Summary of DIGITALPOST INTERACTIVE, INC.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements.

Business Overview

We are a SaaS (Software as a Service) and application provider that delivers digital media sharing solutions. We produce destination websites that allow subscribers and other users to securely share digital media, including photos, calendars, videos, message boards and history. Our proprietary website administration system, Qwik-Post™, and online video uploading system, Video-PostSM allow PC users to manage these "virtual family rooms" and provides a destination to display photo and video memories, discussions, and history.

We earn revenue primarily from subscriptions generated from monthly subscriptions for Website hosting services. The typical subscription agreement includes the usage of a personalized website and hosting services. As of March 31, 2009, we have generated 22,523 subscribers, 15,171 recurring subscribers, 29,503 users, and have transferred more than 4,746 gigabytes of consumer digital media across our systems. However, our revenues are not sufficient to cover our operating costs and expenses. We also earn revenue from providing professional software development services in addition to our subscription based business model. During the years ended December 31, 2008 and 2007, our revenues were $488,900 and $118,100, respectively. We are in the early phases of revenue generating activities and we intend to continue marketing our product more aggressively upon the implementation of business arrangements we've recently entered into with marketing partners and the completion of additional debt or equity financing.

Current Conditions

Historically we have incurred significant losses and we continue to incur additional losses during the year ended December 31, 2008. Our net loss was $4,017,200 and $2,544,500 for the years ended December 31, 2008 and 2007, respectively, which includes non-cash stock-based compensation expense of $1,811,500 and $462,200, respectively. Our cash used in operations was $1,515,700 and $1,724,700 for the years ended December 31, 2008 and 2007, respectively. As of December 31, 2008, we had an accumulated deficit of approximately $7,511,400. We expect operating losses and negative cash flow to continue for the foreseeable future. We expect that our losses may decrease as result of generating new revenues driven from the implementation of our business arrangements we've entered into with our marketing partners, however, there is no assurance that the implementations will produce sufficient revenues to cover our costs and expenses. Our ability to become profitable depends on our ability to generate new revenue and sustain substantially higher revenue while maintaining reasonable expense levels. In particular, although we intend to increase significantly our spending on marketing and promotional activities, these efforts may not be effective in growing our brand, increasing our subscriber base or generating new revenues. If we do not achieve profitability, we may not be able to continue our operations.

Historically, we have relied upon private debt and equity financings as our primary source of cash and we continue to rely on these financings to meet our working capital needs. In January 2008, we entered into a $1 million private placement with foreign investors under a Regulation S Stock Purchase agreement, of which we received approximately $619,000 during the first and second quarter of 2008. Additionally, during the second and third quarter of 2008, we received approximately $850,000 pursuant to convertible notes offerings (see Note 7 to the financial statements included elsewhere in this report). Additionally, in September 2008, we received $256,000 pursuant to a private placement of our common stock (see Note 8 to the financial statements included elsewhere in this report).

We plan to use the proceeds of the most recent offerings for marketing of our product, increasing revenue generating activities and for general working capital purposes.

In addition to the above financings, we plan to continue to raise capital by sales of additional private placement equity or debt offerings during 2009, although we have no assurance that such financings will be completed.

During the fourth quarter of 2008, we launched a strategic marketing partnership with Kiddie Kandids, America's largest children's photography studio chain with 185 retail locations nationwide. We derived 17% of our total 2008 revenue from this marketing partnership in the fourth quarter of 2008 alone and we expect this trend to continue through the foreseeable future. It is our expectation that the growth from this strategic marketing partnership may assist us in becoming less reliant upon sourcing cash from debt and equity financings, however, we have no assurance that such growth shall continue.

Going Concern

We have not established sufficient sources of revenue to cover our operating costs and, as such, we have incurred operating losses since inception. Further, as of December 31, 2008, our cash resources were insufficient to meet our current working capital needs and on-going business plan. These and other factors raise substantial doubt about our ability to continue as a going concern. The report of the independent registered public accounting firm accompanying our financial statements for the year ended December 31, 2008, as filed with this report, contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern because of our operating losses and our need for additional capital. Such doubt could make it more difficult for us to raise additional capital and may materially and adversely affect the terms of any financing that we may obtain. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of us to continue as a going concern.

Results of Operations

The Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

Total revenue was $488,900 and $118,100 for the years ended December 31, 2008 and 2007, respectively, representing an increase of $370,800. The increase was due to an increase in subscription revenues of $211,900 during the year ended December 31, 2008 as compared the same period last year and an increase in professional services of $158,900 during the year ended December 31, 2008 as compared to the same period last year.

Subscription revenues for the year ended December 31, 2008 was $310,000 as compared to $98,100 during the same period last year. Subscription revenue increased $211,900 due to an increase in our customers to 13,151 recurring subscribers as of December 31, 2008 from 2,775 recurring subscribers as of December 31, 2007. The increase in subscriptions was due to additional sales and marketing activities performed through a major marketing partnership which was launched during the fourth quarter 2008. As we continue marketing activities and promotions, subscription revenues continued to increase through December 31, 2008. Digital media sharing products and services are relatively new, and as a result, it is difficult to determine our current market share or predict our future market share. We believe that the market for digital media sharing products and services is growing and that related market opportunities are also expected to grow. Our revenue, profitability and future growth depend not only on the anticipated market growth, but also our ability to execute our business plan and ultimate customer acceptance of our products and services and the success or failure of our competitors. As a result, we expect the trend of our revenues to be positive, however, provide no assurance that such will occur.

Professional services revenues for the year ended December 31, 2008 was $178,900 as compared to $20,000 during the same period last year. The increase was due to us providing custom website design services under software development contracts completed during the year ended December 31, 2008. We did not have similar contracts during the same period last year. From time to time, we may enter into professional services agreements resulting from our strategic partnership marketing activities and as a result, revenues from professional services may recur in future periods. As of December 31, 2008, we had not entered into any significant professional services agreements, however, on February 19, 2009, we entered into a professional services agreement for an aggregate amount of $165,000. As a result, we expect the trend of our revenues to be positive, however, provide no assurance that such will occur.

Total cost of revenue was $150,900 and $48,100 for the years ended December 31, 2008 and 2007, respectively, representing an increase of $102,800. The increase was due to an increase in subscription cost of revenues of $59,300 and increased cost of professional services revenue of $43,500 during the year ended December 31, 2008, respectively.

The increase in cost of subscription revenues for the year ended December 31, 2008 as compared to the same period last year is due to primarily having an increase in subscription sales. Cost of subscription revenues for the year ended December 31, 2008 were mostly derived from our marketing partnerships, hosting and setup services incurred from website services provided to our subscribers.

The increase in cost of professional services revenues for the year ended December 31, 2008 as compared to the same period last year is due to having provided professional services, primarily labor related costs, during the year ended December 31, 2008 whereas there were fewer such services provided during the same period last year.

Research and development expense was $299,200 and $361,700 for the years ended December 31, 2008 and 2007, respectively, representing an decrease of $62,500. The decrease was primarily due to lower amounts of research and development activities, including lowering development personnel and consultants which was part of a company-wide cost reduction program implemented in the fourth quarter 2008 as compared to the same period last year.

Sales and marketing expense was $633,600 and $685,400 for the years ended December 31, 2008 and 2007, respectively, representing an decrease of $51,800. The decrease was primarily due to lower amounts of sales and marketing activities and promotions during the year ended December 31, 2008 including a decrease in media advertising of $87,700 and a decrease in marketing salaries of $158,000 related to fewer marketing personnel primarily, both reductions due in part by a company-wide cost reduction program implemented in the fourth quarter 2008 as compared to the same period last year. Also, the overall decrease in sales and marketing expense was partially offset by an increase in non-cash stock based compensation expense of $168,200.

General and administrative expense was $2,729,300 and $1,468,800 for the years ended December 31, 2008 and 2007, respectively, representing an increase of $1,260,500. The increase was primarily due to increase in warrant expense of $1,069,500 a majority of which relates to warrants granted to our investor relations firm which expired unexercised in July 2008. There were no such warrants granted or outstanding to our investor relations firm the same period last year.

Interest expense was $693,100 and $98,600 for the years ended December 31, 2008 and 2007, respectively, representing an increase of $594,500. The increase was attributable to interest and debt discount amortization expense of $693,100 during the year ended December 31, 2008, which was primarily related to our prior year convertible notes being outstanding the entire year ended December 31, 2008, as compared to being outstanding for only a few months during the same period last year, and additional borrowings of $850,000 during 2008.

Liquidity and Capital Resources

Cash Flows

At December 31, 2008, our cash and cash equivalents were $67,700, a decrease of $20,700 from $88,400 as of December 31, 2007. The change in our cash was due to receiving $619,000 related to our Regulation S Stock Purchase agreement entered into January 2008, $850,000 related to our convertible notes entered into in May 2008 through September 2008, and $256,000 related to our private placement of our common stock in September 2008; all of which was offset by cash used in operating activities of $1,515,700 and $153,900 of cash used in the acquisition of and development of software.

Historically, we have incurred losses and have had capital and stockholders' deficits and limited cash to fund our operations. During the year ended December 31, 2008, we raised approximately $1.6 million through equity and debt financings and have no other significant source of cash. Although we expect to grow our revenues, they are not a significant source of cash at this time. Because we expect that revenues from operations may continue to be insufficient to meet our working capital needs, we may need to raise additional capital through equity or debt financings in the near future.

We cannot be certain that such capital will be available to us or whether such capital will be available on terms that are acceptable to us. Such financing likely would be dilutive to existing stockholders and could result in significant financial and operating covenants that would negatively impact our business. If we are unable to complete additional financings or to raise sufficient additional capital on acceptable terms, we will have insufficient funds to operate our business or pursue our planned growth.

Foreign Private Placement Equity Financing

In January 2008, we entered into a $1 million private placement with foreign investors under a Regulation S Stock Purchase agreement, which we issued 5,145,837 restricted shares for cash proceeds of $619,000 during 2008. The offer and sale of the securities above were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Rule 501 promulgated under Regulation S of the Securities Act.

The 2008 Convertible Promissory Notes

In May 2008, four individual investors purchased an aggregate of $100,000 of 12% secured convertible notes and were issued warrants to purchase shares of the Company's common stock (the "2008 Convertible Notes"). Each convertible note holder has the right, at any time, to convert their note into shares of the Company's common stock at a conversion ratio of one share of common stock for each $0.14 of principal amount of their note for a maximum potential aggregate of 714,285 shares of common stock; in addition, the investors were issued warrants to purchase an aggregate of 357,143 shares of common stock at an exercise price of $.14 per share that expire five years from the date of issuance. Additionally, the convertible notes are secured by approximately 1.4 million restricted shares of the Company's common stock held by a third party. These collateral shares return to the Company and become canceled when the terms of the convertible notes have been satisfied. In December 2008, the maturity date of these notes was extended to December 2009. The offer and sale of the securities underlying the convertible notes were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Sections 4(2) and Section 4(6) of the Securities Act of 1933 and/or Rule 506 of Regulation D adopted thereunder.

The AOI Fund Convertible Promissory Notes

In May 2008, an investor purchased $242,400 of 15% secured convertible notes and was issued warrants to purchase shares of our common stock. The convertible note holder has the right, at any time, to convert their note into shares of our common stock at a conversion ratio of one share of common stock for each $0.25 of principal amount of their note for a maximum potential aggregate of 969,696 shares of common stock; in addition, the investors were issued "Series A Warrants" to purchase 96,969 shares of common stock at an exercise price of $.25 per share that expire five years from the date of issuance and "Series B Warrants" to purchase 96,969 shares of common stock at an exercise price of $.30 per share that expire five years from the date of issuance. The Series A Warrants also have a put option in the amount of $60,000 which can only be exercised after the two year anniversary date of the convertible note. The Series B Warrants have no put option. The convertible note included an original issue discount of $42,400. Additionally, the convertible notes are secured by a security interest in all assets of the Company. The offer and sale of the securities underlying these convertible notes were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Sections 4(2) and Section 4(6) of the Securities Act of 1933 and/or Rule 506 of Regulation D adopted thereunder.

In June 2008, the same investor purchased for a second investment, $242,400 of 15% secured convertible notes and was issued warrants to purchase shares of our common stock. The convertible note holder has the right, at any time, to convert their note into shares of our common stock at a conversion ratio of one share of common stock for each $0.25 of principal amount of their note for a maximum potential aggregate of 969,696 shares of common stock; in addition, the investors were issued "Series A Warrants" to purchase 96,969 shares of common stock at an exercise price of $.25 per share that expire five years from the date of issuance and "Series B Warrants" to purchase 96,969 shares of common stock at an exercise price of $.30 per share that expire five years from the date of issuance. The Series A Warrants also have a put option in the amount of $60,000 which can only be exercised after the two year anniversary date of the convertible note. The Series B Warrants have no put option. The convertible note included an original issue discount of $42,400.

Additionally, the convertible notes are secured by a security interest in all assets of the Company. The offer and sale of the securities underlying these convertible notes were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Sections 4(2) and
Section 4(6) of the Securities Act of 1933 and/or Rule 506 of Regulation D adopted thereunder.

In July 2008, the same investor purchased for a third investment, $242,400 of 15% secured convertible notes and was issued warrants to purchase shares of our common stock. The convertible note holder has the right, at any time, to convert their note into shares of our common stock at a conversion ratio of one share of common stock for each $0.25 of principal amount of their note for a maximum potential aggregate of 969,696 shares of common stock; in addition, the investors were issued "Series A Warrants" to purchase 96,969 shares of common stock at an exercise price of $.25 per share that expire five years from the date of issuance and "Series B Warrants" to purchase 96,969 shares of common stock at an exercise price of $.30 per share that expire five years from the date of issuance. The Series A Warrants also have a put option in the amount of $60,000 which can only be exercised after the two year anniversary date of the convertible note. The Series B Warrants have no put option. The convertible note included an original issue discount of $42,400. Additionally, the convertible notes are secured by a security interest in all assets of the Company. The offer and sale of the securities underlying these convertible notes were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Sections 4(2) and Section 4(6) of the Securities Act of 1933 and/or Rule 506 of Regulation D adopted thereunder.

In September 2008, the same investor purchased for a fourth investment, $180,000 of the AOI Convertible Notes (15% secured convertible notes) and were issued warrants to purchase shares of our common stock. The convertible note holder has the right, at any time, to convert their note into shares of our common stock at a conversion ratio of one share of common stock for each $0.123 of principal amount of their note for a maximum potential aggregate of 1,463,414 shares of common stock; in addition, the investors were issued "Series C Warrants" to purchase 750,000 shares of common stock at an exercise price of $.123 per share that expire five years from the date of issuance and "Series D Warrants" to purchase 750,000 shares of common stock at an exercise price of $.15 per share that expire five years from the date of issuance. The Series D Warrants also have a put option in the amount of $45,000 which can only be exercised after the one year anniversary date of the convertible note. The Series C Warrants have no put option. The convertible note included an original issue discount of $30,000. Additionally, the convertible notes are secured by a security interest in all assets of the Company. The offer and sale of the securities underlying these convertible notes were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Sections 4(2) and
Section 4(6) of the Securities Act of 1933 and/or Rule 506 of Regulation D adopted thereunder.

Other Financings

In September 2008, the Company entered into a $256,000 private placement with accredited investors, which the Company had received $256,000 cash proceeds for the issuance of 8,533,333 restricted shares. $100,000 of the $256,000 cash proceeds was provided by two executive officers of the Company and 3,333,333 restricted shares were issued to them as part of the private placement in September 2008. The offer and sale of the securities above were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Section 4(2) and Section 4(6) of the Securities Act and/or Rule 506 of Regulation D thereunder.

In addition to the equity and debt financing discussed above, we intend to conduct additional capital raising activities seeking additional private financings through the issuance of our common stock or issuance of debt instruments to increase our required working capital, increase the marketing of our product and increase revenue generating activities. We plan to complete additional private placement offerings during the foreseeable future, although we have no assurance that such financing will be completed.

Off-Balance Sheet Arrangements

As of December 31, 2008, we had no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

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

Web Site and Software Development Costs-Under Emerging Issues Taskforce Statement 00-2, Accounting for Web Site Development Costs ("EITF 00-2"), costs and expenses incurred during the planning and operating stages of the Company's web site are expensed as incurred. Under EITF 00-2, costs incurred in the web site application and infrastructure development stages are capitalized by the Company and amortized to expense over the web site's estimated useful life or period of benefit.

The Company also applies Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed to costs incurred internally in creating its software products. Under SFAS No. 86, costs are charged to research and development expense until technological feasibility has been established for the related product. Technical feasibility is deemed to have been established upon completion of a detail program design or completion of a working model. Subsequent to technological feasibility having been established, software production costs shall be capitalized and reported at the lower of amortized cost or net realizable value.

Revenue Recognition- Our subscription revenue is generated from monthly subscriptions for Website hosting services. The typical subscription agreement includes the usage of a personalized website and hosting services. The individual deliverables are not independent of each other and are not sold or priced on a standalone basis. Costs to complete the Website and ready it for the end customer are minimal and are expensed to cost of revenue as incurred. Upon the completion of a customer's signup and initial hosting of the Website, the subscription is offered free of charge for a two week trial period during which the customer can cancel at anytime. In accordance with Staff Accounting Bulletin (SAB) No. 104, after the two week trial period has ended, revenue is recognized when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer;
(3) the amount of fees to be paid by the customer is fixed or determinable; and
(4) the collection of our fees is probable. These criteria are met monthly as our service is provided on a month-to-month basis and collections are generally made in advance of the services. There is no provision for refunds as December 31, 2008, as the Company's historical refund experience has been minimal.

Customers signup and agree to purchase the website service on a monthly or annual basis, at the customer's option. The monthly customers pay monthly in advance of the services, and as the services are performed, the Company recognizes subscription revenue on a daily basis.

For annual customers, upon payment of a full year's subscription service, the subscription revenue is recorded as deferred revenue in the accompanying balance sheet. As services are performed, the Company recognizes subscription revenue ratably on a daily basis.

During the year ended December 31, 2008, the Company also distributed its website service through a marketing partnership and shared a portion of revenue generated with the marketing partner. In accordance with Emerging Issue Task Force No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, revenue is reported gross of the payment received from its marketing partner because the Company acts as the primary obligor and is responsible for the fulfillment of services.

Professional services revenue is generated from custom website design services. Our professional services revenue from contracts for custom website design is recorded using a proportional performance model based on labor hours incurred. The extent of progress toward completion is measured by the labor hours incurred as a percentage of total estimated labor hours to complete. Labor hours are the most appropriate measure to allocate revenue among reporting periods, as they are the primary input to the provision of our professional services.

Stock-Based Compensation-Accounting for stock options issued to employees follows the provisions of SFAS No. 123R, Share-Based Payment. This statement requires an entity to measure the cost of employee services received in exchange . . .