet adopted any policy regarding payment of dividends. No dividends have been paid or declared since inception.

Long-lived assets

The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors.

Accounting Policy for Impairment of Intangible Assets

The Company evaluates the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. Such circumstances could include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts.

8

Segment reporting

The Company follows Statement of Financial Accounting Standards No. 130, Disclosures About Segments of an Enterprise and Related Information. The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.

Advertising costs

The Company expenses all advertising as incurred. For the three month periods ended December 31, 2006 and 2005 the Company incurred advertising expense of $2,758 and $0 respectively.

Stock-Based Compensation

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

Our statement of operations for the three months ended December 31, 2006 and 2005 included stock-based compensation expense of $46,672 and $0, respectively.  

Unrecognized stock-based compensation expense expected to be recognized over an estimated weighted-average amortization period of 43.4 months was approximately $382,356 at December 31, 2006.

Stock Plan

On November 2, 2006 the Board of Directors of UpSNAP, Inc. approved a 2006 Omnibus Stock and Incentive Plan. The Plan will make four million (4,000,000) shares, either unissued or reacquired by the Company, available for awards of either options, stock appreciation rights, restricted stocks, other stock grants, or any combination thereof. Eligible recipients include employees, officers, consultants, advisors and directors. Options granted generally have a ten-year term and vest over four years from the date of grant. Certain of the stock options granted under the Plan have been granted pursuant to various stock option agreements. Each stock option agreement contains specific terms.

Time-Based Stock Awards

The fair value of each time-based award is estimated on the date of grant using the Black-Scholes option valuation model, which uses the assumptions described below. Our weighted-average assumptions used in the Black-Scholes valuation model for equity awards with time-based vesting provisions granted during the three months ended December 31, 2006 are shown in the following table:

Expected volatility	70.0%
Expected dividends	0%
Expected terms	6.0-6.25 years
Risk-free interest rate	4.45% - 4.76%

The expected volatility rate was estimated based on historical volatility of the Company’s common stock over approximately the fourteen month period since the reverse merger and comparison to the volatility of similar size companies in the similar industry. The expected term was estimated based on a simplified method, as allowed under SEC Staff Accounting Bulletin No. 107, averaging the vesting term and original contractual term. The risk-free interest rate for periods within the contractual life of the option is based on U.S. Treasury securities. The pre-vesting forfeiture rate used for the three months ended December 31, 2006 was assumed to be zero. As required under SFAS No. 123(R), we will adjust the estimated forfeiture rate to our actual experience. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time,

9

which could result in changes to these assumptions and methodologies, and thereby materially impact our fair value determination.

A summary of the time-based stock awards as of December 31, 2006, and changes during the three months ended December 31, 2006, is as follows:  

	Shares		Weighted-Average Exercise Price		Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at October 1, 2006		-		-
Granted		700,000	$	0.92			$	-
Forfeited or expired		-		-
Outstanding at December 31, 2006		700,000				3.61	$	-
Exercisable at December 31, 2006		75,000	$	0.64		2.92	$	-

The aggregate intrinsic value represents the pretax value (the period’s closing market price, less the exercise price, times the number of in-the-money options) that would have been received by all option holders had they exercised their options at the end of the period. The exercise price of stock options granted during the three months ended December 31, 2006 was equal to the market price of the underlying common stock on the grant date.

Income Taxes

In accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, the Company uses an asset and liability approach for financial accounting and reporting for income taxes. The basic principles of accounting for income taxes are: (a) a current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year; (b) a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards; (c) the measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law and the effects of future changes in tax laws or rates are not anticipated; and (d) the measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

Loss per common share

The Company adopted Statement of Financial Accounting Standards No. 128 that requires the reporting of both basic and diluted earnings (loss) per share. Basic loss per share is calculated using the weighted average number of common shares outstanding in the period. Diluted loss per share includes potentially dilutive securities such as outstanding options and warrants, using the "treasury stock" method and convertible securities using the "if-converted" method. The assumed exercise of options and warrants and assumed conversion of convertible securities have not been included in the calculation of diluted loss per share as the affect would be anti-dilutive.

Recent Accounting Pronouncements

In May 2005, the FASB issued SFAS No. 154 “Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This Statement replaces APB Opinion No. 20, “Accounting Changes”, and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements” and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provision. When a pronouncement includes specific transition provisions, those provisions should be followed. The Company has no transactions that would be subject to SFAS 154.

10

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Instruments-an amendment of FASB Statements No. 133 and 140 ("SFAS 155"). SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 eliminates the need to bifurcate the derivative from its host, as previously required under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedge Accounting ("SFAS 133"). SFAS 155 also amends SFAS 133 by establishing a requirement to evaluate interests in securitized financial assets to determine whether they are free standing derivatives or whether they contain embedded derivatives that require bifurcation. SFAS 155 is effective for all hybrid financial instruments acquired or issued by the Company on or after January 1, 2007. The Company does not anticipate any material impact to its financial condition or results of operations as a result of the adoption of SFAS 155.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS 156”). SFAS 156 addresses the accounting for recognized servicing assets and servicing liabilities related to certain transfers of the servicer’s financial assets and for acquisitions or assumptions of obligations to service financial assets that do not relate to the financial assets of the servicer and its related parties. SFAS 156 requires that all recognized servicing assets and servicing liabilities are initially measured at fair value, and subsequently measured at either fair value or by applying an amortization method for each class of recognized servicing assets and servicing liabilities. SFAS 156 is effective in fiscal years beginning after September 15, 2006. The adoption of SFAS 156 is not expected to have a material impact on our consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements.” The standard provides guidance for using fair value to measure assets and liabilities. Under the standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The Statement is effective for financial statements issued for fiscal years beginning after November15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the Statement to determine what impact, if any, it will have on the Company.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”). This statement requires balance sheet recognition of the funded status, which is the difference between the fair value of plan assets and the benefit obligation, of pension and postretirement benefit plans as a net asset or liability, with an offsetting adjustment to accumulate other comprehensive income in shareholders’ equity. In addition, the measurement date, the date at which plan assets and the benefit obligation are measured, is required to be the company’s fiscal year end. The Company currently Company is currently evaluating the Statement to determine what impact, if any, it will have on the Company.

NOTE C - STOCKHOLDERS’ EQUITY

The Company issued 9,999,999 shares of common stock to its directors on December 20, 2004 for $3,000 of which, $2,000 was paid in cash and $1,000 was paid by director’s reimbursable company expense. The shares issued have been restated to reflect the 1.3 to 1 forward split on August 28, 2005.

Donated capital represents Company expenses paid by certain directors of the Company totaling $146,999 during the period from inception to September 30, 2005.

On August 28, 2005, the Board of Directors of UpSNAP, Inc. approved a 1.3 for 1 forward stock split which was approved by a majority of the existing shareholders. The forward stock split has been retroactively applied and is reflected in the statement of stockholders’ equity.

On November 15, 2005, the closing under the Share Exchange occurred. 11,730,000 shares of common stock were issued to the stockholders of UpSNAP USA, Inc. Additionally, 370,000 shares of common stock and 560,000 warrants were issued to an investment banking firm in consideration for services provided (See Note D).

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On January 6, 2006, the Company acquired substantially all of the assets of XSVoice, Inc. 2,362,830 shares of common stock were issued to the stockholders of XSVoice, Inc. (See Note L).

NOTE D - WARRANTS

The Company has recorded the warrant instruments described below as equity in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity, paragraph 11(a), and EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock.

During September - October 2005, the Company issued Series A warrants to purchase 2,384,668 shares of common stock at $1.50 per share, in conjunction with the Company’s Private Placement. The fair value of the warrants in the amount of $1,935,260 was recorded as a debit and credit to additional paid in capital so there was no net impact on equity. The Private Placement warrants have a twelve month life.

In October 2005, the Company issued Series B warrants to purchase 2,200,000 shares of common stock at $1.10 per share to investor relations firms in conjunction with services related to the Private Placement offering. The warrants have a term of five years. These warrants have been recorded at fair value using the Black-Scholes option-pricing model. The value of these warrants, $2,057,125, was recorded as additional paid-in capital and a non-cash compensation expense in October 2005.

In November 2005, the Company issued warrants to purchase 560,000 shares of common stock at $0.90 per share to an investment bank in conjunction with investment services related to the Private Placement offering. The warrants have a term of five years. These warrants have been recorded at fair value using the Black-Scholes option-pricing model. The value of these warrants, $900,063, was recorded as additional paid-in capital and a non-cash compensation expense in November 2005.

In September 2006, the Company extended the expiration date for the Series A Warrants from October 2006 to March 30, 2007. The fair value of the warrants in the amount of $71,540 was recorded as a debit and credit to additional paid in capital so there was no net impact on equity.

The following table summarizes information about warrants outstanding at December 31, 2006:

	Shares Exercisable	Exercise Price	Date of Expiration
Series A Warrant: Issued in conjunction with Private Placement	2,384,668	$1.50	March 2007
Series B Warrant: Issued for investor relations services	2,200,000	$1.10	October 2010
Viant Capital LLC Warrant	560,000	$0.90	November 2010
Total	5,144,668

At December 31, 2006, a total of 5,144,668 warrants remain outstanding. All warrants are fully vested and exercisable upon issuance.

The Company may from time to time reduce the exercise price for any of the warrants either permanently or for a limited period or extend their expiration date.

NOTE E - INCOME TAXES

For the twelve month periods ended September 30, 2006 and 2005, the Company incurred net operating losses and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At September 30, 2006, the Company had approximately $2,470,810 of accumulated net operating losses. The net operating loss carryforwards, if not utilized, will begin to expire in 2024.

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The components of the Company’s deferred tax asset are as follows:

	Twelve Month Period Ended September 30			Twelve Month Period Ended September 30
	2006			2005
Federal and state income tax benefit	$	864,783		$	238,854
Change in valuation allowance on deferred tax assets	$	(864,783	)		(238,854	)
	$	-		$	-

For financial reporting purposes, the Company has incurred a loss since its inception. The Company provided for a full valuation allowance against its net deferred tax assets at September 30, 2006.

A reconciliation between the amounts of income tax benefit determined by applying the applicable U.S. and State statutory income tax rate to pre-tax loss is as follows:

	Twelve Month Period Ended September 30			Twelve Month Period Ended September 30
	2006			2005
Federal and state statutory rate	$	864,783		$	238,854
Change in valuation allowance on deferred tax assets	$	(864,783	)		(238,854	)
	$	-		$	-

NOTE F - GOING CONCERN

As shown in the accompanying financial statements, the Company has accumulated net losses from operations from inception through December 31, 2006 totaling $2,406,002 and as of December 31, 2006, has had limited revenues from operations. These factors raise substantial uncertainty about the Company’s ability to continue as a going concern.

The Company’s financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

NOTE G - CONCENTRATION OF CREDIT RISK

For the three month period ended December 31, 2006, our largest customer accounted for more than 85% of sales.

The Company has deposits of $87,871 in a bank in excess of federally insured limits at December 31, 2006. The amount has not been reduced by items recorded in the account not yet clearing the bank.

Management periodically reviews the adequacy and strength of the financial institutions and deems this to be an acceptable risk.

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NOTE H - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31, 2006:

	As of December 31			As of December 31
Fixed Assets	2006			2005
Computer and office equipment	$	167,565		$	2,761
Office Equipment		1,000			-
Office Furniture		3,000			-
Accumulated Depreciation		(54,921	)		(208	)
Total Fixed Assets	$	116,644		$	2,553

Depreciation expense for the three months ended December 31, 2006 and 2005 was $12,708 and $ 208, respectively.

The estimated service lives of property and equipment are 3 - 7 years.

NOTE I - COMMITMENTS

In March 2006, the Company began a lease for approximately 1,800 square feet of office space. The lease extends through February 28, 2007 at a rate of $2,250 per month. Future maturities associated with this commitment are as follows:

Year Ended September 30	Amount
2007	$4,500

NOTE J - RELATED PARTY TRANSACTION

The Chairman of the Board of the Company provides services to the Company as its CEO, for monthly compensation of $10,000 and related expenses. The Company pays $10,000 per month in fees to a board member who is providing services related to product content.

NOTE K - NOTE PAYABLE

As part of the consideration for the purchase of XSVoice, the Company assumed the principal balance of a November 5, 2004 note that was in default between XSVoice, Inc. and one of its carrier partners. The principal balance of the note at the time of the acquisition of XSVoice, Inc. was $113,500 and it carries an interest rate is 5% above the prime rate and is subject to an additional 2% after any Event of Default. The Company has been unable to identify any parties within the carrier that are aware of the note and are thus able to negotiate terms. The carrier has also made no attempts to collect the note. The Company carries the note as long-term and is not accruing interest.

NOTE L - ACQUISITION OF XSVOICE, INC.

On January 6, 2006, the Company completed the purchase of XSVoice, Inc., a privately held wireless platform and application developer, by acquiring substantially all of the assets of XSVoice, Inc. for a total purchase price of $6.3 million. XSVoice, Inc.’s results of operations have been included in the consolidated financial statements since the date of acquisition.

As a result of the acquisition, the Company acquired XSVoice's proprietary SWInG (Streaming Wireless Internet Gateway) technology, which enables mobile access to virtually any type of audio content, including Internet-based streaming audio, radio, television, satellite or other audio source. The acquisition also allowed the Company to gain access to carrier distribution channels and premium content provider relationships.

The aggregate purchase price of $6,393,223 consisted of $198,829 in cash consideration, the assumption of $130,000 in debt, and common stock valued at $5,735,000. In addition, the Company paid $80,820 for accounting and legal fees related to the acquisition and issued common stock valued at $265,074 for investment banking services.

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The value of the 2,362,830 common shares issued as a result of this acquisition was determined based on the average market price of the Company’s common shares over the preceding 15-day period before the closing date of the acquisition. 590,710 of the common shares given as consideration were placed into an escrow account and were subject to an Escrow Agreement which allowed for the release of shares as certain revenue thresh holds were met over the first year after the acquisition. Total revenues recognized during the year indicate that the shareholders of XSVoice are entitled to 60% of the escrowed shares. The Company has made a demand for the balance of the escrowed shares, or 147,677 shares to be returned to the company for cancellation.

The following table presents the allocation of the acquisition cost, including professional fees and other related acquisition costs, to the assets acquired and liabilities assumed, based on their fair values:

Allocation of acquisition cost:
	Accounts receivable		$ 71,621.43
	Property, plant, and equipment
		Computer equipment	28,200.00
		Office equipment	1,000.00
		Office furniture	3,000.00
	SWinG copyright		1,345,040.00
	Customer relationships		104,000.00
	Employment contracts		78,000.00
	Supplier contracts		84,500.00
	Goodwill		4,791,361.53
		Total assets acquired	6,506,722.96
	Note payable		(113,500.00)
		Total liabilities assumed	(113,500.00)
		Net assets acquired	$6,393,222.96

Of the $6,402,902 of acquired intangible assets, $1,345,040 was assigned to the SWinG technology platform, $104,000 for customer relationships, $78,000 for employment contracts, and $84,500 for supplier contracts. These intangible assets were assigned a life of 45 months. The remaining unallocated intangible balance of $4,791,362 was assigned to goodwill.

The allocation of the purchase price is based on preliminary data and could change when final valuation of certain intangible assets is obtained.

In connection with the XSVoice, Inc. acquisition, the Company agreed to pay an additional $550,000 in cash consideration by January 6, 2007, if the company raises an additional $3.2 million in additional equity capital or a majority of the Series A warrants are exercised. In accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, the Company does not accrue contingent consideration obligations prior to the attainment of the objectives. Any such payments would result in increases in goodwill.

NOTE M - SUBSEQUENT EVENT

During the period from January 20, 2007 to February 12, 2007, the Company issued 1,019,000 shares of common stock each at a price of $0.25 upon exercise of previously placed warrants (619,000 Series A warrants and 400,000 Series B warrants) . Total proceeds of $274,750 were received to be added to working capital. The Company relied on  Rule 4(2) in this private placement.

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ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS

The following discussion should be read in conjunction with the Financial Statements and related notes thereto included elsewhere in this report.

BUSINESS OVERVIEW

UpSNAP is a mobile search & entertainment engine that helps mobile US consumers quickly find mobile content and entertainment services. UpSNAP provides a seamless platform for search & content delivery to almost all mobile devices in the United States. Our catalog of free and premium streaming audio content delivers compelling content from some of the world’s premier brands including Fan Scan (the NASCAR in car-audio application on Sprint/Nextel), ABC, ESPN Radio, ESPN Deportes, Radio Disney and Batanga. Over the past 12 months, UpSNAP has built one of the largest Radio networks of content from over 1,500 content providers. It has built a mobile advertising platform that allows for the automated insertion of audio and pay-per-call contextual mobile advertising. UpSNAP currently operates in the United States only.

MD&A Overview:

UpSNAP spent 2005 developing its core hardware and software infrastructure and 2006 building out its core platform of services. UpSNAP now has a rich platform of content ranging from radio stations, to sports commentary and podcasts from over 1,500 content providers.

The typical revenue model for mobile content has been subscription only. UpSNAP has now built an advertising driven model, rather than relying on subscriptions alone. Many successful media models have involved making money from advertising services, while growing the advertising base of consumes as rapidly as possible.

UpSNAP management believes that a mobile advertising driven model will in the long-run achieve greater revenues than a subscription model.

For the quarter ended December 31, 2006, UpSNAP recorded record sales of $253,977 and implemented operating measures that will reduce the forecasted operating cash burn during calendar 2007 to approximately $36,000 a month.

During January- February 2007 UpSNAP raised an additional $254,750 through the sale of warrants. The company’s current financial models, benefiting from this additional cash raised and progress to reduce cash burn, indicate that within twelve months the Company’s cash balances may fall to levels that will not sustain operations.

As of February 12, 2007 the Company had approximately $303,000 in cash and approximately $395,000 in working capital.

General

Consumer interest and spend on mobile phones and services are continuing to showing very high growth rates. In the US, according to the Cellular Telecommunications & Internet Association (CTIA) as reported in its Wireless Quick Facts September 2006, wireless subscribers reached 219.4 million by June 2006, reaching more than 72% of the total US population. Wireless Data Revenues grew particularly sharply, showing growth of 70% from $3.8 billion in the first half of 2005, to $6.5 billion for the first six months of 2006.

UpSNAP’s search technology is in part based on text messaging or Short Message Service (SMS) that is proving to be extremely popular amongst the youth demographic in the United States.

According to the CTIA’s April 2006 Wireless Quick Facts Report, 9.8 billion messages were sent in December 2005, up 109% from 4.8 billion messages in December 2004. 48.7 billion SMS messages were sent in the last six months of 2005, up 50% from 32.5 billion in the first six months of 2005, and up 97% from 24.7 billion in the last six months of 2004.

Reports are available from http://www.ctia.org/ and are free to the public.

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Mobile Search Business Model

Putting as few obstacles between joining merchants and buyers together has proved to be a highly successful business strategy that has created several billion dollar industries. In the 1980s 1-800 services became enormously popular, and enabled consumers to reach merchants at no cost. In the 1990s, merchants paid for ‘clicks’ on Internet advertisements on search engines such as Yahoo! and Google. Again, these services were virtually free to the consumer, and the merchant paid for new incoming business. In 2000, cellular customers had to pay up to $1.50 for a merchant number using cellular 411 directory assistance services, or have to use expensive handsets and data packages to view a web site, crammed onto a tiny mobile browser.

UpSNAP provides a SMS, WAP and mobile application based search engine that allows mobile subscribers to quickly and easily search for mobile content and information services. The consumer pays for the cost of sending a text message, which can vary from free, to a few cents per message depending on their mobile contract with their carrier.

UpSNAP business model is to generate consumer traffic from the provision of these search services, and then up-sell premium content, or direct response advertising as a “pay per call” service targeted according to the nature of the consumer search.

The business model is a media model - reliant on the sale of subscriptions and advertising from content-based services. UpSNAP relies on third-party operators for our advertising.

One of the key problems to establishing a media model for cell-phones is the difficulty of rolling out media based services to all the many carrier platforms and different handsets. The cellular industry has many competing technologies, standards and platforms.

UpSNAP solves this problem by allowing its premium services to be broadcast to any cell-phone using its proprietary technology outlined below.

Principal Products and Services

UpSNAP has four principal products and services:

1 Mobile Search Engine Platform

2 Pay-Per-Call Advertising services using our Voice over Internet Protocol (VoIP) platform

3 SWinG streaming audio platform

4 Premium audio content supplied from content partners

MOBILE SEARCH ENGINE PLATFORM

The UpSNAP mobile search engine platform allows consumers to search via text message, WAP and through a digital download on the mobile handset to a mobile “short-code” or 5 digit telephone number, which in our case is 2SNAP (27627). Current services include yellow pages directory assistance, sport scores, horoscopes, price comparison shopping services, weather, calorie counter, spelling, and airline travel information. Consumers type in search requests e.g. “Leo” for a horoscope reading. The consumer will be offered a free horoscope, but also receive an advertisement via a text message to speak with an astrologer direct or hear an extended audio horoscope.

Similarly, consumers looking for sports scores, for example, will receive a text message advertising UpSNAP premium sports services. The short-code can also be used for Premium Text Messaging Services (PSMS) which are directly billed by the carriers, and included on the consumer’s phone bill. UpSNAP has PSMS services provisioned for billing with most of the major US carriers including, Cingular, Sprint/Nextel, T-Mobile and Alltel. These short-codes at present will only work on US handsets, limiting the geographic coverage of the service to those areas in the United States with cell-phone coverage. Our mobile search engine was launched live to consumers in November 2005.

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These searches do not generate any revenue for UpSNAP. They are free content to the consumer and are used by UpSNAP as a promotional vehicle to convert consumers from free to paid services.

PAY-PER-CALL ADVERTISING PLATFORM

Once a consumer makes a search for a specific search category or uses a “key-word’ identified and purchased by an UpSNAP partner as indicative of buying behavior, the UpSNAP advertising platform inserts a “paid’ advertising listing into the search reply.

UpSNAP has a Voice Over Internet Protocol (VoIP) switch which seamlessly bridges the merchant telephone number with the consumer via a call connect. Our Pay Per Call advertising platform can then record the number of calls received by a merchant and produce an audit trail for a billing engine. UpSNAP partners with specialized “Pay-Per-Call” companies, that sign-up advertisers nationwide throughout the US for this type of advertising. Our pay-per-call advertising platform technology was built in 2005, and our first pay-per-call-partnership was announced with Ingenio, who provides pay-per-call advertisers nationwide on May 4, 2006. We rely on third party operators for our advertising. For example if a national pizza chain were to only want to target select US cities, our third party partners would only pass us the advertising for a specific geographical locale.

UpSNAP has now begun to generate small amounts of revenue from our pay-per-call Platform.

SWING STREAMING AUDIO PLATFORM

UpSNAP’s SWinG (Streaming Wireless Internet Gateway) platform enables mobile access to virtually any type of live and on-demand streaming audio content, such as radio, podcasts and live sports events. The software translates data from almost any type of common audio format, for example MP3 files, to allow it to be streamed to cell-phones capable of supporting audio streaming. If the cell-phone does not have any data services, the platform broadcasts the audio via the voice channel on the cell-phone. The SWinG platform is thus able to be used on any cell phone in the United States, regardless of handset, data package or software. The SWinG platform was built over the course of 2002-2004 and is fully operational.

Our catalog of free and premium streaming audio content delivers compelling content from some of the world’s premier brands including Fan Scan, the NASCAR in car-audio application on Sprint/Nextel, ABC, ESPN Radio, ESPN Deportes, Radio Disney & Botanga. The catalogue of content includes over 1,500 content providers, with a wide selection of content ranging from Radio Stations, to sports coverage and Podcasts.

The company generates subscription revenues from the SWinG platform by providing the technology platform to major companies that already have a relationship with the carriers, such as ESPN and NASCAR. In addition, the Company generates revenues acting as the principal in the relationship with the carriers, providing content from over 1,500 content providers.

The subscription revenues can take two forms. 1.) One off Subscription: A consumer subscribes for a particular event or for a limited amount of time. For example, in the case of the NASCAR Fan-Scan in car audio content, consumers purchase a “$4.99 race pass” that is only good for one NASCAR race, and will simply expire after the race is finished. 2.) Recurring Subscribers: Consumers can also subscribe per month. For example, in the case of the NASCAR Fan-Scan in car audio content, consumers purchase a “$9.99 race pass” that is valid for use each month, until the consumer chooses to opt out.

In each case, the cost of the paid service is added to the consumer’s phone-bill, and the carriers pay UpSNAP after deducting their margin and associated costs.

Margins

The selling of mobile content typically involves:

1 The wireless carrier, who operates the cellular infrastructure and billing interface to add micro-payments from wireless services onto the customer phone bill. The carrier will typically demand 30-50% of the gross revenues.

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UpSNAP reports revenues net of the carrier gross margin. For example, if UpSNAP sells an application for $10.00 to the consumer, UpSNAP would only report $5-$7 of net revenue.

2 An aggregator or mobile delivery and clearing house for the receipt and delivery of mobile messages will take 5-10% of the gross sale value.

3 The content owner who has the rights to the mobile content typically will take 20-85% of the net proceeds of the sale after all carrier and distribution charges depending on the nature, exclusivity and licensing rights of the content. If the content owner has a large brand, and distribution rights and relationships with the wireless operators, the content owner will be able to demand a higher margin, but will also bring much higher volume to the transaction. If the content is not exclusive, or is not a name brand, the content owner will be reliant on other companies such as UpSNAP to promote and distribute the application, and will thus take a much smaller margin.

The mobile supplier, in this case UpSNAP, takes between 15-80% of the remaining net revenue, A large media brand that has distribution with the wireless carriers and exclusive content will typically act as the principal in the wireless application deal, and will retain their brand and direct consumer relationship (via the mobile operator) with the consumer. In this case UpSNAP acts as a service provider, and will typically be paid a smaller margin and will not show the revenues from the content. In all other cases, UpSNAP acts a the principal in the wireless application deal. UpSNAP builds the application, makes it available on its servers, and on the wireless handsets, introduces the content into the wireless distribution channels, sets the price, and handles all the customer related issues and support.

DISTRIBUTING AGREEMENTS

Distribution of the UpSNAP suites of services is multi-tiered but can be summarized as:

1 Carrier or “on deck” promotion - where the carrier actually promotes the service from the menu’s on the carrier handset, bills the consumer on their mobile phone bill, and takes its cuts, and then remits the balance to UpSNAP. UpSNAP has ‘on deck’ agreements with Sprint/Nextel.

2 Off Deck Promotion - where the consumer signs up for services through traditional media promotions, internet advertising, affiliate marketing relationships, or other media channels directly, and payment is made via a short-code or Premium SMS (PSMS) to the consumers mobile phone bill. UpSNAP has billing relationships in place with most major US carriers including, Cingular, T-Mobile, Sprint/Nextel and Alltel.

3 White-label or third-party branded services, where UpSNAP sells its suite of search applications, content and services to third-parties, who when resell its services. UpSNAP has not yet entered into any such deals, but industry standard arrangements for these type of deals are largely done on a revenue-share basis, while some are performed on a license basis. These third-parties include media companies, who have relationships with local media and merchants, but lack the technology to offer mobile search and entertainment services.

In order to increase its revenues UpSNAP plans to aggressively market its search and entertainment technology to all three of these distribution channels outlined above over the course of 2007.

In addition, we expect to perform continued research and development around mobile search and integration of multi-media content during the course of the next 12 months. We may also enter into significant acquisitions, joint ventures, or offshore outsourcing programs to rapidly increase the amount of programming resource available to the company to allow us to continue to innovate in the marketplace.

Our growth strategy contemplates acquisitions.  During the first Quarter of 2006 we successfully integrated the assets and personnel of XSVoice into the company. We continue to look for acquisition targets for although this will depend upon the timing and availability of appropriate acquisition opportunities. Our business plan calls for acquisitions in the advertising sector, that will allow us increase our average revenue per subscriber as well as our distribution channels.  

As of December 31 we have a total of eight full-time employees and two part time individual contractors. We do not expect significant increases in employees, but do expect incremental additions in line with revenues in all areas of the business.

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RESULTS OF OPERATIONS

THREE-MONTH PERIOD ENDED DECEMBER 31, 2006 COMPARED TO THREE-MONTH PERIOD ENDED DECEMBER 31, 2005

Our net losses during the three-month period ended December 31, 2006 were $431,574 compared to a net loss of $364,937 during the three-month period ended December 31, 2006.

The Company was a development stage company during the three month period ended December 31, 2005. Activities were primarily limited to outside contractors performing product development work, marketing costs, and officer’s travel expenses. The Company commenced generating revenue immediately after the XSVoice, Inc. acquisition on January 6, 2006.

The Company had revenues of $253,977 for the three month period ended December 31, 2006 and gross profit of $130,563. These revenues were primarily generated by the company’s relationship with Nextel and consisted primarily of streaming audio revenues generated by the company’s music content providers as well as the streaming audio content from NASCAR races. Cost of revenues for the three month period ended December 31, 2006 were $123,414. Costs of revenues were primarily fees paid to the company’s content providers; royalty payments for the music content, server farm, and call connect charges. The Company did not have any revenues for the comparable quarter ended December 31, 2005 because the XSVoice acquisition had not yet been completed.

During the three-month period ended December 31, 2006, we incurred operating expenses of $562,264 compared to operating expenses of $361,107 incurred during the three-month period ended December 31, 2005, The increase in operating expenses during the three-month period ended December 31, 2006 from the same period in 2005 resulted from: (i) an increase of $30,134 in product development costs as the Company added personnel to support both the acquired streaming audio technology from XSVoice, Inc. as well as the Company’s mobile search platform, (ii) a decrease of $17,799 in sales and marketing costs reflecting the deliberate reduction in marketing staff positions to reduce cash burn, and (iii) an increase of $188,822, in general and administrative expenses resulting from increased operating costs associated with increased operations and professional fees related to our SEC filings and $150,690 in amortization expense related to intangible assets generated as a result of the XSVoice acquisition.

For the three months ended December 31, 2006, our net loss was ($431,574) or ($0.02) per common share compared to a net loss of ($364,937) or ($0.02) per common share for the three month period ended December 31, 2006.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2006, our current assets were $307,376 and our current liabilities were $110,421, which resulted in net working capital of $196,955.

For the three months ended December 31, 2006, net cash flow used by operating activities was $191,925 compared to net cash used in operating activities of $377,293 for the three months ended December 31, 2005. The decrease in cash flows used in operating activities is mainly due to the decrease in net loss for the period.

Net cash flows used by investing activities amounted to $5,258 for the three months ended December 31, 2006 compared to $1,916,901 provided for the three months ended December 31, 2005. The Company received $1,919,662 in cash as part of the reverse merger in November 2005.

There was no net cash flow provided by financing activities for the three months ended December 31, 2006 and December 31, 2005.

In summary, based upon the cash flow activities as previously discussed, for the three months ended December 31, 2006, our overall cash position decreased by $197,184.

Overall, we have funded our cash needs from inception through December 31, 2006 with the $2,146,200 in funds acquired as part of the September - October 2005 Private Placement.

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At the date of this report we are continuing to incur losses. We used capital of approximately $197,184 during the quarter ended December 31, 2006 to fund operations. The company’s current financial models indicate that within twelve months the Company’s cash balances may fall to levels that will not sustain operations. This financial model is highly sensitive to revenue forecasts based on existing revenue sources.

As of February 12, 2007 the Company had approximately $303,000 in cash and $395,000 in working capital. The Company has taken steps to reduce its cash burn to a forecasted average cash burn of approximately $36,000 per month for calendar 2007.

During the period from January 20, 2007 to February 12, 2007, the Company issued 1,019,000 shares of common stock each at a price of $0.25 upon exercise of previously placed warrants (619,000 Series A warrants and 400,000 Series B warrants) . Total proceeds of $254,750 were received to be added to working capital. The Company relied on  Rule 4(2) in this private placement.

The company is likely to be dependent on raising a minimum of $500,000 in additional capital in order to fund its existing operating plan over the next twelve months, increase marketing and research and development and maintain a cash balance of approximately $ 250,000 at the end of such period.

The Company has no other commitments for such capital. The Company may obtain up to $5,132,502 in additional capital if all of the Company’s remaining outstanding warrants are exercised; however there is no assurance that any of these warrants will be exercised. The Company will also seek long-term financing through additional debt or equity financing. Without such additional capital we would likely have to curtail our activities (including our marketing and research and development expenses) during the next twelve months but may be able to continue operations depending on the development of new revenue sources.

Our auditors have raised substantial doubt about our ability to continue as a going concern due to recurring losses from operations. We expect to continue to have net operating losses until we can expand our sales channel and implement our marketing efforts. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts nor to amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern.

ITEM 3. CONTROLS AND PROCEDURES

Quarterly Evaluation of Controls. As of the end of the period covered by this quarterly report on Form 10-QSB, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures ("Disclosure Controls"). This evaluation (“Evaluation”) was performed by our Chairman and Chief Executive Officer, Tony Philipp, and our Chief Financial Officer, Paul C. Schmidt (“CFO”). In addition, we have discussed these matters with our securities counsel and board. In this section, we present the conclusions of our CEO and CFO as of the date of the Evaluation with respect to the effectiveness of our Disclosure Controls.

CEO and CFO Certifications. Attached to this quarterly report, as Exhibits 31.1 through 31.4, are certain certifications of the CEO and CFO, which are required in accordance with the Exchange Act and the Commission's rules implementing such section (the "Rule 13a-14(a)/15d-14(a) Certifications"). This section of the quarterly report contains the information concerning the Evaluation referred to in the Rule 13a-14(a)/15d-14(a) Certifications. This information should be read in conjunction with the Rule 13a-14(a)/15d-14(a) Certifications for a more complete understanding of the topic presented.

Disclosure Controls. Disclosure Controls are procedures designed with the objective of ensuring that information required to be disclosed in our reports filed with the Commission under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time period specified in the Commission's rules and forms. Disclosure Controls are also designed with the objective of ensuring that material information relating to us is made known to the CEO and the CFO by others, particularly during the period in which the applicable report is being prepared.

Scope of the Evaluation. The CEO and CFO's evaluation of our Disclosure Controls included a review of the controls' (i) objectives, (ii) design, (iii) implementation, and (iv) the effect of the controls on the information generated for use in this quarterly report. This type of evaluation is done on a quarterly basis so that the conclusions concerning the effectiveness of our controls can be reported in our quarterly reports on Form 10-QSB and annual reports on Form 10-KSB. The overall goals

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of these various evaluation activities are to monitor our Disclosure Controls, and to make modifications if and as necessary. Our intent in this regard is that the Disclosure Controls will be maintained as dynamic systems that change (including improvements and corrections) as conditions warrant.

Conclusions. Based upon the Evaluation, our Disclosure Controls and procedures are designed to provide reasonable assurance of achieving our objectives. Our CEO and CFO have concluded that our Disclosure Controls and procedures are effective at that reasonable assurance level to ensure that material information relating to the Company is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared. Additionally, there has been no change in our internal controls over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to affect, our Internal Controls over financial reporting.

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PART II

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the period from January 20, 2007 to February 12, 2007, the Company issued 1,019,000 shares of common stock each at a price of $0.25 upon exercise of previously placed warrants (619,000 Series A warrants and 400,000 Series B warrants) . The exercise price of the warrants was reduced on a limited basis to permit this exercise. Total proceeds of $254,750 were received and added to working capital. The Company relied on Rule 4(2) in this private placement.

ITEM 6. EXHIBITS

The exhibits to this form are listed in the attached Exhibit Index.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	UPSNAP, INC. (Registrant)
Date: February 14, 2007	By:	/s/ Tony Philipp
		Tony Philipp Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

Date: February 14, 2007	By:	/s/ Paul C. Schmidt
		Paul C. Schmidt Chief Financial Officer (Principal Financial Officer)

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INDEX TO EXHIBITS

Exhibit	Description
2.1	Share Exchange Agreement, dated November 15, 2005, by and among Upsnap, Inc. and the former stockholder of UpSNAP USA (incorporated by reference to Exhibit 2.1 in our current report on Form 8-k filed on November 16, 2005)
3.1.1	Articles of Incorporation as filed with the Secretary of State of the State of Nevada on July 25, 2003 (incorporated by reference to Exhibit 3.1 in our Registration Statement SB-2 filed on September 18, 2003)
3.1.2	Certificate of Amendment filed on November 7, 2005 (incorporated by reference to Exhibit 3.1 in our current report on Form 8-K filed on November 16, 2005)
3.2	Bylaws adopted on July 25, 2003 (incorporated by reference to Exhibit 3.2 in our Registration Statement SB-2 filed on September 18, 2003)
10.1	Form of Subscription Agreement for September 2005 Private Placement (incorporated by reference to Exhibit 10.1 in our quarterly report for the fiscal period ended on September 2005)
10.2	Form of Registration Rights Agreement for September 2005 Private Placement (incorporated by reference to Exhibit 10.2 in our quarterly report for the fiscal period ended on September 2005)
10.3	Debt Conversion Agreement, dated October 31, 2005, among UpSnap, Inc., 518464 B.C. Ltd., Art Mapp Communications, Inc., Jason Sundar, and Yvonne New. (incorporated by reference to Exhibit 10.3 in our quarterly report for the fiscal period ended on September 2005)
10.4	Form of Series A Warrant (incorporated by reference to Exhibit 10.4 in our quarterly report for the fiscal period ended on September 2005)
10.5	Form of Series B Warrant (incorporated by reference to Exhibit 10.5 in our quarterly report for the fiscal period ended on September 2005)
10.6	Directors and Officers Insurance Policy, dated October 18, 2005*
10.7	Confirmatory Assignment, dated June 1, 2005, by and between UpSNAP USA, Inc. and Alto Ventures, Inc. (incorporated by reference to Exhibit 10.7 in our quarterly report for the fiscal period ended on December 31, 2005)
10.8	Asset Purchase Agreement, dated January 6, 2006, by and between UpSNAP, Inc. and XSVoice, Inc. (incorporated by reference to Exhibit 10.1 in our current report on Form 8-K filed on January 12, 2006)
10.9	Nextel Online Handset Placement Agreement with Nextel Finance Company 1
10.10	Commercial Service Agreement between UpSNAP, Inc. and Simplewire, Inc. dated February 7, 2006 1
10.11	Letter Agreement between UpSNAP, Inc. and Tony Philipp dated July 10, 2006 1
10.12	Letter Agreement between UpSNAP, Inc. and Richard Jones dated July 10, 2006 1
10.13	Letter Agreement between UpSNAP, Inc. and Paul Schmidt dated July 10, 2006 1
31.1	Rule 13a-14(a)/15d-14(a) Certification of Tony Phillips, Chairman and Chief Executive Officer*

31.2	Rule 13a-14(a)/15d-14(a) Certification of Paul C. Schmidt, Chief Financial Officer*
32	Certification of Principal Executive Officer and Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

* Filed herein.

¹ Incorporated by reference to Amendment No. 2 our Form SB-2 Registration Statement, Reg. No. 333-132893, filed July 13, 2006.