UpSnap (CEENQ) 10QSB 2007 Q1 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 March 31, 2007

[   ] 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 May 5, 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 March 31, 2007

TABLE OF CONTENTS

Page

	PART I - FINANCIAL INFORMATION
ITEM 1.	Selected Financial Statements
	Balance Sheet - March 31, 2007 (unaudited)	2
	Statements of Operations - Three Months Ended March 31, 2007 and 2006 (unaudited)	3
	Statements of Stockholders’ Equity - (unaudited)	4
	Statements of Cash Flows - Three months Ended March 31, 2007 and 2005 (unaudited)	5
	Notes to Financial Statements (unaudited)	6
ITEM 2.	Management’s Discussion and Analysis	16
ITEM 3.	Controls and Procedures	22
	PART II - OTHER INFORMATION
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	22
ITEM 5.	Other Information	23
ITEM 6.	Exhibits	23
Signatures

1

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

UPSNAP, Inc.
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2007
UNAUDITED
ASSETS
Current Assets
Cash	$	245,017
Accounts receivable		173,139
Other current assets		17,472
TOTAL CURRENT ASSETS		435,628
PROPERTY & EQUIPMENT (Note H)
Computer and office equipment		171,565
Accumulated Depreciation		(67,353	)
NET PROPERTY & EQUIPMENT		104,212
OTHER ASSETS
Other intangibles (Note L)		902,507
Goodwill (Note L)		4,677,862
Security deposits		1,114
TOTAL ASSETS	$	6,121,323
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	74,965
Total Other Current Liabilities		28,605
TOTAL CURRENT LIABILITIES		103,570
LONG TERM LIABILITIES
Note Payable (Note K)		113,500
TOTAL LIABILITIES		217,070
Commitments (Note I)
STOCKHOLDERS' EQUITY (Note C and D)
Common stock, par value $0.001, 97,500,000 authorized,		22,170
issued and outstanding 22,170,324 shares at March 31, 2007
Additional paid-in capital		8,560,233
Accumulated deficit		(2,678,150	)
TOTAL STOCKHOLDERS' EQUITY		5,904,254
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	6,121,323

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

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UPSNAP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2007 AND 2006
UNAUDITED
	Three Months Ended March 31,						Six Months Ended March 31,
		2007			2006			2007			2006
SALES AND COST OF SALES
Advertising Revenue	$	4,704		$	-		$	8,216		$	-
Revenue Share		225,124			244,042			471,149			244,042
Other		-			-			1,032			-
Total Sales		229,827			244,042			480,397			244,042
Cost of Sales		100,122			136,996			227,278			133,466
Gross Profit		129,706			107,046			253,119			110,576
OPERATING EXPENSES
Product development		89,223			113,211			175,298			169,153
Sales and marketing expenses		8,928			57,856			37,804			104,531
General and administrative		270,682			288,325			718,024			546,815
Total Expense		368,833			459,393			931,127			820,499
Net operating income		(268,711	)		(322,396	)		(703,849	)		(687,033	)
Other income and expense
Interest income		1			4,890			127			4,890
Interest expense		-			-			-			300
Net Other Income		1			4,890			127			4,590
NET LOSS	$	(268,711	)	$	(317,506	)	$	(703,722	)	$	(682,443	)
Net loss per share	$	(0.01	)	$	(0.02	)	$	(0.03	)	$	(0.04	)
Weighted average common shares outstanding:
Basic and diluted		21,683,468			20,993,802			21,414,472			16,396,022
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:		4,612,524			5,144,668			4,881,520			3,858,501

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

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UPSNAP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 30, 2004 to MARCH 31, 2007
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	-		-		80,468		-			80,468
Exercise of Series A Warrants	1,019,000		1,019		253,731					254,750
Net loss	-		-		-		(703,722	)		(703,722	)
Balances, March 31, 2007	22,170,324		22,170	$	8,560,233	$	(2,678,150	)	$	5,904,254

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

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UPSNAP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED MARCH 31, 2007 AND 2006
UNAUDITED
		March 31, 2007			March 31, 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(703,722	)	$	(682,443	)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation		25,140			8,470
Amortization of intangibles		256,963			17,767
Changes to goodwill		-			(36,408	)
Stock based compensation		80,468			-
CHANGES IN CURRENT ASSETS AND CURRENT
LIABILITIES: (Net of effect of acquisition)
Accounts receivable		(4,312	)		(38,801	)
Other current assets		(6,529	)		(29,833	)
Deposits		-			(1,115	)
Accounts payable and accrued expenses		(48,460	)		122,255
Other current liabilities		15,181			(16,200	)
NET CASH USED FOR OPERATING ACTIVITIES		(385,270	)		(656,308	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash to acquire XSVoice, Inc.		-			(243,241	)
Cash received from the company merger		-			1,919,662
Purchase of equipment		(5,258	)		(131,087	)
NET CASH PROVIDED BY INVESTING ACTIVITIES		(5,258	)		1,545,334
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of warrants		254,750			-
NET CASH PROVIDED BY FINANCING ACTIVITIES		254,750			-
NET INCREASE IN CASH		(135,778	)		889,026
CASH, beginning of period		380,796			175,611
CASH, end of period	$	245,017		$	1,064,637
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

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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 March 31, 2007 and the results of their operations for the six month periods ended March 31, 2007 and 2006 and their cash flows for the six months ended March 31, 2007 and 2006. 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 March 31, 2007.

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 March 31, 2007, 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.

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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 typically reports net revenues received from the carrier which are revenues after both carrier charges and content provider charges.

The Company negotiated a new contract with its largest carrier customer effective February 12, 2007 in which the carrier is no longer deducting content provider charges before submitting revenue to the Company. Under this arrangement, the content provider charges are the responsibility of the Company. The net effect of this new contract is that revenues and cost of revenues are increased by an identical amount to reflect the 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.

The Company also receives advertising revenues from third parties. These revenues are resultant from audio ads played on the Company’s SWInG platform, banner ads on the WAP deck, and pay per call revenues when the consumer proactively responds to a text message. These advertising revenues are recognized in the period the transactions are recorded by the third party provider.

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  

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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.

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 six month periods ended March 31, 2007 and 2006 the Company incurred advertising expense of $3,758 and $10,053 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 six months ended March 31, 2007 and 2006 included stock-based compensation expense of $80,468 and $0, respectively.  

Unrecognized stock-based compensation expense expected to be recognized over an estimated weighted-average amortization period of 41.5 months was approximately $460,280 at March 31, 2007.

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 six months ended March 31, 2007 are shown in the following table:

Expected volatility	70.%
Expected dividends	0%
Expected terms	6.0 - 6.25 years
Risk free interest rate	4.45% - 4.76%

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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 six months ended March 31, 2007 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, 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 March 31, 2007, and changes during the six months ended March 31, 2007, is as follows:  

	Shares		Weighted Average Exercise Price		Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at October 1, 2006		-
Granted		1,120,000	$	0.72		9.7
Forfeited or expired		-
Outstanding March 31, 2007		1,120,000	$	0.72		9.7
Exercisable at March 31, 2007		75,000	$	0.64

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 March 31, 2007 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.

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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.

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.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a

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warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by the Company in the first quarter of fiscal 2009. The Company is currently is determining whether fair value accounting is appropriate for any of its eligible items and cannot estimate the impact, if any, which SFAS 159 will have on its consolidated results of operations and financial condition.

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).

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 to the extent not exercised have expired.

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.

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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.

In February 2007, 619,000 Series A Warrants and 400,000 Series B Warrants were exercised at an Exercise Price of $0.25.

The following table summarizes information about warrants outstanding at March 31, 2007:

	Shares  Exercisable	Exercise Price	Date of Expiration
Series B Warrant: Issued for investor relations services	1,800,000	$1.10	October 2010
Viant Capital LLC Warrant	560,000	$0.90	November 2010
Total	2,360,000

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.

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	)
	$	-		$	-

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NOTE F - GOING CONCERN

As shown in the accompanying financial statements, the Company has accumulated net losses from operations from inception through March 31, 2007 totaling $2,684,483 and as of March 31, 2007, 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 six month period ended March 31, 2007, our largest customer accounted for more than 90% of sales.

The Company has deposits of $161,150 in a bank in excess of federally insured limits at March 31, 2007. 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.

NOTE H - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at March 31, 2007:

PROPERTY& EQUIPMENT(Note H)

		As of March 31			As of March 31
Fixed Assets		2007			2007
Computer and office equipment	$	167,565		$	159,287
Office Equipment		1,000			1,000
Office Furniture		3,000			3,000
Accumulated Depreciation		(67,353	)		(8,470	)
Total Fixed Assets	$	104,212		$	154,817

Depreciation expense for the six months ended March 31, 2007 and 2006 was $25,139 and $ 8,470, 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, 2008 at a rate of $2,250 per month. Future maturities associated with this commitment are as follows:

Year Ended September 30	Amount
2007	$13,500
2008	$11,250

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. A board member and Vice President of the Company provides services to the Company for monthly compensation of $10,000 and related expenses.

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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.

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.

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ITEM 2. MANAGEMENT’S 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 and 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 sells a rich platform of mobile content to consumers in the United States, and makes money from subscriptions and mobile advertising. UpSNAP has searchable mobile content from over 1,500 content providers, ranging from live NASCAR in-car broadcasts, to ESPN sports and Hip-Hop radio. In April 2007, UpSNAP launched a multi-media search engine for all other mobile content, such as ringtones, and mobile videos stored on the Internet.

Mobile consumers are now buying more and more powerful phones with Internet features cable of sending emails, running applications, and browsing the Internet. According to the Pew Wireless Internet Access study in February 2007, as many as 25% of Internet users now have a cell-phone capable on accessing the Internet. In the key youth demographic of 18-34, consumers are using their cell-phones as their primary method of communication and entertainment- effectively replacing their Personal Computer.

The market in general for mobile services is continuing to show very high growth rates.  In the U.S, according to the Cellular Telecommunications & Internet Association (CTIA), as reported in its Wireless Quick Facts December 2006, wireless subscribers reached 233 million by December 2006, reaching more than 76% of the total U.S. population.  

Now that the number of subscribers has almost reached saturation point - particularly in the 18-35 demographic - the mobile operators are seeking to increase their revenues from wireless data usage. According to the CTIA, Wireless Data Revenues in the US grew particularly sharply, showing growth of 82% from $4.8 billion in the first half of 2005, to $8.7 billion for the latter six months of 2006.

In the past, the typical revenue model for mobile content has been a paid subscription model. Consumers have proved willing to spend several dollars on a 20 second ring-tone from a mobile carriers store, even when they can purchase the whole song on Apple’s iTunes for a mere .99 cents on their computer, an example of the current large discrepancies between the mobile and Internet content pricing models. As the features of the Internet and PCs converge into powerful handsets with wireless Internet access, the Company predicts that these discrepancies cannot last for long.

The global market for mobile-phone premium content is expected to expand to more than $43 billion by 2010, rising at a compound annual growth rate of 42.5 percent from $5.2 billion in 2004, according to iSuppli Corp.

UpSNAP management believes that this paid content subscription model will start to migrate to a search and advertising driven model over time. Most mass media business models have started as subscription only, and then migrated with the increasing reach of consumers into advertising driven services. As John Templeton said: “History never repeats itself, but it often rhymes.”

In the United States, most mobile content is sold from ‘virtual’ shops on the mobile handsets. However, this trend is set to change. In Europe, the mobile operators are leaving content choice and selection to media and distribution companies who sell mobile content. Consumers in the US are now being increasingly exposed to direct marketing for mobile products.

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UpSNAP has built a search and advertising driven business model, which enables UpSNAP and its media and carrier partners to make money from advertising, rather than from the content subscription. UpSNAP is very well positioned to take advantage of the enormous consumer demand for mobile content and entertainment. A 2006 study from Shosteck Group, showed that revenues from Mobile advertising could reach $9.6 billion by 2010. Consumers will also increasing need quick and convenient ways to search for all the latest content they can consume on their mobile phone.

In order to increase sales, UpSNAP needs to increase its media partnerships that can actively promote offers direct to consumers, as well as continue to partner with as many of the mobile operators as possible.

UpSNAP is actively in partnership with media companies who can reach customers directly with direct response offerings. UpSNAP has recently launched ESPN Radio on the Alltel network, renewed its yearly NASCAR in-Car-Audio deal with Sprint and United Management for 2007, and signed a Letter of Intent with dating site Hot-or-Not to produce a mobile Hot-or-Not dating service to be promoted via the network operators. UpSNAP signed a contract with Lincoln Financial which enables consumers to listen and search for popular shows such as the Bob and Sheri Show on demand from their mobile phones. UpSNAP has a strong sales pipe-line of media distribution deals that will be announced over the coming year.

Media companies and Advertising Agencies are hopeful that mobile advertising can reach the massive reach numbers of a TV campaign, combined with the direct response and tracking potential of the Internet. However, mobile marketing is still in its infancy as they struggle with the right forms of direct marketing, privacy issues, and how to structure mobile advertising deals. The pace of our deal making activities with the media companies has been much slower than we would have liked. UpSNAP is looking at acquisitions to push this process quicker, and has hired a media specialist to increase our business development capacity and increase the amount of deals in our pipeline.

In January 2006 UpSNAP derived 99% of its revenues from subscription revenue from one major US mobile operator. In our second fiscal quarter Jan-March 2007, our dependency on this carrier has been reduced to approximately 90% of our revenues, as we move towards the more lucrative and higher margin search and advertising related revenues.

Principal Products and Services

UpSNAP has two principal products and services:

1    Mobile Search Engine and Advertising Platform

2    Mobile Content Services

MOBILE SEARCH ENGINE AND ADVERTISING PLATFORM

UpSNAP has expanded its search engine suite to enable consumers to search for a wide variety of mobile content, services and data. In April 2007 UpSNAP launched a mobile search tool that finds mobile data stored on the Internet. Mobile consumers can search for ringtones, mobile video content, mobile games, and other images, wallpapers and multi-media content.

The suite of mobile search product now allows consumers to find and access mobile content and service from any mobile phone in the US. 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 are free to use by the consumer - save for any communications cost incurred by their cellular phone usage according to their carrier contract.

UpSNAP makes money from advertisers who love the direct response pay-per-click model of the Internet, and now want the same model to work on mobile.

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.

Pay-per-call advertising is receiving a much higher margin than pay-per-click on the Internet. The average price of a pay-per-click on Google according to the Wall Street Journal was .50 cents. Pay Per Call, which directly bridges a consumer who is looking to buy on their cell-phone with a merchant starts at $2 dollars a call, and goes up considerably depending on the nature of the sale.

MOBILE CONTENT SERVICES

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 runs on any mobile phone in the US, 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.

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DISTRIBUTION AGREEMENTS

UpSNAP’s revenues are directly affected by its distribution agreements. The distribution of our content occurs in one of two ways:

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 media partner 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 consumer’s mobile phone bill. UpSNAP has billing relationships in place with most major US carriers including, Cingular, T-Mobile, Sprint/Nextel and Alltel,

The Business

Our business plan calls for acquisitions in the mobile advertising and content sector, that will allow us increase our average revenue per subscriber as well as our distribution channels.  We continue to look for acquisition targets although this will depend upon the timing and availability of appropriate acquisition opportunities and our ability to find capital to acquire the same and provide working capital.

As of May 8, 2007 we have a total of six full-time employees and one part-time individual contractor. We do not expect significant increases in employees, but do expect incremental additions in line with revenues in all areas of the business.

Margins

The revenue stream from the consumer is shared across several parties:

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. 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.

The mobile supplier, in this case UpSNAP reports net revenue after the carrier and aggregator have taken their cut of 30 -60%. In turn, UpSNAP’s average pay-out to content providers in 30% of the net revenue.

UpSNAP’s margin improves considerably on advertising related services such as banner ads, audio ads, and Pay-per-call advertising. For these services, UpSNAP receives net revenue from an advertising partner. When UpSNAP deals directly with the media companies, the wireless carriers do not share in this revenue.

LIQUIDITY AND CAPITAL RESOURCES

Overall, we have funded our cash needs from inception through March 31, 2007 with the $2,146,200 in funds acquired as part of the September - October 2005 Private Placement. In addition, the Company raised $254,750 in February 2007 from the sale of 619,000 Series A warrants and 400,000 Series B warrants at $0.25 each.

As of March 31, 2007, our current assets were $435,628 and our current liabilities were $103,570, which resulted in net working capital of $332,058. As of May 12, 2007 cash on hand was $207,493.

Our cash burn rate continues to decline. For the six months ended March 31, 2007, net cash flow used by operating activities was $385,270 compared to net cash used in operating activities of $656,308 for the six months ended March 31, 2006. The decrease in cash flows used in operating activities is mainly due to the decrease in the loss for the period adjusted for non-cash items.

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For the three months ended March 31, 2007, net cash flow used by operating activities was $135,779 compared to net cash used in operating activities of $656,308 for the three months ended March 31, 2006. The decrease in cash flows used in operating activities is mainly due to the decrease in the loss for the period adjusted for non-cash items.

Net cash flows used by investing activities amounted to $5,258 for the six months ended March 31, 2007 compared to $1,545,334 provided for the six months ended March 31, 2006. The Company received $1,919,662 in cash as part of the reverse merger in November 2005.

The Company received $254,750 in net cash flow provided by financing activities for the six months ended March 31, 2007. These cash proceeds were resultant from the sale of 619,000 Series A warrants and 400,000 Series B warrants at $0.25 each. The Company relied on Rule 4(2) in this private placement. There were no net cash flows provided by financing activities for the six months ended March 31, 2006.

In summary, based upon the cash flow activities as previously discussed, for the six months ended March 31, 2007, our overall cash position decreased by $135,788.

At the date of this report we are continuing to incur losses. We used capital of approximately $385,000 during the six month period ended March 31, 2007 to fund operations. The company’s current financial models indicate that the Company will have an average cash burn rate of $23,000 per month from operations and that within nine 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.

The Company does not have any material commitments for capital expenditures as of March 31, 2007.

The company is likely to be dependent on raising a minimum of $300,000 in additional capital in order to fund its existing operating plan over the next twelve months and maintain a cash balance of approximately $ 250,000 at the end of such period.

The Company has no commitments for such capital. The Company may obtain up to $2,484,000 in additional capital if all of the Company’s remaining outstanding Series B and Viant warrants are exercised at their stated exercise price; 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.

RESULTS OF OPERATIONS

SIX-MONTH PERIOD ENDED MARCH 31, 2007 COMPARED TO SIX-MONTH PERIOD ENDED MARCH 31, 2006

Revenue for the six month period ended March 31, 2007 grew to $480,397 compared to $244,042 during the six month period ended March 31, 2006.

Our net losses during the six-month period ended March 31, 2007 were ($703,722) or ($0.03) per common share compared to a net loss of ($682,443) or ($0.04) per common share during the six-month period ended March 31, 2006.

UpSNAP generates approximately half of its revenue from Internet Radio Stations, who may be affected by the recent Copyright Royalty Board decision to more than double royalty rates for distribution over Internet or mobile data networks in 2006, and mandates further major increases in 2007 and 2008. The Copyright Royalty Board decision, which was long overdue, is also retroactive to January 2007, and new payments are to be collected by July 2007. The decision has prompted

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outrage in the Internet Radio industry, which claims the industry will effectively be put of business by the large increases in royalties. A recent appeal of the ruling was denied. The Internet Radio Industry has responded by petitioning Congress and the Senate, through the Internet Radio Equality Act, which would reverse the Copyright Royalty Board’s decision through an Act of Congress. Senators Brownback (R-Kansas) and Wyden (D-Oregon) also introduced a bipartisan bill aimed at reversing the decision in the Senate.

The increase in royalty payments is performed on a per listener basis. On the Internet many people choose to “listen” to an Internet stream all day long, so the audience reach is relatively high. In the mobile environment, people are typically listening to broadcasts for a very short length of time. Our service is a mobile interactive service that our customer requests on demand. It is not clear at this stage if our service is subject to the extra royalty payments as approved by the Copyright Royalty Board for mobile services.

UpSNAP is watching the legal situation carefully. If the Copyright Royalty Boards decision is upheld and Congress fails to reverse the ruling, UpSNAP may be affected if some of the Internet Radio Stations are put out of business. If the decision is upheld UpSNAP believes that revenue losses will occur, albeit they will be offset to some extent due to:

·  UpSNAP has over 1500 radio station partners in the US and operating abroad. This decision, should it be upheld, only affects music providers located in the United States.

·  UpSNAP partners with sports radio providers such as EPSN and Sporting News which are not affected by the decision.

·  Should the decision be upheld, UpSNAP feels that it is likely that only the larger Internet Radio Stations will survive. UpSNAP makes the bulk of its music revenues from the top 5% of music providers.

Cost of revenues for the six month period ended March 31, 2007 were $227,278, resulting in a gross profit of $253,119 (52.7%) compared to cost of revenues for the six month period ended March 31, 2006 of $133,466 and a gross profit of $110,576 (45.3%). 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 has increased gross margins by negotiating better terms with content providers and modifications to the technology supporting the company’s offerings.

During the six-month period ended March 31, 2007, we incurred operating expenses of $931,127 compared to operating expenses of $820,499 incurred during the six-month period ended March 31, 2006, This increase was primarily driven by non-cash increases of $239,197 in amortization expense related to intangible assets generated as a result of the XSVoice acquisition and an increase of $73,818 in stock based compensation resultant from the company’s stock option plan introduced in November 2006.

THREE-MONTH PERIOD ENDED MARCH 31, 2007 COMPARED TO THREE-MONTH PERIOD ENDED MARCH 31, 2006

The Company had revenues of $229,827 for the three month period ended March 31, 2007 compared to $244,042 during the three month period ended March 31, 2006.

Our net losses during the three-month period ended March 31, 2007 were ($268,711) or ($0.01) per common share compared to a net loss of ($317,506) or ($0.02) per common share during the three-month period ended March 31, 2006. On a cash basis our net cash used in operations fell to $135,779 for the quarter ended March 31^st, 2007, compared to $656,308 for the quarter ended March 31^st 2006.

For the quarter ended March 31, 2007 revenues from Nextel are down approximately 18% from the comparable quarter ended March 31, 2006.. The revenue decline was principally due to lower new subscriptions for the Company’s music services,. During April, this decline has been reversed. The Company is aggressively attempting to diversify its revenue stream by focusing on advertising revenues and selling subscription services directly to consumers. If the company is not successful in its continuing efforts to diversifying its revenue base or halting the slide in revenues, then the Company’s operating results and liquidity will continue to be adversely affected.

Cost of revenues for the three month period ended March 31, 2007 were $100,122, resulting in a gross profit of $129,706 (56.4%) compared to cost of revenues for the three month period ended March 31, 2006 of $136,996 and a gross profit of $107,046 (43.9%). Costs of revenues were primarily fees paid to the company’s content providers; royalty payments for the

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music content, server farm, and call connect charges. The Company has increased gross margins by negotiating better terms with content providers and modifications to the technology supporting the company’s offerings.

During the three-month period ended March 31, 2007, we incurred operating expenses of $368,833 compared to operating expenses of $459,393 incurred during the three-month period ended March 31, 2006.

OFF- BALANCE SHEET ARRANGEMENTS

The Company did not have any off -balance sheet arrangements as of the fiscal period ended March 31, 2007.

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 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.

PART II - OTHER INFORMATION

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.

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ITEM 5. OTHER INFORMATION

On May 11, 2007 the Company’s Compensation Committee approved a change in the compensation plan for the Company’s CFO. Under this new arrangement, in lieu of cash compensation, the Company’s CFO will be compensated for the company’s third and fourth fiscal quarter with a restricted stock grant of 130,000 shares to be vested 21,666.67 shares per month, effective April 1, 2007.

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:  May 15, 2007	By:	/s/ Tony Philipp
		Tony Philipp
		Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

Date:  May 15, 2007	By:	/s/ Paul C. Schmidt
		Paul C. Schmidt
		Chief Financial Officer (Principal Financial Officer)

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INDEX TO EXHIBITS

Exhibit No.	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	Agreement dated as of February 12, 2007 between UpSNAP, INC. AND SPRINT/NEXTEL.2
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

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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.

² incorporated by reference to Form 8-K filed March 20, 2007

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