You should read the following discussion in conjunction with our condensed consolidated financial statements, which are included in Item 1 of this Form 10-Q.

Company Overview

In 2007, Quepasa transitioned from being a bilingual search engine into a bilingual portal and Hispanic social network. With the evolution of our website into a Hispanic portal and social network, we expect future revenues will come from predominately display advertising, distributive social media campaigns and revenue generated from social applications. In December 2006, the portal service of Quepasa was discontinued.

Highlights for the first nine months of 2009 included:

·

Our website traffic continued to show growth as the year evolved. The site had 2,322,273 unique visitors in the first nine months of 2008 and 12,923,628 in 2009, a 457% increase. In part, this was due to our improved ability to deliver emails inviting persons to become members of Quepasa.

·

Although still not material, revenue increased by 362% to $197,018.

Critical Accounting Policies, Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with Generally Accepted Accounting Principles. The preparation of these condensed consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements.

Stock-Based Compensation Expense

Effective January 1, 2006, the Company adopted the fair value recognition provisions under GAAP, using the modified-prospective transition method. Since all share-based payments made prior to January 1, 2006 were fully vested, compensation cost recognized during the years ended December 31, 2008 and 2007 represents the compensation cost for all share-based payments granted subsequent to January 1, 2006 based upon the grant-date fair value using the Black-Scholes option pricing model.

The fair values of share-based payments are estimated on the date of grant using the Black-Scholes option pricing model, based on weighted average assumptions. Expected volatility is based on historical volatility of the Company's common stock. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation expense is recognized on a straight-line basis over the requisite service period of the award.

In December 2007, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 110. This guidance allows companies, in certain circumstances, to utilize a simplified method in determining the expected term of stock option grants when calculating the compensation expense to be recorded under SFAS 123(R), Share-Based Payment, for employee stock options. The simplified method can be used after December 31, 2007 only if a company's stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term. Through 2007, we used the simplified method to determine the expected option term, based upon the vesting and original contractual terms of the option. On January 1, 2008, we continued

to use the simplified method to determine the expected option term since the Company's stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term.

The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

Contingencies

The Company accrues for contingent obligations, including estimated management support agreements and legal costs, when the obligation is probable and the amount can be reasonably estimated. As facts concerning contingencies become known we reassess our position and make appropriate adjustments to the financial statements. Estimates that are particularly sensitive to future changes include those related to tax, legal, and other regulatory matters that are subject to change as events evolve and additional information becomes available.

Income Taxes

The Company uses the asset and liability method to account for income taxes. Under this method, deferred income taxes are determined based on the differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements which will result in taxable or deductible amounts in future years and are measured using the currently enacted tax rates and laws. A valuation allowance is provided to reduce net deferred tax assets to the amount that, based on available evidence, is more likely than not to be realized.

Results of Operations

Revenue Sources

During the nine months ended September 30, 2009, our revenue was generated from one principal source, revenue earned from the sale of banner advertising on our website.

Banner Advertising Revenue: Banner advertising revenue is generated when an advertiser purchases a banner placement within our quepasa.com website. We recognize revenue related to banner advertisements upon delivery. Approximately 99% of our revenue came from banner advertising.

Virtual Currency Revenue: Virtual currency revenue is generated when users buy QDollars on the site and use that currency to send a broad range of virtual gifts from the Quepasa storefront. We recognize revenue related to virtual currency upon receipt.

Operating Expenses

Our principal operating expenses are divided into the following categories:

·

Product Development and Content Expenses: Product development and content expenses consist of personnel costs associated with the development, testing and upgrading of our website and systems, content fees, and purchases of specific technology, particularly software and hardware related to our infrastructure upgrade.

·

Sales and Marketing Expenses: Sales and marketing expenses consist primarily of salaries and expenses of marketing and sales personnel, and other marketing-related expenses including our mass media-based branding and advertising.

·

General and Administrative Expenses: General and administrative expenses consist primarily of costs related to corporate personnel, occupancy costs, general operating costs and corporate professional fees, such as legal and accounting fees.

·

Depreciation and Amortization Expenses: Our depreciation and amortization are non-cash expenses which have consisted primarily of depreciation related to our property and equipment.

·

Other Income (Expense): Other income (expense) consists primarily of interest earned, interest expense and earned grant income. We have invested our cash in AAA rated, fully liquid instruments. Interest expense relates to our Corporate Sponsorship Agreement and Note Purchase Agreements. Earned grant income represents the amortized portion of a cash grant received from the Mexican government for approved capital expenditures. The grant is being recognized on a straight-line basis over the useful lives of the purchased assets.

Comparison of the three months ended September 30, 2009 with the three months ended September 30, 2008

The following table sets forth a modified version of our Condensed Consolidated Statements of Operations and Comprehensive Loss that is used in the following discussions of our results of operations:

                                               For the the three months ended September 30,
                                           2009              2008         Change ($)      Change (%)
REVENUES                              $       51,827     $     10,989     $  40,838               372 %
OPERATING EXPENSES
Sales and marketing                          111,774           89,357          22,417              25 %
Product development and content              718,533        1,184,884        (466,351 )           -39 %
General and administrative                 1,796,930        2,097,035        (300,105 )           -14 %
Depreciation and amortization                130,527          113,710          16,817              15 %
Operating Expenses                         2,757,764        3,484,986        (727,222 )           -21 %

LOSS FROM OPERATIONS                      (2,705,937 )     (3,473,997 )       768,060             -22 %

OTHER INCOME (EXPENSE):
Interest income                               10,128           34,544         (24,416 )           -71 %
Interest expense                            (151,500 )       (151,502 )             2               0 %
Other income                                 (90,959 )        511,371        (602,330 )          -118 %
TOTAL OTHER INCOME (EXPENSE)                (232,331 )        394,413        (626,744 )          -159 %

NET LOSS                              $   (2,938,268 )   $ (3,079,584 )   $   141,316              -5 %

Revenues

Our revenues were $51,827 for the three months ended September 30, 2009, an increase of $40,838 compared to 2008. In February 2008, we re-launched our website. Website traffic has increased since the re-launch. The site had 1,775,432 unique visitors in the third quarter of 2008 and 5,288,445 in 2009, an 198% increase. We believe there will be a direct correlation between website traffic and our ability to increase revenue.

As part of our website development strategy, we have focused on establishing a platform for sustained, viral growth-based on (i) simple user registration and invitation process; (ii) effective email deliverability; and (iii) a simplified way to navigate the home page for our members. In June 2008, we redesigned the sign-up and invitation pages of our site, resulting in approximately a 50% increase in the number of new users who invited friends and contacts to join Quepasa.com. In addition, with the help of a third-party consultant, we have substantially reduced the number of Quepasa.com invitation emails that fail to reach recipients' email inboxes. Improved deliverability, together with the redesign of our sign-up and invitation steps, has resulted in significant gains in the number new registered users and site traffic.

Operating Costs and Expenses

Sales and Marketing: Sales and marketing expenses increased $22,417, or 25%, to $111,774 for the three months ended September 30, 2009. During the three months ended September 30, 2009, we had increases commissions of $22,000 as a result of increased ad sales.

Product Development and Content: Product development and content expenses decreased $466,351, or 39%, to $718,533 for the three months ended September 30, 2009. This decrease is attributable to a focused effort to reduce costs. During the three months ended September 30, 2009, we had decreases in stock based compensation of $275,000, consulting fees of $41,000, a decrease in U.S. salaries of $30,000, a decrease in salaries and associated payroll costs of $67,000 due to the change in exchange rates for our product development and technology personnel within Quepasa.com de Mexico, which, under the direction of our U.S.-based Chief Technology Officer, provides substantially all of our design, translation services, and website management and development services.

General and Administrative: General and administrative expenses decreased $300,105, or 14%, to $1,796,930, for the three months ended September 30, 2009. The significant changes consisted of:

·

a decrease in stock based compensation of $426,000; and

·

a decrease in salaries and associated payroll costs of $27,000 due to the change in exchange rates for our general and administrative personnel within Quepasa.com de Mexico;

·

partially offset by, a increase in U.S. salaries and related payroll costs of $54,000, due to unusually low salary in 2008 caused by reduction of some salaries in exchange for stock based compensation;

·

an increase in professional fees of $34,000, primarily comprised of legal fees; and

·

an increase in managed hosting of $36,000 for the new data center in Dallas.

Stock Based Compensation: Stock based compensation expense, which is included in the other operating expense categories as discussed above, decreased $697,312 to $1,228,685 for the three months ended September 30, 2009. This decrease is attributable to higher stock based compensation in 2008 related to vesting of a performance based grant and an effort to reduce salaries in exchange for stock based compensation. Stock based compensation expense represented 57% and 65% of operating expenses for the quarters ended September 30, 2009 and 2008, respectively. At September 30, 2009, we had $5,762,560 of unrecognized stock based compensation expense, almost all of which we expect to recognize over the next four quarters.

                                       For the three months ended September 30,
                                            2009                       2008
  Sales and marketing                             38,011                     34,461
  Product and content development                251,489                    526,833
  General and administrative                   1,291,419                  1,716,937
   Total Stock Based Compensation              1,580,919                  2,278,231

Depreciation and Amortization: Depreciation and amortization expense increased $16,817, or 15%, to $130,527 for the three months ended September 30, 2009. This increase is attributable to fixed asset additions to create a primary data center in the Dallas, Texas metropolitan area leaving the redundant data center in the Arizona metropolitan area as a backup.

Other Income/ Expense: Other income decreased $626,744 to other expense of $232,331 for the three months ended September 30, 2009. The decrease is primarily attributable to the write-off of invoices totaling $508,610 for a technical consultant in 2008. This decrease is also attributable to a reduction of $100,000 of a note receivable as discussed in Note 3 of the unaudited consolidated financial statements. This decrease is also attributable to a reduction of $24,000 in interest income due to lower interest rates and lower cash balances.

Comparison of the nine months ended September 30, 2009 with the nine months ended September 30, 2008

The following table sets forth a modified version of our Condensed Consolidated Statements of Operations and Comprehensive Loss that is used in the following discussions of our results of operations:

                                               For the the nine months ended September 30,
                                          2009             2008          Change ($)      Change (%)
REVENUES                              $    197,018     $     42,626     $    154,392             362 %
OPERATING EXPENSES
Sales and marketing                        355,111          231,032          124,079              54 %
Product development and content          2,174,999        2,954,330         (779,331 )           -26 %
General and administrative               4,762,634        5,586,827         (824,193 )           -15 %
Depreciation and amortization              394,030          335,133           58,897              18 %
Operating Expenses                       7,686,774        9,107,322       (1,420,548 )           -16 %

LOSS FROM OPERATIONS                    (7,489,756 )     (9,064,696 )      1,574,940             -17 %

OTHER INCOME (EXPENSE):
Interest income                             36,051          132,048          (95,997 )           -73 %
Interest expense                          (452,106 )       (779,315 )        327,209             -42 %
Gain/ (Loss) on disposal                        --          (42,977 )         42,977             100 %
Gain on extinguishment of debt                  --        5,056,052       (5,056,052 )          -100 %
Other income                               (79,660 )        530,850         (610,510 )          -115 %
TOTAL OTHER INCOME (EXPENSE)              (495,715 )      4,896,658       (5,392,373 )          -110 %

NET LOSS                              $ (7,985,471 )   $ (4,168,038 )   $ (3,817,433 )            92 %

Revenues

Our revenues were $197,018 for the nine months ended September 30, 2009, an increase of $154,392 compared to 2008. In February 2008, we re-launched our website. Website traffic has increased since the re-launch. The site had 2,322,273 unique visitors in the first nine months of 2008 and 12,923,628 in 2009, a 457% increase. We believe there will be a direct correlation between website traffic and our ability to increase revenue.

As part of our website development strategy, we have focused on establishing a platform for sustained, viral growth-based on (i) simple user registration and invitation process; (ii) effective email deliverability; and (iii) a simplified way to navigate the home page for our members. In June 2008, we redesigned the sign-up and invitation pages of our site, resulting in approximately a 50% increase in the number of new users who invited friends and contacts to join Quepasa.com. In addition, with the help of a third-party consultant, we have substantially reduced the number of Quepasa.com invitation emails that fail to reach recipients' email inboxes. Improved deliverability, together with the redesign of our sign-up and invitation steps, has resulted in meaningful gains in the number new registered users and site traffic.

Operating Costs and Expenses

Sales and Marketing: Sales and marketing expenses increased $124,079, or 54%, to $355,111 for the nine months ended September 30, 2009. During the nine months ended September 30, 2009, we had increases in stock based compensation of $62,000, commissions of $49,000 and salaries of $47,000. The increase was partially offset by a decrease of $40,000 due the shutdown of the Mexico City sales office in the first quarter of 2008.

Product Development and Content: Product development and content expenses decreased $779,331, or 26%, to $2,174,999 for the nine months ended September 30, 2009. This decrease is attributable to a focused effort to reduce costs. During the nine months ended September 30, 2009, we had decreases in consulting fees of $167,000, a decrease in stock based compensation of $374,000, a decrease in U.S. salaries of $70,000, and a decrease in salaries and associated payroll costs of $202,000 due to the change in exchange rates for our product development and technology personnel within Quepasa.com de Mexico, which, under the direction of our U.S.-

based Chief Technology Officer, provides substantially all of our design, translation services, and website management and development services.

General and Administrative: General and administrative expenses decreased $824,193, or 15%, to $4,762,634, for the nine months ended September 30, 2009. The significant changes consisted of:

·

a decrease in professional fees of $42,000, primarily made up of decreases in accounting fees of $106,000 partially offset by an increase in legal fees of $78,000;

·

a decrease in travel related expenses of $78,000;

·

a decrease in stock based compensation of $409,000;

·

a decrease in rent expenses of $197,000, due to the closing of our Scottsdale, AZ headquarters;

·

a decrease in salaries and related payroll costs of $60,000, due to a reduction in headcount and a reduction of some salaries in exchange for stock based compensation;

·

partially offset by an increase in managed hosting of $50,000 for the new data center in Dallas; and

·

an increase in reporting dues of $54,000.

Stock Based Compensation: Stock based compensation expense, which is included in the other operating expense categories as discussed above, decreased $720,715 to $4,119,774 for the nine months ended September 30, 2009. This decrease is attributable to a reduction in headcount, partially offset by an effort to reduce salaries in exchange for stock based compensation. Stock based compensation expense represented 54% and 53% of operating expenses for the quarters ended September 30, 2009 and 2008, respectively. At September 30, 2009, we had $5,762,560 of unrecognized stock based compensation expense, almost all of which we expect to recognize over the next four quarters.

                                        For the nine months ended September 30,
                                            2009                      2008
   Sales and marketing               $           102,351       $            40,464
   Product and content development               670,177                 1,043,980
   General and administrative                  3,347,245                 3,756,045
    Total Stock Based Compensation   $         4,119,773       $         4,840,489

Depreciation and Amortization: Depreciation and amortization expense increased $58,897, or 18%, to $394,030 for the nine months ended September 30, 2009. This increase is attributable to fixed asset additions to create a primary data center in the Dallas, Texas metropolitan area leaving the redundant data center in the Phoenix, Arizona metropolitan area as a backup.

Other Income (Expense): Other income decreased $5,392,373 to other expense of $495,715 for the nine months ended September 30, 2009. The decrease is primarily attributable to a gain on the extinguishment of debt of $5,056,052 recorded in the second quarter of 2008 as a result of the termination of the CSMSA discussed in Note 4 of the unaudited consolidated financial statements. This decrease is also attributable to a reduction of $100,000 of a note receivable as discussed in Note 3 of the unaudited consolidated financial statements. This decrease is also attributable to a reduction of $96,000 in interest income due to lower interest rates and lower cash balances. The decrease is partially offset by a reduction in interest expense of $327,000 due to the termination of the CSMSA and a loss of $43,000 on the disposal of office furniture and equipment associated with the closure of our Scottsdale, Arizona office.

Liquidity and Capital Resources

                                                 For the nine months ended September
                                                                 30,
                                                     2009                  2008
 Net cash used in operating activities           $  (2,835,728 )       $  (4,301,066 )
 Net cash used in investing activities           $     (15,494 )       $    (770,533 )
 Net cash provided by financing activities       $          --         $   7,337,019

Cash used in operating activities for the nine months ended September 30, 2009 was driven by our net loss, adjusted for non-cash items. Non-cash adjustments include depreciation and amortization, the vesting of stock options and issuance of common stock for compensation, and interest accrual and amortization of discounts associated with long-term debt. Net cash used in operations was $2,835,728 for the nine months ended September 30, 2009 compared to $4,301,066 for 2008. For the nine months ended September 30, 2009, net cash used by operations consisted primarily of a net loss of $7,985,471, offset by non-cash expenses of $394,030 in depreciation and amortization, $211,347 in non-cash interest, $217,956 in amortization of discounts on notes payable and debt issuance costs, and $3,948,254 related to the vesting of stock options. Additionally, changes in working capital impacted the net cash used in operating activities. These changes included a decrease in other current assets and other assets of $279,547, and an increase in accounts payable and accrued expenses of $30,076. For the nine months ended September 30, 2008, net cash used by operations consisted primarily of a net loss of $4,168,038 plus a gain on extinguishment of debt of $5,056,052, offset by non-cash expenses of $335,133 in depreciation and amortization, $571,413 in non-cash interest, $198,795 in amortization of discounts on notes payable and debt issuance costs, $42,977 loss on the disposal of fixed assets, and $4,782,878 related to the issuance of stock options, warrants, and common stock for compensation and professional services. Additionally, changes in working capital impacted the net cash used in operating activities. These changes included a decrease in accounts payable and accrued expenses of $338,168, offset by a decrease in other current assets and other assets of $163,125.

Net cash used in investing activities in the nine months ended September 30, 2009 was primarily attributable to the purchase of property and equipment. Net cash used in investing activities in the nine months ended September 30, 2008 was primarily attributable to Investment in BRC/La Alianza of $350,000, see Note 3 of the unaudited consolidated financial statements. Our capital expenditures were $15,494 for the nine months ended September 30, 2009, compared to $431,134 for the same period in 2008.

There was no net cash provided by or used in financing activities for the nine months ended September 30, 2009. Net cash provided by financing activities for the nine months ended September 30, 2008 came from net proceeds of $6,959,519 from our borrowing in January 2008. See Note 5 of the unaudited consolidated financial statements. Cash proceeds from the exercise of stock options and warrants was $377,500 for the nine months ended September 30, 2008.

                                              2009             2008
              Cash and cash equivalents    $ 2,074,308      $ 4,932,629
              Total assets                 $ 3,157,014      $ 6,741,705
              Percentage of total assets            66 %             73 %

. . .